i

Corporate Governance: Theory and Professional Practice

Name

Institution

Instructor

Date
 ii

Contents

Table of Contents

Introduction..............................................................................................................................3

Definition and Importance of Corporate Governance...............................................................3

Corporate Social Responsibility (CSR) and Sustainability.......................................................4

Corporate Social Responsibility (CSR)................................................................................4

Sustainability........................................................................................................................4

Corporate Governance Theories..............................................................................................6

Real-Life Business Scandal.....................................................................................................7

Analysis of Corporate Governance Theories in the Scandal...................................................8

Lessons Learned and Recommendations................................................................................9

Conclusion.............................................................................................................................11
 1

Introduction

Corporate governance is the system of rules, practices, and processes that guide and

control the activities of a corporation and its stakeholders (Turnbull, 2019). It involves

balancing the interests of various parties, such as shareholders, management, employees,

customers, suppliers, regulators, and society at large (Turnbull, 2019). The main purpose of

corporate governance is to ensure accountability, transparency, fairness, and efficiency in

the corporate sector. This paper discusses the different theories and professional practices

of corporate governance, such as agency theory, stewardship theory, stakeholder theory,

and corporate social responsibility. It also analyzes the benefits and challenges of

implementing good corporate governance in various contexts and industries.

Definition and Importance of Corporate Governance

Corporate governance is the system of rules, practices, and processes by which a firm is

directed and controlled (Turnbull, 2019). It involves balancing the interests of various parties,

such as shareholders, management, employees, customers, suppliers, regulators, and

society at large. The main purpose of corporate governance is to ensure accountability,

transparency, fairness, and efficiency in the corporate sector (Payne & Petrenko, 2019).

Corporate governance is significant in modern business environments for several

reasons. First, it helps to build an environment of trust, transparency, and accountability

necessary for fostering long-term investment, financial stability, and business integrity

(OECD, 2021)1. Second, it helps to protect the rights and interests of shareholders and other

stakeholders, who provide the capital and resources for the firm’s operations. Third, it helps

to align the incentives and objectives of management and directors with those of the firm and

its stakeholders, thereby reducing agency problems and conflicts of interest (Boon, 2018).

Fourth, it helps to enhance the performance and competitiveness of the firm by improving its

strategic decision-making, risk management, and innovation capabilities.

 2

Corporate governance also relates to the responsible management of companies in terms of

their social and environmental impacts. It can help companies to adopt ethical values and

practices that respect human rights, labor standards, environmental protection, and anti-

corruption measures. It can also help companies to engage with their stakeholders and

respond to their expectations and concerns. By doing so, corporate governance can

contribute to the sustainable development of the society and the planet.

 3

Corporate Social Responsibility (CSR) and Sustainability

Corporate Social Responsibility (CSR)

Corporate social responsibility (CSR) is a business practice that considers the impact a

company has on society, employees, and other stakeholders. CSR involves going beyond

the legal and regulatory obligations of a firm and voluntarily taking actions that benefit the

social and environmental well-being of the communities where the firm operates. CSR is

connected to corporate governance because it reflects the values, principles, and policies

that guide the decisions and actions of a firm and its stakeholders (Meseguer-Sánchez et al.,

2021). CSR can also enhance the reputation, trust, and legitimacy of a firm among its

stakeholders and the public.

CSR can be divided into four categories: altruistic, legal, ethical, and economic. Economic

CSR refers to a company's obligation to create products and services that satisfy the needs

and desires of its clients while also bringing in profits for its owners (Meseguer-Sánchez et

al., 2021). Legal CSR is the obligation of a company to abide by the rules and laws that

control its sector or industry. A company's obligation to uphold the moral standards and

norms that are anticipated by its stakeholders and society is referred to as ethical CSR.

According to Chrisman (2019), philanthropic CSR refers to a company's obligation to support

social issues and causes that are important to its stakeholders and the general public.

CSR can have several benefits for a firm, such as:

 Improving its brand image and reputation among its customers, investors,

employees, suppliers, regulators, media, and society.

 Increasing its customer loyalty and satisfaction by offering products and services that

are socially and environmentally responsible.

 Enhancing its employee engagement and retention by providing a positive work

environment that values diversity, inclusion, empowerment, and development.

 4

 Reducing its operational costs and risks by improving its resource efficiency, waste

management, and compliance with environmental and social regulations.

 Creating new opportunities for innovation, differentiation, and market expansion by

addressing the unmet needs and wants of its stakeholders and society (Chrisman,

2019).

Sustainability

Sustainability is a comprehensive approach to business management that works to

maximize long-term economic, social, and environmental value. Sustainability aims to leave

systems capable of continued existence. There are three dimensions to a sustainable

business model: environmental, social, and economic. Sustainability is an integral part of

corporate governance because it ensures that a firm considers the long-term consequences

and impacts of its activities on the natural resources, human capital, and financial capital that

it depends on.

