12

0
co Hro rvrr E GO VEH N/\N CE

. ration al Pe rfo rm anc h

e: Good Corpor
. al p atee a1,,
' r;ib lc v:i lu c to t e ope ra tion
l
ZJ Imp rov ing th e pc·•cfc
( erforlri Q,-,
st~111 d,1rds add co ns r <l~l1·
1

.
co 111 p ;111y by :
. ·tn lcgic thinl<rn g at_th e to p;
•

.
• ; 11 ,p rov 111g ~ • ck and bett de .
, l .11 ·cl o f dir ect o rs to ta ke qui er
• t• 11:1h l111 g J0 , c mc nt a nd co nst a nt lll on· _ c:i_~i1
·.. , th e 111 , 11 wg I to r•·
I
11
11)1)
• l"cl li o 11 :1 I i'.11 If..,
. •• ti r11
' 1 , ;1cc s ,
1'1 :11 ;1 nrr1
I
I , ·os t o f c:i' pita l;
• rt•cl uc 111g <- •
r epo rts;
. _ , ,·nteg rity of fin a ncial
,1ss11n11 g l 1re
•
• . 1·,1g excess wa s tag e of co
mp a ny res o urces and Wti l·-
• ~1vo 1c , ' . '~ ir.
res o u rces opt , ma lly.
. . 1 Mi's ma na gem ent an d Corruption : A corri '
. .
(3 J Redu ce R1s <S, risk s in the ir bus me ss following the P<!D;
-re duce the qua ntum of 1
ou nt of tra nsp are ncy ne Pt~<
of good gove rna nce. Due to the am
co mpa nies tha t follow the prin_cip
les_ ~f goo d governance, ~ess~r
pos1t10n and pow er Will be any i:
vidua ls inte nding to mis use the ir
inc ide nce s of corruption, fr~n an.,
do so. This wil l red uce the overaH ~di:
mis ma nagement.
( 4 ) Stability and Growth: Ad opt
ion ofgoo d cor ~o rat e governance
ent erp ris e. Pta~.
provide stability and gro wth to the
Re pu tat ion and Re cog nit ion : Good cor por ate gov ern anc e fi0 ll 0w
(5) . est ors , the custom
f t h e inv e,
· h
firms allo w them to gam t e tru st o
com mu nit y at large. This wil l hav
e a pos itiv e im pac t on the ersanq,
rep uta tio n. It helps in bra nd for ma
tio n and dev elo pm ent . 1
;irn~at.
com pan y pro spe r in the lon g run and ach iev e its s ~
wil l help the goals ~!
quickly.
Hig her Fir m Va lua tio n: Go od cor por ate gov ern anc e has a Posj.
(6)
pany. Many res ear ch have pr tivei-
pac t on the sha re pri ce of the com
ces for the sha res of well-:ed ~
investors are rea dy to pay higher pri ana;
company.

I
i
!
Theories of cor por ate gov ern anc e ma y be
• Agency Th eor y
bro adl y cat ego ris ed as:

I • Ste wa rds hip Th eor y

• Stakeholder Theory

I
 CO N CEPTUAL f- HJ\M EW OR I< or, CO RPORATE GOVERNANC E 13

• Resource Dependen cy Theo,-y

• Manageri al Hege mony Theory
Mency Theory
Agency the~ry provides the fundamen tal theo1-etica\ base of corporat e
overnance . fh e essence of the theory is separation of ownershi p and control.
~harehold ers as_ o""'.'ners of the company set the objective s of the company an?
acting as the principal appoints the managers as their agents to pursue then-
objectives. Thus,_ th~ managers (agents) run the company on beha\f of the \
sharehold ers (principa l). The objective s of managers , many times are different 1
from the sharehold ers. Such conflict in objective s is referred as the 'agency \
problem'. Berle and Means (1932) drew attention to the growing sep~ratio n \
of power between the executive managem ent of major public compani es and \
their increasin gly _d iverse and remote sharehold ers. The separatio n leads to \
self-inter ested action by those in control i.e. the managers '.
The theory states that the separatio n of managem ent from control in firms creates
agency issues due to the conflicts of interest between owners (principa ls) and \
managers (agents) who are assumed to pursue self-inter est (Fama & \ensen 1
1983; Eisenhar dt 1989). This relations hip enables informat ion asymmet ry, ;:
goal conflicts, adverse selection and opportun istic behaviou r by the agent ..
(Eisenha rdt 1989). '
The agency theory is an extension of the contractu al theory of the firm develope d
by Jensen and Meckling (1976), and Fama and Jensen (1983) wherein a firm
is view~d as the nexus of contracts (written and unwritte n) among different
constitue nts specifyin g the rights of each agent (manage r) in the firm,
performa nce criteria on which agents are evaluated , and allocatio n of profits.
Agency theorists argue that since the contracts are unable to envisage all the
continge ncies which may take in future, the manager s end up [Link] substant ia1
control rights and in conseque nce discretio n to allocate funds. ln theory, th(
manager s are the agents of the owners, but in reality, they acquire significa n
control over the funds. The manager s use their control rights to pursue the,
personal goals even expropriate the funds through many forms: paying inflate
transfer prices to affiliated entities, engaging in insider trading, paying excessi,
compens ation to themselv es, investing in declining industri es and so on.
Manager s of the firm are in the advantag eous position over the owners
account of possessi on of the manager ial expertis e and firm- specific kn owled
This position acts as instrum ent to the manager s to gain control over

i. Jensen and Meckling (1976); Eisenhardt (1989)

 l
14 CO RPO RATE GOVERNANCE

firm . A conflict of goals thus occurs as managers PL1rsue action.s which . ..

