ROLE OF CREDITORS IN CORPORATE GOVERNANCE

Abstract

The source for every problem in the corporate governance is the allocation of resources to different class, so how the vast revenues are allocated have a profound effect on the performance. It also depends on who makes the investment decisions in corporations and how returns from investments are distributed.  One entire class i.e., the shareholders play a dominant role in the corporate governance due to the Board’s accountability to them (Hire and fire senior executives and approve or reject important policies and strategies of the firm) and so having the right to treat the firm as a vehicle to maximize the return on their investment, neglecting the interests of the stakeholders. If we look into the main objective of the corporate law, it is to serve the interests of the society as a whole, in particular to all who are affected by a firm’s activities, including the firm’s shareholders, employees, suppliers, and customers, as well as third parties such as local communities. Where does these Creditors Stand, they too contribute to the capital but why play a second fiddle? On one hand, it can be said that the creditors are also contributing to the capital of the company, though it is debt capital, so they are also should be considered as investors and be a part of the investor ownership, which is one of the five basic characteristics of a company.

However, as explained below, at least one group other than the shareholders also have a strong claim to be recognized in discussions of corporate governance. While some have written about governance in the context of a multi-stakeholder theory of the firm, this paper complements the debates by examining the position of the creditor – a party (or stakeholder) that is often omitted from the debates about corporate governance. Stakeholders may need protection against unjust outcomes (similar to the constitutional protections enjoyed by the citizens of majority rule democracies) beyond what they negotiate in the contracting process. These protections need not always take the form of legislation; they could be internalized as corporate or managerial codes of conduct. In the absence of extensive legislation or detailed corporate codes of conduct that mitigate the deleterious outcomes for stakeholder groups (including investors), the ethical values and the capability for moral reasoning of the manager may be the only guiding forces in the face of difficult decisions.