Environmental sustainability refers to a company's obligation to defend and maintain the

environment against deterioration or depletion brought on by its operations (Meseguer-

Sánchez et al., 2021). In order to be environmentally sustainable, a company must reduce

its negative environmental effects, such as greenhouse gas emissions, pollution, waste

generation, water consumption, land use, biodiversity loss, etc. Maximizing a company's

beneficial environmental effects through practices like renewable energy production,

recycling, conservation, restoration, etc. is another aspect of environmental sustainability. A

company can lower its expenses and risks related to environmental challenges, such as

climate change, resource shortages, regulatory compliance, etc., by focusing on

environmental sustainability. (2018) (Uribe-Macas et al.).

A company's obligation to uphold and support the human rights, dignity, well-being, and

development of its stakeholders and society is referred to as social sustainability. Observing

social sustainability entails making sure that a company's operations don't in any way violate

the rights of its stakeholders, exploit society, or pose a health risk. Assuring that a
 5

company's operations benefit or enable its stakeholders or society in some way, such as by

offering employment opportunities, education, health care, community development, etc., is

another aspect of social sustainability. According to Meseguer-Sánchez et al. (2021), social

sustainability can assist a business in enhancing its revenues and profits related to social

issues including investor confidence, supplier reliability, and employee engagement.

Economic sustainability refers to the responsibility of a firm to create and maintain long-term

value for its shareholders and stakeholders. Economic sustainability involves ensuring that a

firm’s activities are financially viable profitable competitive resilient adaptable etc Economic

sustainability also involves ensuring that a firm’s activities are aligned with its vision mission

goals strategies values etc Economic sustainability can help a firm enhance its performance

competitiveness innovation capabilities risk management capabilities etc (Boon 2018)

 6

Corporate Governance Theories

Corporate governance theories are frameworks that explain and guide the relationships and

interactions between the owners, managers, and stakeholders of a corporation. They also

address the issues of accountability, transparency, fairness, and efficiency in the corporate

sector. Two of the primary corporate governance theories are agency theory and

stewardship theory.

Agency theory is based on the assumption that there is a potential conflict of interest

between the owners (principals) and the managers (agents) of a corporation. The owners

delegate the authority and responsibility to manage the corporation to the managers, who

are expected to act in the best interest of the owners. However, the managers may have

different goals and preferences than the owners, such as maximizing their own wealth,

power, or reputation. This creates an agency problem, which is the risk that the managers

may act in a self-serving manner that is detrimental to the owners’ interests (Turnbull, 2019).

To mitigate this problem, the owners need to monitor and control the managers’ actions and

provide them with incentives that align with their own objectives. This may involve

establishing contracts, performance measures, compensation schemes, governance

structures, and external audits. Agency theory suggests that effective corporate governance

requires minimizing agency costs, which are the costs incurred by the owners to monitor and

control the managers, as well as the costs incurred by the managers to comply with the

owners’ demands (Turnbull, 2019).

Stewardship theory is based on the assumption that there is a harmony of interest between

the owners and the managers of a corporation. The managers are not opportunistic or self-

interested, but rather they are loyal and committed to the corporation and its goals. They act

as stewards who protect and enhance the value of the corporation for the benefit of all

stakeholders (Payne & Petrenko, 2019). Therefore, there is no need for excessive

monitoring and control of the managers by the owners. Instead, the owners should empower

and trust the managers to make decisions and take actions that are in line with their vision
 7

and mission. Stewardship theory suggests that effective corporate governance requires

maximizing stewardship behavior, which is the behavior that reflects a sense of

responsibility, accountability, and service towards the corporation and its stakeholders

(Payne & Petrenko, 2019).

The key difference between agency theory and stewardship theory lies in their contrasting

views on human nature and motivation. Agency theory assumes that humans are rational,

self-interested, and opportunistic, who seek to maximize their own utility at the expense of

others (Turnbull, 2019). Stewardship theory assumes that humans are social, altruistic, and

cooperative, who seek to fulfill their psychological needs of achievement, affiliation, and self-

actualization through their work (Payne & Petrenko, 2019). These different assumptions lead

to different implications for corporate governance practices. Agency theory advocates for a

more formal, hierarchical, and contractual approach to corporate governance, while

stewardship theory advocates for a more informal, participatory, and relational approach to

corporate governance (Younas, 2022).

Real-Life Business Scandal

One of the real-life business scandals that I have chosen as an example is the Enron

scandal. Enron was an American energy company that was once one of the largest and

most admired corporations in the world. However, in 2001, it was revealed that Enron had

engaged in widespread accounting fraud, deception, and corruption to hide its massive

debts and losses from investors, regulators, and the public. The scandal led to the

bankruptcy of Enron, the dissolution of its auditor Arthur Andersen, the prosecution of

several executives and employees, and the loss of billions of dollars for shareholders,

creditors, and employees.