be
. nen,
th emselv es. It 1s also argued th at t 11e owne1•s ca nnot verify, or 1t 1s difficult f
· · o1
th em to venfy th e appropriate ness of agents , be havior· To resolve th e conn1llt1 - 1

of interes t, certain mechanisms ii are prescribed in the th eory to protec

t thl
interest of the owners of the firm:
. . system . . t he If . t
• aud1tmg to 11m1t se ·tn eres te d managerial behaviour·'
· s · g assura
• vanou bondm nces by the managers that such abuses don 01
take place;
• changes in organisation system to limit the ability of managers to engage
in the undesirable practices.
The implicit assumption of the agency theory is that manager~al behavi
our
is self-interested and that managers are inherently opportumSrs a nd
take
advantage of every opportunity that comes to maximize their person~! ~el
fare
at the cost of the shareholders. The focus of the theory is on idennfymg
the
governance mechanisms to limit the agent's self-serving behaviour a nd
thusI
solving the agency problem. The role of efficient capital market and labour
market to control the self-serving behaviour of top executives is prescribed by
the
~ agency theoristsiii. The role of the board of directors is particularly empha
sized
~ by the protagonists of the theoryivto monitor the opportunism
::E: of managers
x: and control the self-interested tendencies of
;:S. the corpor ate manag ement. The
theory propound that an effective board comprises majority of directors
who
are not managers in the company and independent from the management.
The
interest of such directors referred as outside directors or unaffiliated directo
rs
or independent directors align with the shareholders. It is contended
that
independent directors lead to superior corporate performance by mitiga
ting
the conflict of interest between owners and managers. This proposition
has
driven a series of studies on the issue which has reported a positive relationship
between outside directors' representation and firm performance.
The agency theory is also called shareholder theory of the firm because
the
role of managers of a firm is to act as agents of the shareholders. As agents
,

iL Jenson and Meckling (1976)

iii. Fama (1980)
iv. Fama and Jensen (1983) ; Waldo (1985), Fleischer, Hazard and Klipper
(1988)
v. Baysinge r and Butler (1985) basing th eir study on 26~ U.S. corporations
found that firms with more
outsi de board member s achi eved higher return on equity. Ezzamel and Watson
(1993) also concluded
likewi se after exa mining a sample of U.K. firms. Pear_ch and _Zahra (1991)
reported that boards with a
hea lthy representa tion of outsid e members are associated with better financial
. . performance co d
to th ose with a smaller percentage of outside directors. Several other researchers have also mpare
noted a
positive relati onship between outsid e directors ' represe ntati on and firm performa
nce (Rosenstein and
Wyat, 199 0; Millstein and MacAvay).
►

CO NCE PTU1\I. FH/\Ml~WOHI< OF C.O HPOH/\TE GOVEHN/\N CE 15

th e)' ~,re required lo apply lh e resources of th e firm for th e purposes authorised

hV the sharehol~lcrs ;i ml lo serve th e ob jectives of th e sharehold ers which is
· -,~[Link] ol we;:dth.
11 \, '
,,,,ency theory h;:is its s upporte rs .J S well as detracto rs. On e of the most
' ~0 ,nincnl limitations of th e theo ry li es in its over stress on sharehold ers' wealth
1
:,,. 1~i1niz:1tio n to the exclusion ofother important sta kehold ers. Th e governance \
( lllodern giant public co rporations has complex economic, soci al and moral 1
0
issues hav ing enormous influence on th e lives of million s of peopl e. A th eory \
of gove rnance which does not address these issues is bound to be inadequate. \
1
The 'age ncy problem' is particularly acute in Anglo cultures with dispersed
0 vmership"'. Cross nationalresearch conducted by Professor La Porta and others I
have sugge st ed that in developing countries the primary agency problem has \
histo rically been between majority and minority owners (and not between \
owners and managers). In these countries, in many cases, the company is \
contr~lled by a dominatnt gdroup of shareholders not by managemf e~t. I~tysuch \
situat10ns, owner con ro 1 oes little to protect the interest o mmon or 1

external shareholders who are not part of the dominant group. Further, the \
separation of ownership and control is less marked in Germany, Japan and most 1

other Asian countries owing to block holding by banks or business families. In ~

these jurisdictions, a company cannot be described by an 'agency relationship' ~
between shareholders and managers. ~
The agency theory is also criticized for its overstatement of the self- interested
qualities of human beings, and for its lack of empirical developmentvii. The
structure of directors on the lines of executive or non-executive directors to
resolve the agency conflict is also challengedviii. The behaviour ofboard members
\
\
is also likely to be shaped by their background, values, experience and tactical \
I
skills not me_rely on the basis of their being insiders or outsiders. \

, ,,: ··;. , Vi//{ ·}t< ?( .>?(/(;:.:·• ...

