The organizations are the core and center of all the major institutions.
The organizations are
operating across the globe and comprise of numerous sizes, inspirations, sectors, capabilities
and inspirations. The contribution of organization in regard to good governance has affected
economies and social affluence around the world. Moreover, a loss in the shareholder’s
confidence has been witnessed which also affected the market value (Agrawal & Chadha,
2005). However, as a result of the globalization the boundaries and barriers between countries
reduced leading to lesser control of government and higher degree of accountability need. Thus,
the corporate governance became a central tenant in the management of business in the present
complex global environment (Bhagat & Bolton, 2008). For the better understanding of
corporate governance, it is critical to first understand the concept. The Corporate
Governance refers to the process involved in making decisions and executing those decisions
in large organizations. A number of theories have been proposed for describing the association
amongst different stakeholders of an organization (Brown & Caylor, 2006). The purpose of
this paper is to understand the concept of corporate governance in light of three theories of
corporate governance. The three selected theories to be reviewed for the paper include agency
theory, stewardship theory and resource dependence theory. The paper also attempts to explore
the contributions of stewardship theory in general to effective governance in non-profit and
for-profit organizations as well as the relationship of a leader’s values and beliefs to effective
governance in organizations. In the end a conclusion has been made based on the carried out
analysis and review of the literature.
2. Discussion on Corporate Governance
Bebchuk, Cohen and Ferrell, (2008) described the concept of corporate governance as a
mechanism in which shareholders compel management to work in for the protection of their
interests by giving them a level of confidence essential for the effective functioning of capital
markets. Bhagat and Bolton, (2008) viewed corporate governance to be a process by which the
investors from outside safeguard their interests by the inside expropriation for instance through
controlling the shareholders and managers. The people inside the organization might just steal
the revenues, sale the assets, outputs or securities to some other organization in lower prices
than market, turn away the firm’s corporate growth opportunities, succumb to nepotism by
hiring relatives in in core management positions, or pay managers higher than they deserve.
Moreover, Carney (2005) said that the corporate governance is how the organizations are
managed and directed. The corporate governance has a wide scoped phenomenon and
encompasses the firm owners, creditors, debtors, analysts, financiers, auditors as well as the
corporate policy makers and regulators. This various actors in the corporate governance is
indicative of different social values, structures of ownership, business situation, degree of
competition, strength in enforcing the contracts (Bhagat & Bolton, 2008). Thus, on the basis
of the above discussion on corporate governance it is evident that it deals with the social, legal
and political environment that impacts the operations of corporation. Moreover, the corporate
governance is central to every firm since good corporate governance results in better
performance of the firm. In order to accomplish the organizational goals, it is required for all
other firm to enforce the policy of corporate governance (Boateng & Okoe, 2015).
2.1 Discussion on Corporate Governance Theories
There exist a number of governance theories (Solomon, 2007). However, for this paper three
governance theories has been reviewed i.e. agency theory, stewardship theory and resource
dependency theory.
2.1.1 Agency Theory
One such theory is Agency theory which describes the association amongst the “principals”
which are the business’s shareholders and “agents” who are the directors or executives of the
business (Berger & Di Patti, 2006). The Agency theory suggests that in order to carry out
business activities agents are hired by principals of an organization. Thus, the work is delegated
by the principals to the agents who are the managers and in turn the principals expect that the
agents will act in the best interest of shareholders and all decision making is done in accordance
to the principal’s interests (Mustapha & Che Ahmad, 2011). However, on the other hand, it is
not imperative that managers or agents carry out decision making as per the shareholder’s
interests. In reality, the agents might be subject to unprincipled conduct, protection of own self-
interest, and as a result a gap is created between the expectations of the shareholders (Cohen &
Holder-Webb, 2006). One of the prime characteristic of the agency theory is segregation of
governance and ownership rights and the employees of an organization are responsible for their
actions and thus are accountable. Moreover, it prescribes that the mechanism of rewards and
punishments could be employed for the correction of the agent’s priorities (Fong & Tosi Jr,
2007).
Gomez-Mejia and Wiseman, (2007) said that the Agency Theory emphasizes on the ownership
separation and segregation which leads in to the problems between principal and agent resulting
due to dispersal of ownership in the contemporary organizations. The Agency Theory
considered corporate governance to be a process where the role of board of directors is critical
and act as a monitoring tool for minimizing the issues in the relationship of principal and agent
(Berger & Di Patti, 2006). Furthermore, the empirical evidence on the corporate governance
attaches two elements on the agency theory. One factor is the reduction of firms between two
actors i.e. shareholders and management who have consistent and clear interests. The second
element in the agency theory is that all the humans’ act according to their self-interest and
would sacrifice other’s interests if it clashes with their own (Cohen & Holder-Webb, 2006).
Moreover, the firm has been described in early literature as an interconnection of agreements
between individual characteristics of manufacturing leading to the development of the agency
theory (Kivistö, 2008). Furthermore, the firm cannot be deemed as a living being rather a legal
entity, in which the contradictory aims and objectives of people are carried into the state of
equilibrium through the relationships of contractual framework. The firm is not just in
contractual agreements with its workforce but also with customers, suppliers and creditors. The
rationale for all these agreements and contracts is grounded in the assumption that every party
acts in their own self-interest and have motivation for the maximization of the firm value
resulting in the reduction of agency costs as well as adoption of accounting and reporting
procedures that efficiently depicts efficiently how they have performed (Miller & Sardais,
2011).
In addition, the agency theory points out the agency problem which refers to how to compel
agent in acting according to the principal’s best interests which leads to the agency costs, such
as the cost of disciplining and monitoring to ensure that the agent complies and does not abuse
his power. The agency costs have been defined as the aggregate of the entire expenditure
pertinent to monitoring done by the principal for limiting the deviant practices of the agent
(Mustapha & Che Ahmad, 2011). Furthermore expenditure related to bonding agent to
guarantee that some of the agent’s actions would not cause harm to the shareholder and
ensuring him or her about the compensation in case of any such happenings. Moreover, the
problem of agency is also contingent upon the characteristics of ownership characteristics of
every country (Gomez-Mejia & Wiseman, 2007). For example, the countries that have
dispersed structures of ownership, in case of a disagreement between investors and
management due to the firm’s performance, the shareholders take up the exit choices which
would be indicated by the decrease in the prices of shares. However, in the countries where the
ownership structure is concentrated with large number of powerful shareholders; the managers
are controlled through expropriation of shareholders with small number of shares for gaining
benefits of private controlling (Shapiro, 2005).