The document discusses several theories of corporate governance:
- Agency theory addresses the relationship between principals (shareholders) and agents (directors/managers) and the potential for agents to act in their self-interest rather than the principals' interests.
- Stewardship theory posits that executives and managers act as stewards to maximize shareholder wealth through firm performance.
- Stakeholder theory argues that managers are accountable to a broad range of stakeholders, not just shareholders.
- Resource dependency theory examines how board directors provide resources like skills, information and connections that enhance the firm's performance and survival.
- Transaction cost theory states that firms undertake transactions internally when the transaction costs of using external markets are too
The document discusses several theories of corporate governance:
- Agency theory addresses the relationship between principals (shareholders) and agents (directors/managers) and the potential for agents to act in their self-interest rather than the principals' interests.
- Stewardship theory posits that executives and managers act as stewards to maximize shareholder wealth through firm performance.
- Stakeholder theory argues that managers are accountable to a broad range of stakeholders, not just shareholders.
- Resource dependency theory examines how board directors provide resources like skills, information and connections that enhance the firm's performance and survival.
- Transaction cost theory states that firms undertake transactions internally when the transaction costs of using external markets are too
The document discusses several theories of corporate governance:
- Agency theory addresses the relationship between principals (shareholders) and agents (directors/managers) and the potential for agents to act in their self-interest rather than the principals' interests.
- Stewardship theory posits that executives and managers act as stewards to maximize shareholder wealth through firm performance.
- Stakeholder theory argues that managers are accountable to a broad range of stakeholders, not just shareholders.
- Resource dependency theory examines how board directors provide resources like skills, information and connections that enhance the firm's performance and survival.
- Transaction cost theory states that firms undertake transactions internally when the transaction costs of using external markets are too
The document discusses several theories of corporate governance:
- Agency theory addresses the relationship between principals (shareholders) and agents (directors/managers) and the potential for agents to act in their self-interest rather than the principals' interests.
- Stewardship theory posits that executives and managers act as stewards to maximize shareholder wealth through firm performance.
- Stakeholder theory argues that managers are accountable to a broad range of stakeholders, not just shareholders.
- Resource dependency theory examines how board directors provide resources like skills, information and connections that enhance the firm's performance and survival.
- Transaction cost theory states that firms undertake transactions internally when the transaction costs of using external markets are too
and Political Theory. There are many theories of corporate governance which addressed the challenges of governance of firms and companies from time to time. The Corporate Governance is the process of decision making and the process by which decisions are implemented in large businesses is known as Corporate Governance. There are various theories which describe the relationship between various stakeholders of the business while carrying out the activity of the business.
Theories of Corporate Governance:
We will discuss the following theories of corporate governance:
Agency Theory Stewardship Theory Resource Dependency Theory Stakeholder Theory Transaction Cost Theory Political Theory
Agency Theory:
Agency theory defines the relationship between the principals (such as shareholders of company) and agents (such as directors of company). According to this theory, the principals of the company hire the agents to perform work. The principals delegate the work of running the business to the directors or managers, who are agents of shareholders. The shareholders expect the agents to act and make decisions in the best interest of principal. On the contrary, it is not necessary that agent make decisions in the best interests of the principals. The agent may be succumbed to self-interest, opportunistic behavior and fall short of expectations of the principal. The key feature of agency theory is separation of ownership and control. The theory prescribes that people or employees are held accountable in their tasks and responsibilities. Rewards and Punishments can be used to correct the priorities of agents.
Agency Problem and Corporate Governance:
In simple terms, Governance means “the process of decision-making and the process by which decisions are implemented”. Thus governance related to large businesses is called Corporate Governance. Firms are social entities and have certain social obligations. A firm needs coordination between many groups of people known as stakeholders. The stakeholders are the owners, the managers, the workers, the suppliers, the creditors, the customers, the competitors, the government, and even the society at large. The stakes of various stakeholders are: Owners get a share of the profits Managers get salaries. Workers get wages Suppliers get paid for their inputs to the firm Customers want to get good quality products at reasonable prices Creditors wants their loans to be repaid in time Competitors want fair competition in the market place. Government wants the firm to declare its true earnings and pay appropriate taxes Good Corporate Governance requires that the firm: Pursue its goal efficiently At the same time take into account the harm that it is causing to some stakeholders and try to ensure that those losers are adequately compensated. The corporate form of business raises large capital from public; therefore there are millions of shareholders contributing small capital. Since contribution of shareholder is small, it is not practically possible for shareholders to run the day-to-day management of business. Thus in between owners and business, a corporate form of business introduced a new entity called Management. This management consists of professional managers who manages the company and take the important decisions. Corporate Governance and Agency Problem: We have seen that in corporate form of business, there is separation of ownership and business. This creates a unique type of problem known as Agency Problem. The problem of Principal-Agent is universal. Agents (Managers) are expected to work for the benefit of principal (owners) and take decisions that are beneficial for the principal. However often agents take decisions that are beneficial for themselves. When ownership and business is separated, the managers are expected to act for the benefits of the owners. However, there is chance that managers may pursue certain alternative objectives that are beneficial to themselves rather than owners. The conflict is called Agency Problem. Mitigating Agency Problem: One solution to mitigate the agency problem is to appoint the honest and ethical managers. But question is how to determine whether a manager is honest/ethical or not. Thus there is need to do something beyond appointment of managers. Traditionally auditing was instituted to resolve the agency conflict. Auditors are expected to work on behalf of owners and examine the conduct of business run by managers and submit the report to owners. However the auditing is restricted to financial auditing which can unearth the financial frauds. But it cannot question the managerial efficiency. In addition to auditing, the corporate governance is used to resolve the agency conflict. Under the corporate governance, the emphasis is on the board including the appointment of directors for the board, who are expected to be independent and expert in their fields. In addition, the board forms sub-committees to have more close interaction with management. Stewardship Theory
The steward theory states that a steward protects and maximises shareholders wealth through firm Performance. Stewards are company executives and managers working for the shareholders, protects and make profits for the shareholders. The stewards are satisfied and motivated when organizational success is attained. It stresses on the position of employees or executives to act more autonomously so that the shareholders’ returns are maximized. The employees take ownership of their jobs and work at them diligently.
Stakeholder Theory
Stakeholder theory incorporated the accountability of management to a broad range of
stakeholders. It states that managers in organizations have a network of relationships to serve – this includes the suppliers, employees and business partners. The theory focuses on managerial decision making and interests of all stakeholders have intrinsic value, and no sets of interests is assumed to dominate the others
Resource Dependency Theory
The Resource Dependency Theory focuses on the role of board directors in providing access to resources needed by the firm. It states that directors play an important role in providing or securing essential resources to an organization through their linkages to the external environment. The provision of resources enhances organizational functioning, firm’s performance and its survival. The directors bring resources to the firm, such as information, skills, access to key constituents such as suppliers, buyers, public policy makers, social groups as well as legitimacy. Directors can be classified into four categories of insiders, business experts, support specialists and community influentials. Transaction Cost Theory
Transaction cost theory states that a company has number of contracts within the company itself or with market through which it creates value for the company. There is cost associated with each contract with external party; such cost is called transaction cost. If transaction cost of using the market is higher, the company would undertake that transaction itself.
Political Theory
Political theory brings the approach of developing voting support from shareholders, rather by purchasing voting power. It highlights the allocation of corporate power, profits and privileges are determined via the governments’ favor.