\
Proppsition,s oft"4geitcylPlieo,,;yY /
··</-. ;, .·.,' ~

(il The'jT'plict~arsu~ptiqAof,the agency theory is that managerial behaviour is \

1/ <

· .·. seJf"intere,s;t:ed ~~~ t~.at managers are inherently opportunists and take ad- \
;;:ff !tantag~ of:,[Link];&pl)ortunity that comes to maximize their personal welfare \
;,4"]fit¥-;I/),!'. ' it :. , ; ,;, '· ' / , ' , '
7

/i#{l ~

&ti:rm ~cost':o ftheishareholders, ,

f$!)}17!,Y j f ,- ; , ,, 3'.tt /,;, -.·.; _ -.-.·_ C...... _ ·
CJ' .
I
i

jt\ifftlr«t tgivi~f.[tij~:;t!i~ifY{son identifyi11g the governance mechanisms to limit

i J~<~he~tg(~tf~t.~Jf.1~~,1nt1:1?ellexi9.~r: .a11st t\lussolving the a~ency problem,.
0
.:tf '// «,;,,%/J}~/,/~>·. f;}f%fft)ff;'.)/:\::\:::;:;::::::::t:~?(,t;f:-/:·/../::-:::/:-·•::;::>:::::··:: :;:::{•:.::::,.::· ·:·:·-::·· ::- ;, . ·. "/.:'

vi. Turnbull, 1997

vii. Eisenhardt (1989) and Perrow (1986)
viii. Zajac and Westphal (1996)
 16 CORPORATE GOVERNANCE

(3) The theory prescribes the role of efficient capital mark

. b h . . et and labo
to control the self-serving e av1our of the managers. ur rnatket
( 4) The role of th e board of directors is particularly emph ._
to monitor th e opportunism of .m anagers and control th asizlefd· by the the 0 ,.., _
denci cs of. the co rporate
. management. ese -rntere sted ten. ·y

(SJ Th etheo rya ss um esthat

.
aneffectiveboardcomprises rna· .·
.
.
Jo1 rtyofd1rect
·ire not manage rs rn th e company and are mdependent fr ti 0 rs'Nho
< • . om ,e ma nag
The interest of such directors referred as independent ct · ern ent
.. . . . . . d . .. rrectors align ..
the sharehold ers. It 1s c1sstmie that independent directors I d With
. b .. . I ea to supe .
co rp ora te performance y m1t1gatmg t 1e conflict of interest b tw riot
e een ow
and man age rs. ners
Criticism of the A!}ency Theory
(lJ Over Stress on Shareholders - One of the most prominent limitati
. .. , . · onsof~
theory 1s over stress on shareholders wealth maximization to the excJ . e
of other important stakeholders. The governa1ice of modern giant publi~sion
porations has complex econorpic, social and moral issues having enorrncor.
influence on the liv_es of m_iUions ofp~opl:. A theory of governance which
not address these 1ssues1s bo~.n dtg ~emadequate.
d:~:
(2) Not Relevant for D~~el«>rir~ijgfflli!~~ - Jhe 'agency problem' is particu.
larly acute in America~ .?n~.~t~~f~fi ~~!~~es ~ith dispersed ownership. It is

I
!

I
I
I (3)
1
I
i
background, values,/ .¢¥.P.~t~F1Fi
i!~~£~tc.~,skmsnotmerely the basis on
of their being ,insi?e,i:sbr [Link]~: x~~ $t111:cture ofdirestpr7 on the lines
of executive or non-execqgve cli[~<;:t<?r:f\[Link]·e th~ .~g~11GY £9J}ftlc;:ti!s also
challenged. '•.• · , ''\

Stewardship Theory
The stewardship theory of corporate governance is an alternative to the agenq
theory which discounts the conflict of interest between managers and owners
The theory argues that managers are inherently trustworthy and not prone tc

I
 CO NCEl'Tlll\1. FHI\ MEWO IU( OF CO Hl'OHI\TE <; OV EHNANC I·: 17

uii sa ppropriate th e fund s of th e investors'' . Th e manage rs attach signifi ca nt

va lu e to their own perso nal rcput~1ti on.
·rite th eo ry pu t fo rth th e argum ent th at mzi nagc rs ..i re not mere ly age nts uf t~e '
s
-ti ~irehold crs; th ey arc goo d stewa rd s ul co mpa ny and work dil ige ntly to atta in
- . .
high leve ls ol co rporate prunt and sharehold ers re turn . De sire to max 1m1se
·nco ni c (age ncy theory ) might be cou nte r ba lanced by 'a mu ch larger ra nge ,
~if 11uma11 motives', in cl udin g needs fo r ac hi evements, re sponsib ili ty, a nd 1
recogni tion, as we ll as be li ef, respect fo r authority a nd mot ivation. Th e prim a_ry
11
,cchani sm to co ntro l the manage ri al behavi or is th e market fo r ma nage rs with
strong perso nal reputati on. Thus, th e managers far from bein g a n opportuni sti c
shirker esse nti ally want to do a good job, to be a good stewa rd of th e co rporate
agents wh ose motives are aligned with the objectives of their principal.
Stewa rd ship theory assumes that managers are faithful , respon s ive and
effective persons and good administra tors of the resources entrusted to th e m.
on e of the protagonis ts of the theory Schoorma n & Donaldson ( 1997) state \
that "an administr ator protects and maximizes sharehold ers' wealth, thus, the \
shareholde r's utility functions are maximised". From this perspectiv e, directors \.
and managers work for sharehold ers ensuring the growth of sharehold ers' ....,
wealth. In compariso n with agency theory, where the managers are tempted to ~
take decisions for their own advantage not for the owners, the steward theory ~
assumes that managers act not in their own interests but in a situation · of 2

interest situation they put the company's interests in front of the personal ones. f
In contrast to agency theory, stewardship theory pro poses that the interests of \, \
the company managem ent and the sharehold ers are in alignment (Albrecht et
al., 2004 ). Managem ent is assumed to be trustworth y and that their interests 1
are properly aligned with the organisati on and its owners. Thus, opportun istic \
behaviour such as earnings managem ent would be unlikely to happen and there \
is no need for monitorin g cost to be incurred. i