The Enron scandal involved a complex web of unethical practices, such as:

 Creating off-balance-sheet entities and partnerships to conceal debts and losses

from its financial statements.

 8

 Manipulating energy markets and prices to inflate revenues and profits.

 Falsifying accounting records and documents to misrepresent its financial

performance and condition.

 Misleading investors, analysts, rating agencies, and regulators about its business

operations and risks.

 Bribing foreign officials and politicians to secure contracts and favors.

 Exploiting tax loopholes and shelters to avoid paying taxes.

 Abusing its market power and influence to lobby for favorable policies and

regulations.

 Engaging in insider trading, fraud, and obstruction of justice.

The consequences of the Enron scandal were devastating for many stakeholders, such as:

 Shareholders lost more than $60 billion in market value as Enron’s stock price

plummeted from $90 per share in 2000 to less than $1 per share in 2001.

 Creditors lost more than $20 billion in unpaid debts as Enron defaulted on its

obligations and filed for bankruptcy protection in December 2001.

 Employees lost more than $2 billion in retirement savings as Enron’s pension plan

was heavily invested in its own stock. Many employees also lost their jobs, health

benefits, and severance pay as Enron collapsed.

 Customers faced higher energy bills and blackouts as Enron manipulated the supply

and demand of electricity and gas in California and other states.

 Regulators faced criticism and scrutiny for failing to detect and prevent Enron’s fraud

and malfeasance. The scandal also exposed the weaknesses and loopholes in the

accounting standards, corporate governance rules, and oversight mechanisms in the

U.S. financial system.

 9

 Society suffered a loss of trust and confidence in the integrity and ethics of the

business world. The scandal also raised questions about the role and responsibility

of corporations in addressing social and environmental issues.

Analysis of Corporate Governance Theories in the Scandal

Agency theory could have helped in avoiding the Enron scandal by ensuring that the

shareholders, who were the owners and principals of the corporation, had more control and

oversight over the management, who were the agents and stewards of the corporation. The

shareholders could have exercised their rights and responsibilities to elect, monitor, and

evaluate the board of directors, who were supposed to represent their interests and protect

their investments. The shareholders could have also demanded more transparency and

accountability from the management, who were supposed to report and disclose their

financial and operational activities and performance. The shareholders could have also

provided more appropriate and effective incentives for the management, who were

supposed to act in alignment with the shareholders’ objectives and expectations. The

incentives could have been based on long-term value creation, ethical conduct, and social

responsibility, rather than short-term profit maximization, fraudulent manipulation, and

personal gain (Turnbull, 2019).

Although agency theory may have been flawed or poorly monitored at Enron which resulted

into the scandal. Most shareholders remained indifferent, and knew little about the real

situation as well as threats facing the corporation. The management, auditors, analysts, and

rating agencies were to blame for hiding or failing to pay attention to Enron’s problems

(Younas, 2022). Enron’s fraudulent schemes also managed to trick the shareholders through

high returns and growth prospects that the company offered that were matched with Enron’s

artificially inflated stock prices. This led to the management’s decisions and actions, which

were frequently complicated, obscure, and unscrupulous being unacceptable to the

shareholders as they never questioned or challenged them. In addition, the shareholders did

not make the management liable for their misdeeds and mismanagement, as most of which
 10

was ignored or even acknowledged and rewarded by Enron’s corporate culture (2022,

Younas).

Stewardship theory could have been applied in Enron by fostering a culture of trust, shared

values, and long-term objectives among the owners, managers, and stakeholders of the

corporation. The managers could have acted as stewards who cared for and served the

interests of the corporation and its stakeholders (Payne & Petrenko, 2019). The managers

could have demonstrated their loyalty and commitment to Enron’s vision and mission by

making decisions and taking actions that enhanced its value and reputation. The managers

could have also shown their responsibility and accountability to Enron’s goals and standards

by reporting and disclosing their performance and condition accurately and honestly. The

managers could have also fulfilled their psychological needs of achievement, affiliation, and

self-actualization through their work at Enron, rather than through their personal wealth,

power, or fame (Payne & Petrenko, 2019).

Enron, however, did not adhere to the stewardship philosophy, which added to the crisis.

The managers exploited and hurt the interests of the company and its stakeholders since

they were not stewards but rather opportunists. The managers routinely flouted Enron's

beliefs and ideals because they did not appreciate or share them. Additionally, they

consistently worked against Enron's long-term goals rather than pursuing or supporting

them. The management regularly lied to and misled Enron's shareholders and stakeholders

instead of showing them trust or collaborating with them. The managers' employment at

Enron did not satisfy or inspire them to fulfill their psychological requirements, but rather their

own self-interest (Boon, 2018).

