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Agency theory describes the relationship between principals (shareholders) and agents (corporate executives and managers) in a company. Principals delegate authority to agents to manage the company but agents may not always act in the principals' best interests due to differing goals. Stewardship theory argues that managers want to maximize company profits and shareholder value. Stakeholder theory posits that corporate managers should consider the interests of all stakeholders, not just shareholders, in governance. Resource dependency theory states that corporate boards provide resources and connections that are crucial to company performance and survival.

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40 views3 pages

Notes

Agency theory describes the relationship between principals (shareholders) and agents (corporate executives and managers) in a company. Principals delegate authority to agents to manage the company but agents may not always act in the principals' best interests due to differing goals. Stewardship theory argues that managers want to maximize company profits and shareholder value. Stakeholder theory posits that corporate managers should consider the interests of all stakeholders, not just shareholders, in governance. Resource dependency theory states that corporate boards provide resources and connections that are crucial to company performance and survival.

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Agency theory

Agency theory is defined as the relationships between principals, such as


shareholders, and agents, such as corporate executives and managers. The
shareholders, who represent the owners or principals of the business, are
said to employ the agents to carry out tasks. Directors or managers, are the
shareholders’ agents and are given authority by principals to manage the
company. According to the agency theory, shareholders expect agents to act
and make decisions in the best interests of the principal. On the contrary, the
agent may not always act in the best interests of the principals. In the 18th
century, Adam Smith identified such a problem, and Jensen and Meckling
presented the first detailed description of agency theory in 1976. 

Stewardship theory
This theory holds that managers desire to produce quality work and
maximise company profit, which generates a favourable return and raises the
value of the shareholders. This theory contradicts the agency theory. As in
this case, the theorist assumes that company managers are stewards whose
actions, intentions, and behaviour are connected to the principal’s objectives

Stakeholder theory
A stakeholder is a group of people who have influence over or are affected by
an organisation’s processes, systems, and efforts to accomplish its
objectives. If the competing interests of all the firm’s stakeholders were
balanced, the goal could be accomplished. This strategy explains how the
firm is managed by a variety of stakeholders, each of whom has specific
demands. Stakeholders are interested in making the most of the company by
managing it effectively. It also implies that when formulating policies, all
organisations must take into account the needs of all stakeholders.

This theory posits that corporate managers (officers and directors) should
take into consideration the interests of each stakeholder in its governance
process. This includes taking efforts to reduce or mitigate the conflicts
between stakeholder interests. It looks further than the traditional members
of the corporation (officers, directors, and shareholders) and also focuses
on the interests of any third party that has some level of dependence upon
the corporation. Stakeholders are generally divided into internal and
external stakeholders.

Resource dependency theory


According to the resource dependency theory, the board of directors’
responsibility is to give the company access to resources. It asserts that,
through their connections to the outside world, directors are crucial in
providing or securing essential resources for an organisation. The provision
of resources enhances organisational performance, the firm’s performance,
and its ability to survive. The directors bring legitimacy to the company as
well as resources like knowledge, skills, and connections to important
stakeholders like suppliers, buyers, public policymakers, and social groups.
The four categories of directors are insiders, business experts, support
specialists, and community influencers

Resource dependency theory is based on the principle that an organization,


such as a business firm, must engage in transactions with other actors and
organizations in its environment in order to acquire resources. Although
such transactions may be advantageous, they may also create dependencies
that are not. 

Governance and transaction cost theory


Transaction cost theory can be viewed as part of corporate governance and agency theory. It is based on the
principle that costs will arise when you get someone else to do something for you .e.g. directors to run the
business you own.

Transaction cost theory can be applied to a discussion of governance by viewing it as as an alternative variant of
the agency understanding of governance assumptions. It describes governance frameworks as being based on
the net effects of internal and external transactions, rather than as contractual relationships outside the firm (i.e.
with shareholders).

Theory of moral hazard

The theory of moral hazard is central within agency theory and also refers to hidden actions or
opportunistic behaviour of managers (Hendrik, 2003). Hidden action arises as a consequence of
asymmetric information held by counterparties. (Arrow,1968), Eisenhardt ,1989) and
opportunistic actions occur as human inclination. (Jensen 1994)

Hendrik (2003) and Smith (2011) identify moral hazard as being determined by two issues: the
conflict of interests of the counterparties (principal and agent), hidden actions and opportunistic
behaviour as a result of asymmetric information. The result can only be extremely dramatic such
as decreasing performance and even business failure.

Political theory
Political Theory refers to political influence in the governance structure of companies, evidenced
by the participation of the government in the capital of companies or laws adopted by political
structures which have a significant influence on corporate governance.

The political model emphasizes the governmental favours on corporate decision-making


activities related to the distribution of corporate power, profits or various benefits

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