The theory also referred to as 'trusteesh ip theory'x regards business firm as \\

a nexus of long-estab lished trust relationsh ip. The large public corporati on is
vi ewed as a social institution , not the creation of a private contract. The emphasis
on stewardsh ip and trusteeshi p theory finds manifesta tion in the Anglo-Ind ian
laws also wherein the duties of the directors are based on stewardsh ip. In fact
underpinn ing of company law in the UK and most other commonw ealth countries
including India is that directors have a fiduciary duty towards the sharehold ers
of the company. As stewards they control and manage assets of the company
which they do not beneficial ly own it. The duty of the managers (directors ) is

ix. Dona ld son,-1990 ; Donaldso n and Davis, 1991, 1994

x, Kay and Sil herston (1 995)
 18 CO RPORATE GOVEHN/\N CE
,
to sustain the assets of comp;rny and to carry forward the broader ·
company, not just the finan cial objectives of th e shareholders. PUrposl\ i
Ste ,,vardshi!J theorists th e main.· protagonists
. . .
of which are Donalds
. ' onanctD
point out th Jt the non-executive boa1d ol directo rs 1s an 'ineffecf c1vi 1
vv hi ch is opposite to th e agency theory. The protagonists of the theo/ve devic~
giving !ugh· authonty . andd 1'sc1·e t·1011 to CEO' s· who are viewed
· Yadvo cat\
as stewa
co nducting empirical studies, they establish that executive dominated ~ds. BJ
have significantly higher corporate performancex1• The focus of the th 0 c1rd,
thus on structures that facilitate and empower the managers rather theory i,
mechanisms to monitor and control them. an th1
The agency and stewardship theories contradict each other. However c
.. . . , erta·
commonaht1es between the two theories may be observed. Fmancial repor . 1
.. . h . t1n
disclosure ~n d au d1tmg are 1m_portant m~c amsm ~o ~egulate the manageri;1
behaviour m both_ the theoriehs. The difference 1s m the ~resumption t
the managers. While agency t eory assumes that managerial behaviour
opportunistic directed towards personal gains, stewardship theorists see tr
mechanism of control to confirm inherent trust worthiness of the managers
@ In the final analysis, the individual acting as steward or self-seeking agei
~ is contingent upon certain personal characteristics of the individuals ar
i particular situational factors including cultural milieu in which the manage
~ function.

Propositions
(1) The
~f~ft~i j~j(~lm;~l~~l:i ~! ~i~~i .. .
[Link]~Y~~~~~~~\ >. /~[Link]~.119tmerelya~e11ts [Link] shareholder!
>, · •

they ar.e goop ?~.~f~~p~ 9ff£11,1~a~y~tjpfopr-k dil)gently. to~ttain high levels c

corporate prof}t..a'.1,}~~p~rih?lq~r~ r~!uf-'n.\This is b~ca~se their desire to mai
imise persop.alirt59.n1e1s cou!t~~.l:>al~P~~.d by'.'amucli larger range of huma
motives', [Link]:eps, ;p~;~9~i,ey~&e.r-~,/ esponsibility, and r,ecognitio1
as well as-belief, respect for aµtligrity aµd tnothration. ' · > ,
. . '. .. :-: +: '< .: : : .. \: :'.(_:Ji(\:: : \_ :\. ) _. .-~~·<<_·\ ,_;: : :-,:·> .. -'.:: \:.. . .- . . \:: -. :\

·(2) The primary mecnanistnto t:9n~.r~l;the man'agerial beh~y;ip~I'i~,~~e mark1

for [Link] witll strongpersol\ali~putaHon;.Thus,th~,½lanag~~sfar fro1
being an opportunistic shirker essehtiallywanHo doa;~92~:~o~~}?,fieagoc
steward of the corporate agents' whose motives,frea\fgh¢diji~tl.t~objectiv,
of [Link]. , , : .- < \;:\ix>/)<;</ t
'U,;(3) The theory points o~t thatthe.•~o~-e*~cut!.fy~P.~r~re!14,1i~~~~~sart 'lneffe
;i ,t'i~!devic;e'. The pro~agoqists ?(tJlith~2Ei\~9}1g~}t#. ~l~ij~:nttij·~1:1~prity ar

xi. Baysinger and Hoskisson (1990); Donaldson and Davis (1989, 1991); Finkelstein and D'Aveni (19~
Boyd (1994); Hoskisson et al. (1994); and Hill and Snell (1988) establish that inside directors
associated with higher firm performance.
►

CO NCEP TU AL FRAM EWOR K OF CORP ORATE 1.9

GOVE RN A NCE
\
disc1 :etion to CEO' s _who a re vi ew ed as stew a rds. By
cond ucti n g em pirica l
studi es, they esta blt s h that execu tive do1ni natec l board
\
hi gh e r corpo rate p erfor m a n ce. s h a ve s ig n ifican tly