Lessons Learned and Recommendations

The Enron scandal is one of the most notorious and devastating examples of corporate

governance failure in history. It reveals the importance and the challenges of ensuring

ethical, transparent, and efficient corporate governance practices in the modern business

world. The analysis of the scandal using agency theory and stewardship theory provides
 11

some key lessons and recommendations for companies to improve their corporate

governance practices, such as:

 Businesses should strike a balance between the interests and demands of all

relevant parties, including shareholders, managers, employees, clients, suppliers,

regulators, and society. Businesses should be aware that their decisions and effects

not only have an impact on their own performance and value but also on the

sustainability of their stakeholders' communities and the environment. Stakeholder

approaches to corporate governance, which take into account the rights, obligations,

and relationships of all parties involved in the corporation, should be adopted by

businesses. (Meseguer-Sánchez et al., 2021).

 Companies should align the incentives and objectives of managers and directors with

those of shareholders and stakeholders. Companies should design and implement

compensation schemes, performance measures, governance structures, and

external audits that motivate and reward managers and directors for creating long-

term value, ethical conduct, and social responsibility for the corporation and its

stakeholders. Companies should also monitor and control the actions and behaviors

of managers and directors to prevent or detect any agency problems or conflicts of

interest that may arise (Turnbull, 2019).

 •Managers and directors should be enabled to serve as trustees on behalf of the

company and its stakeholders. Managers and directors should be given the power

and mandate to act and decide as they deem fit within this framework. Secondly,

firms must assist managers, as well as directors, to satisfy their psychological needs

of fulfillment by accomplishing their tasks in the company in terms of achievement,

affiliation, and self-actualization. This environment requires companies to develop a

culture of trust, mutual values and long-term goals amongst the manager, board,

shareholders and stakeholders. (Payne & Petrenko, 2019).

 12

 Companies should ensure transparency and accountability in their financial and

operational activities and performance. Companies should report and disclose their

financial statements, business operations, risks, opportunities, and impacts

accurately and honestly to investors, regulators, rating agencies, analysts, media,

and the public. Companies should also comply with the accounting standards,

corporate governance rules, oversight mechanisms, laws, regulations, policies,

codes of conduct, ethics principles that apply to their industry or sector. Companies

should also engage with their stakeholders and respond to their feedbacks and

concerns (Boon, 2018).

 Companies should learn lessons from other firms involved in the corporate scandals

or crises related to corporate governance. Companies must look at the causal

implications, best practices, and resolutions regarding scandals or crises. Companies

should also compare their practices of corporate governance with those of other

companies that have had outstanding performance in corporate governance. Third,

companies should look for external counsel or assistance from experts or consultants

who may give insight into better corporate governance mechanisms. (Younas, 2022).
 13

Conclusion

In conclusion, this paper has demonstrated the importance and the challenges of effective

corporate governance for businesses and society. Corporate governance is a complex and

dynamic phenomenon that requires a balanced and holistic approach that considers the

interests, expectations, and relationships of various parties involved in the corporation. The

paper has used agency theory and stewardship theory as the main frameworks to explain

and guide corporate governance practices. It has also looked into Enron scam as an

illustration of corporate governance collapse with subsequent effects. Based on the two

theories, the paper has made some important lessons and suggestions for companies to

enhance their corporate governance practices. The paper has posited that corporate

governance is more than just rules, practices, and processes and is also about values,

principles, and ethics. Finally, it can be stated that corporate governance is an imperative

and timely theme for business and society of our times.

 14

References

Turnbull, S. (2019). Corporate governance: Its scope, concerns and theories. In Corporate

governance (pp. 415-440). Gower.

Payne, G. T., & Petrenko, O. V. (2019). Agency theory in business and management

research. In Oxford Research Encyclopedia of Business and Management.

Boon, J. (2018). Moving the governance of shared service centres (SSCs) forward:

juxtaposing agency theory and stewardship theory. Public money &

management, 38(2), 97-104.

Chrisman, J. J. (2019). Stewardship theory: Realism, relevance, and family firm

governance. Entrepreneurship Theory and Practice, 43(6), 1051-1066.

Meseguer-Sánchez, V., Gálvez-Sánchez, F. J., López-Martínez, G., & Molina-Moreno, V.

(2021). Corporate social responsibility and sustainability. A bibliometric analysis of

their interrelations. Sustainability, 13(4), 1636.

Uribe-Macías, M. E., Vargas-Moreno, Ó. A., & Merchán-Paredes, L. (2018). Corporate social

responsibility and sustainability, enabling criteria in projects

management. Entramado, 14(1), 52-63.

Younas, A. (2022). Review of Corporate Governance Theories. European Journal of

Business and Management Research, 7(6), 79–83.

https://doi.org/10.24018/ejbmr.2022.7.6.1668