Theories Of
Corporate
Governance PPT
Theories Of Corporate Governance PPT
0
Agency Theory
1
0
Stewardship Theory
2
Governance means the process of 0
decision-making and the process by Stakeholder Theory
which decisions are implemented 3
0
Sociological Theory
4
Agency Theory
• Agency Theory Manager acts as agents Governance
approach is materialistic Behavior pattern is
individualistic, opportunistic & self-serving
• Managers are motivated by their own objectives
• Interests of the managers and principals differ
• The role of the management is to monitor and
control Owners’ attitude is to avoid risks Principal-
Manager relationship is based on control
Agency theory
• Historically, concern about power of big business owners;
today concern about power of top executives in large
corporations
• Major recessions of early 1980s, 1990s and 2000s, exposed
fraudulent or incompetent management
• Led to crisis of confidence in major corporations and a focus
on how they are governed
• Specific concerns: executive fraud, ‘fat-cat’ pay, loss of
savings and pensions, dishonesty to consumers,
environmental disasters, exploitation in developing
countries
Agency Problem
• Agency theory lies at the heart of conventional
approaches to corporate governance, but it overlooks
complications identified by organizational analysis.
• In particular, the presence of:
• Double agency
• Multiple agency
Double Agency
Problem
The key assumption in the governance literature
The Board of Directors has the capacity to
make sure that the managers of capital do the
right thing to the owners of capital
Corporate managers can in turn control the
behaviour of their agents (Employees) within
the firm
There is a double agency relationship involved
here, and hierarchy has been the traditional
approach to making it effective
Agency Failure
• Failure of the second agency relationship can vitiate
the first one, even in conventional hierarchies,
through:
1. Control loss – corporate intentions not realized
• because of pressures for autonomy
2. Distortions in a firm’s policies due to biased
• information being passed to top management
Internal Control Problems
TAKEOVERS AND DOWNSIZING HAVE LED TO A THE LOSS OF TRUST COMPROMISES INTERNAL
“BREACH OF TRUST” THAT EMPLOYEES HAD IN CONTROL
CORPORATE MANAGEMENT
• Multiple Agency (and Ownership):
• “Boundaryless organization”: increased use of
partnerships and strategic alliances.
• partners are owners and at the same time
Multiple agents for each other. Additional dimension of
Agency potential conflict.
• JV managers are agents for the partners, but
Problem often subject to role-conflict regarding
principals’ expectations.
Stewardship
Theory
• Stewards whose motives are aligned with the objectives of
their principals.
• A steward’s behavior will not depart from the interests of
his / her organization.
• Control can be potentially counter productive, because it
undermines the pro- organizational behavior of the
steward, by lowering his / her motivation.
• “Stewardship refers to the responsibility of the board to
oversee the conduct of the business and to supervise
management which is responsible for the day-to-day
conduct of the business.
• In addition, as stewards of the business, the directors
function as the catch-all to ensure no issue affecting the
business and affairs of the company falls between cracks.”
Canadian Guidelines
Stewardship Theory
Governance approach is sociological &
psychological Behavior pattern is
Managers act as stewards
collectivistic, pro-organizational &
trustworthy
The role of the management is to
facilitate and empower Owners’ attitude
Managers are motivated by the
is to take risks Principal-Manager
principal’s objectives Interests of the
relationship is based on trust Agency
managers and principals converge
Theory Vs Stewardship Theory A)
Behavioral Differences
Stakeholders = Shareholder Group + Non-
shareholder Group Employees Customers
Dealers Government Society at Large
Criticism of the Stakeholder Theory
03 • Not applicable in practice by Corporation
• Leading to chaos
• Opening doors to corruption
Stakehold
er Theory
Shareholder vs Stakeholder
Approaches Shareholder
• Obeying the law
• Maximizing shareholder’s wealth Assumption
• Board & Management have responsibilities to
parties other than shareholders.
• Profit maximization subject to the constraint of
respecting obligations owed to such
stakeholders.
04
Sociological
Theory
Power & Wealth Disclosure
Distribution
Board Composition Auditing
Financial Reporting Equity & Fairness