( 4-) The foc u s of the theor y Is on s tru cture s t h at facili tate a nd

agers rathe r than t h e m ech a ni s m s to moni tor a nd contr
e mpow er the man-
ol t h e m .
\ I
stak ehol der Theo ry I
Sta ke h old er theo ry adop ts a broa der a ppro ach a nd \
lays e mph as is that
corp o ratio ns mu st co ns ide ,- wid e r it)te rest of the soc
ie ty whil e runn ing the
busin esses . The e~se ntial pre mise of the theo ry is that a com
pa ny h as relat ions hip
with many co n st1 tuen t grou ps that affec t and are a ffect
ed by its d ec is ionsx" ·
Th e co n st itue nt g,-ou ps are refer red as the stake hold ers.
Firm s mu st r es po nd
to the expe ctati ons of thes e dive rse stake hold
ers to achie ve long -term valu e
maxi misa tion.
\
The argu men ts of the theo ry are base d on 'soci al cont
ract' theo ry whe rein '\
orga nisat ions are seen as acco unta ble to all their
stak ehol ders beca use
orga nisat ions use reso urce s of the socie ty and enjo y
spec ial priv ilege s from
socie ty. Sinc e orga nisat ions need socie ty's perm issio n to
oper ate, thes e are liabl e _,
to be cont rolle d by the socie ty and thes e mus t subm
it to the requ irem ents of :;.,.
the socie ty. Firm in this theo ry is view ed as a syste m of ~

stak ehol der oper ating •;..,

_,.
with in the larg er syste m of the host socie ty that prov >
ides the nece ssar y lega l zz
and mark et infra struc ture for the activ ities of the firm
xiii. The purp ose of the ®
firm is seen to crea te valu e for its stak ehol ders by conv
ertin g thei r stak e into
I
good s and serv ices. The theo ry, thus , cons iders firm as \
an inpu t-ou tput mod el
by addi ng all inte rest grou ps - emp loye es, cust ome rs, deal
ers, gove rnm ent, and
\
the soci ety at large to the corp orate mix.
The term 'stak ehol der' first appe ared in 1963 in the
at the Stan ford Rese arch Insti tute. The conc ept was
man agem ent liter atur e \
thos e grou ps with out who se supp ort the orga nisa tion
origi nally defi ned as
wou ld ceas e to exis eiv. l
\
inclu des all grou ps or \
Afte rwar ds takin g a broa der pers pect ive, 'stak ehol der'
indiv idua ls who can affec t or are affec ted by the orga \
nisa tion that is all thos e
who have a stak e in an orga nisa tion. As a resu lt of this
chan ge, the num ber of
grou ps iden tifie d as stak ehol ders has incr ease d dram
matt er is that the char acte risat ion of stak ehol der' has
atica lly. The fact of the
l
\
turn ed virtu ally ever yone
into a stak ehol der. \
I

xii. Jones and Wicks , 1999

xiii. Clarks on, M.B.E. (1994 ) A Risk Based Model of Stakeh
older Theor y, The Centr e for Corpo rate Socia \
Pe rform ance & Ethics , Unive rsity of Toron to
xiv. Freem an (1984 )
 C:OUPOIV\TI•: GO Vl•:HN/\N CE
20
•• . . • · l>·ised 011 th e belief th at manage rs should work in the b
1 111s t11 eor y 1., . . _. . _ __ __
. . . . •h old ers •11 1(1 the board or d11 ec to1 s should [Link] the p esti
err0 ~ t~ t,
0 I .111 ., 1.1 1
,c ·• . . . . .
. . , •rs Th e 110 tr 0 11 ol the th eory 1s wid ened
. . ,
0 I 111 .111 ,1gc . . . . . . f
111 tod ay s seen . rt'riil
busin ess needs to take ca re th ~ 111tc1 es t~- a_1I st~ke~olders
. ar10 11,
(Schmid \\i~ 1-:
.
I·rcc n1:111 ( l 9U4)· J rgued that a stakeholde, 1s cons1cle1. eel .as an orga . '2oor
:iny individu ~il wh~ ca n affect or affected by the organization decisi n1zar ,
on s, A'o~,:
) . ·s,,-: different vi ews and amendments came under the
1 ,1~-.... ,, . stake holde
.
,rn d sco µe_of th ~ th eory _becomes ~,de~ed, thus al_l the mem rs , thSt111
bers of soe\
where bust11 ess ,s operat111g, worke1 s of firms, suppliers of raw
. mater · c,b
co mmunity and competitors become an· impo . ta s I
rtant element of stakeh1 · oe:·,
theo ry (Free man et al., 2004). Stakeholder theory stipulates that
a firm O1der.
to improve and balance the interests of its several stakeholde
rs in such Wor~'.
that each stakeholder receives s~~~ level of com~ensation. It
is suggeste~ ~a)
a firm is no longer sole respons1b1hty but also a firm needs to
. . take care 0at
interest of socie ty at large. Thus, stakeholder theory proV1. des much wider Of tnc
of corporate governance. However, the stakeholders of the
company coscop_i
of its employees, customers, lenders, suppliers, competitor
s, sharehol~sist
Ij investors, governments, banks, and society at large. ers,
~ The stakeholder model is often claimed to be
the basis of industrial success a
~ social stability in Germany and Japan. In the incorporated firms of
Gerrn nd
~ (Kapitalgesellschaften), stakeholders influence is exerted through a
two-~ny
- company board. In Japan, stakeholder conception is deeply
rooted in corpora:r
thinking and practice. Yoshimori (1995) found in a company
survey that ;
per cent of companies agreed to exist for the interest of all the 9
stakeholder
Kotter and Heskett study of 200 U.S. companies over 20 years S.
found a positive
correlated long-term profitability with corporate cultures
that express the
company's purpose in terms of all stakeholder relationship.
In the current business environment not only owners or share
holders are
more interested in the success of the business but also th,e suppl
iers, creditors,
employees, potential investors, government & regulatory organ
izations, local
community, lenders, trade associations, and the general publi
c have a director
indirect interest in business activities. This notion bringsstakehold
erstheoryto
a more prominent position, where all stakeholders' interest has
been considered
and acknowl edged. This theory refers to dealing with all stakeholde
rs on a fairer
basis (Harri son et al., 2015; Klepczarek, 2017). The figure below
explains the
different stakeholders which can affect and affected by organizatio
n's decisions.
 CONCFPTUI\I · ·
' _,r-Ri\[Link]< OF COHPOHI\TE GO VEHNI\N CE 21

Management

Owners
Local
Community

The Company

Suppliers
Customers

Employees

THE STAKEHOLDERS MODEL

(Adopted from Freeman R. Edward, Strategic Management: A Stakeholders
Approach, 1984) ~
Arguments of the Stakeholder Theo,f yv X
~
2.
(1) The arguments of the theory are based on 'social contract' theory wherein i
organisations are seen as accOUQtable to all their stakeholders because organ-
isations use resources of the society and enjoy special privileges from society.
Since organisations need society's permission to operate, these are liable to
be controlled by the society and these must submit to the requirements of
the society.
(2) The purpose of the firm is seen to create value for its stakeholders by convert-
ing their stake into goods and services . The theory, thus, considers firm as
an input-output model by adding all interest groups-employees, customers,
dealers, government, and the society at IJrge-to the corporate mix.
Criticism of the Theory
(1) The major problem with the stakeholder theory is of defining the concept
of 'stakeholder'. What constitutes a genuine stakeholder? Taking a broader
perspective, 'stakeholder' includes all groups or individuals who can af(ectc
or are affected by the organisation that is all those who have a stake in an or-
gani sation. As a result of this the number of groups identified as stakeholders
has increased dramatically. The fact of the matter is that the characterisation
of 'stakeholder' has turned virtually everyone into a stakeholdet:
(2) Stenberg in her paper published in 1997 put forth th e stro ng argu men ts
against the stakeholder theory saying that the theory is both misguided and
mistaken . She argues that the theory is incompatibl e with busin ess an d-with
 CO RP OH/\T E GO VER NA NCE
22

I ~- (!OO(1 CO i 1
10 ' . r itc go vcrn c1 11 ce as th e l<ey co ncep t in th
e co rp o~
/ I . •
is the ii cco unt.i bi lity. If til e cl 1rcc tor s (as age nts) . gov(:
atte mp t to se rve: l<J rti;, r,
pi .·,nc1
•p. il .s . tll cv w i ll fJ i l to <; J l1 sly t hose w ho have
- a ge nuin e cl
aim '' rr,;..
I (
.,)
1
o r )-!, l ll l:-- ,ll lOll.

- -1 ,
1 lL s·t il 1·cll old cr t heo ry un d er m i nes pr iva te prop
• • erty by deny in g
~r
I I

,
ri,il it to dete nni 11 e how their pro pert·y will ,

be use
0\•1 fl .
d. It also deni e~ <: r•., .
\\' Mll ir ll til e .1gc 11 Ls owe to t 1ie pnn · · 1 ·r1 , th 1:
c1pa s.
, e managers owe shareh o,,
·Jl idi ci,iry d ut·y' w hi ch is not ge nera lly gran te d to
_ - - -- - - - - - - - -any oth er sta kehoi° 1d1:, :
-- - - der ,
Resource Dependence Theory ~
Wh ile both stakehold er and agency theory focu
. sed on the man ag
relat ions hi ps betwee n dtfferentgroups, resource dependence theory intro ers .
ct <l r ·.
dccess ibil ity to resources as a crucial aspect of corp
orate governan ce ~l ~-
theo ry deve loped by Pfeffer and Salancik in 1978
, is the study of ho~l\ .
e\te rn al environm ental resources of organisations
affect the behaviour v th:
orga ni sation. Of a· 1

One important assumption ofresource dependence

theory is that firms can
be fully self-sufficientwith regards to strategically critic
al resources for surv·not
~ They need to depend on resources from . . IVaJ
outside parties to sustain itself. T h:
~ th eo ry postulates that dependence on "crit
ical" and important resourcee
~ influences the actions of organisations. The envi
ronment provides "critical:
resources needed by the organisation.
Th e basic proposition of the theory is based on crea
ting links between the fir
and th e external environment wherein directors of
1 a company are responsib~
to match the changing environment trends with the
firm capabilities. Resource
depe nd ence theory highlights the role of the board
of directors that they play
in acquiring and securing critical resources such
as skills, information, raw
materials, and uses their expertise to connect business
with the resources. Based
on this notion board of directors is considered as a
key source that connects an
organisa tio n to the external environment and prov
ide resources to the firm. As
a resu lt, a busi ness performa nce is highly dependen
t on the power of a board
of dire ctor s to acquire and secure scarce resource
s.
According to Abdoullah & Valentine (2009), the
managers responsible for
leading a business are classified into four categori
es:
(i) "i nsiders", meaning the current and former
managers of the company
offering expertise in specific areas of the company
;
(ii) "bu si ness experts", meaning the managers
ofbigcompanieswho provide
expe rtise in business strategy, decision-making and
solving economic
probl ems facing the company;
 CO NCEPTUAi. Fl1J\MEWOHI{ OF CO HPOllJ\T E GOVEH NJ\N CE 23

(iii) "support speck1lists" represe nted by lawyers, banke rs

and insura~ce
comp anies , publi c rekttlons ex perts and all those ex perts who
provid e
specia lised supp ort in their individual spec ializatio n area;
iv) "communi ty influenti al", meaning politi ca l lea ders, aca demi
c leaders,
( religious leaders or soci;:i l and co mmunity orga nisation lea
ders.
. ,d 0 11 the above categories of direc tors, th e board may offer th e fou
r prim ary
f3;1:ic fits to the firm, first, ;:idvi ce and co unse l servic es
oene . .· . .
secon d legitim acy, th ird
' . .
1iannels for commLllllca tmg 111format1on between exter n al organ1 zat1ons and
c nnn and fourth access to commitments or support from outsi
th e · s 1·~ _0 f boar d de elemen ts.
ThttS, the cl1v;r members is seen as the critical element wh1c · h Iea ds
the boards ability to connect the firm with the best resources
I
and further 1
~~gh financial performance of the business. From the point of view
of allocated \
internal resources, the power engaged in the process of allocated
be stronger or weaker and it depends on the extent to which mana
resources can I
gers belong !
to one of the four categories listed above.
The resource dependency theory emphasises the complex character
of "network"
concept underlying the concept of corporate governance .
\
Managerial Hegemony Theory
~
The managerial-hegemony theory describes the board as a de jure, -;;,

but not the ~

de facto governing body of a firm. It is because the company manageme
nt takes ®
the real responsibility of running and controlling the company.
While agency I
theory highlights the failure of the board in mitigating agency
conflicts such
as excessive executive pay, managerial hegemony theory states
that board is
a legal fiction which is dominated by the management due to the
weakness of
shareholders exercise of ownership and control rights. The theor
y argues that
owing to dominance of professional managers within a firm, the
board plays a
supportive role confined to certify management decisions. The
managers run
the day-to-day operations of the company which most often loose
n the control
of the directors over the company making the board a mere statu
tory body.
While there is lack of empirical evidence on the theory, there are many
examples
across the world where boards have failed to "control" mana
gement at the
expense of shareholders and stakeholders. The Board in many
cases have
formally delegated its powers to the managers. In many Sfate run
enterprises
where the state exercises more direct control over the organisatio
ns, the board
is just a symbolic with no meaningful power or influence. Many
Non-profits
organisations are also exposed to managerial dominance and hegem
ony.
 24 CORPO RATE GOVERNAN CE
,
Another dim ension of hege mony is 'clas
. s hege mony' wh erein th e ct ·
1req
and perceive th cms~ lves as an eli te set
_of pe?ple at the top of th e corn °rs"1"'
they appoint oth erd~recto rs who may ~li
gn with th em ~nd are ofthe sa: a~Y ~il
That includ es appo111t111 c11 t of th ose
inde pend ent director s who ecali~\
the dominance of rulin g group. Further
th e executiv e directors may s~~~
m y dom .inat b d I . . 1
1 e o~ir c ec1s1ons on acco un t o f t he1r
. . · acce
ss to in foron th e b(l~·
kn owledge of operations of. the co mpa rnati
ny. Most of th e boards in th e 0ri a,.
sector fo rm "inn er circl es" bel~nging ~o co ,,
the sam~ 'clas s of hegemony'.Thi rpOt~1•
othe r directors on th e board ineffective
rendenng them just a rubber Stria~
is sa id due to 'inner circles' within the
board "most of the board deci s_titn p_ll
made whil e playing golf and not in the
board room" (Mendis, 2010). Sioris ar:

Based on the system and peculiarities

of governance of companies a
the globe, the following four broad
models of corporate governance c;~o
distinguished: s,
Dt
• Anglo-Saxon Model
i ·•
z
German Model
~ • Japanese Model
X
~ • Family Model

The corporate governance system of the

U.S.A., U.K., Canada, Australia and other
Commonwealth countries is broadly
categorised as the Anglo-Saxon model.
Features of Anglo-Saxon Model
(1) Well Developed Stock Market:
The model is based on market capital-
ism. It is characterised by a well-develop
ed stock market with substantial
degree ofliquidity and depth. The finan
cial market plays a dominant role
in the USA and the UK as a major sour
ce of funds for investment and as
a disciplinary mechanism to resolve the
agency problem.
(2) Ownership Pattern: The striking
feature of the Anglo-Saxon model is the
structure of ownership pattern. The shar
eholders of typical Anglo-Saxon
firm are widely dispersed. Owing to wide
ly dispersed share ownership,
shareholders influence on managem
ent is weak. However, the sound
legal system and strict regulations on corp
orations regarding informati on
disclosure and insider trading provide
protection to the shareholders.

-~· -

r_ _ ·\.
 25
CO NCEPTU/1I. FHi\ MEWOHK OF CO l1POl1ATE GOVERN ANCE

(3) Unitary Boa rd of Directors : Th e boa rd of directors in the An glo-Sax-

on mod el is unitary which gives primacy to sharehold ers interest. 1:he
directors are appointed by th e sharehold ers by exerc is ing th eir vot~ng
rights based on proportionate holdin g of the paid-up equity share capi_tal
in th e company. The board co mprises of two types of directors viz. ins~d e
executive directors (generally ca lled executive directors) and ou ts id e
non- executive directors (also called as independent directors).
(4) Influence of Trade Unions : Influence of trade unions is much less
in the Anglo-Saxon model as compared with the European model of
· · g rate
. countries have a low and dee 1111111
Germany. Th e Ang1o-Amencan
of unionization as the model does not allow for labour to participate in
strategic management decisions.
The Anglo-Saxon model can be described as under:

Shareholders

~
X
:s:
:;;.
2
, Board of 2
Directors ©

8
German model, also known as 'Continental Europe' model, is prevalent in
Germanic countries such as Germany, Switzerland, Austria, and Netherlands.
This model is based on the 'stakeholder' theory of corporate governance.
Features of German Model
Comparatively less developed financial market, closely held large block holding
of shares, inter-firm cross shareholding, dominant role of banks, and employees
representation in the two-tier boards of directors are the striking features of
co rporate governance system in large parts of the Continental Europe.
 26 CORPORATE GOVERNANCE

(1) Dual-B oard System : A key featur e of the Germa

dual-board system. All public limited compa nies (AG) n rnocte\ .
and private / s th,.
companies (GmbH J with more than 500 employees
have a sup 1tnit1:~
board (Aufsic htsrat) and an executive board (vorsta
ncf). erv 1sci r-,)
(2) Partic ipatio n of Emplo yees : Anoth er strikin g featur e
model is partici pation of emp loyees at the level of board of the Ge
of di recto rrri ar1
third to one half (depen ding on size of the compa ny
in terms of [Link]\~
of emplo yees) of th e direct ors on the su pervi sory
board consistsu:b~t
time empl oyees a nd they are electe d by the emplo
yees. fll l\
(J) Prom inent Role of Banks : Germa n model
is based on the prorn ·
rol e of banks . It is comm o n for the univer sal banks
in Germany A in ent
a nd Switze rland (such as Deuts che Bank, Dresd • Ustr-
ner Bank) to ac 1~
s uppli e rs of bank loans and equity capita l. Bank
holdin gs are lar t a~
hi sto rica l a nd strate gic based on long-t erm relatio
nship . The banks tly
s ubsta ntial voting power s in many corpo ration s
of Germa ny as rnos:ve
the shares of comp anies in Germ any are beare r
and depos ited with tif
banks and the banks are permi tted to cast the votes
from these share:
On accou nt of these factor s banks are impor tant
in the govern ance of
Germ an comp anies.
(4) Large Block -Hold ing of Share s : Most Germ
an comp anies has large
contro lling block holde rs of shares . It is repor ted
that more than half of Th
the listed Germ an firms have an owne r holdin g
more than 50 per cent fe
of the equity 2 • The conce ntrati on of contro l is
repor ted even higher in
unlist ed firms. In the Conti nental Europ e, equity
share holde rs (other t
than block holde rs) are usuall y in a weak er positi
on. This is mainl y on
accou ntofth ewide lyuse dmec hanis mofcr oss-sh
areho ldings which leads
to forma tion of owne rship pyram ids. It enabl es
a few large shareh olders
to retain subst antial voting powe r and maint
ain contro l throu gh each
owne rship tier.
(5) Less Deve loped Stock Market : Germ an mode
l is chara cteris ed by an
illiqu id and less devel oped stock marke t. The
role of the mark et in the
exerc ise of corpo rate contro l is insign ifican t owing
to the struct ure and
conce ntrati on of share holdi ng in Germ anic count
ries.
e three organ s of corpo rate gover nance in Germ
an mode l: the super visory
1rd, the execu tive board and the share holde rs \
can be descr ibed as follow s:

rds and Nibler (2000) and Franks and Mayer (2001).

\
l

\
' ~~--
 CO NCEl'TlJi\L Fi~i\M EWll iU<OF C:O HPOili\T E C. OVEHN i\ Nf. E 27

Shareholders

,.
...
Executive
Board ◄ Supervisory
Board

Corporate
Governance

Trade Union Works

Council

(ADOPTED FROM CERNAT, 2004)

:;
>"
~
>
'Z
The Japanese model prevalent in Japan is also referred as 'relationship model'. 2
@
Features of]apanese Model
(1) Small Dominant Groups: The Japanese model comprises a small num-
ber of dominant groups (such as Mitsubishi, Mitsui, Sumitomo) called
Keiretsu. Most of these groups are diversified and vertically integrated by
cross-shareholdings and relationships with number of small businesses.
(Z) Dominant Role of the Government: In the Japanese model, the govern-
ment plays an important role ofsupervision and control over the corporate
activities. Retired government officers are placed on the boards of the
companies. The retired bureaucrats ensure effective implementation of
the government policies. The business groups are closed to the govern-
ment as groups often employ retired civil servants and work together
on government sponsored committees also.
(3) Role of Banks : The main source of funds of Japanese companies is
mostly banks and other financial institutions which provide debts as
well as equity capital by a consortium led by a major bank called 'main
bank'. The banks are linked through Keiretsu as most banks are affiliates of
Keiretsu. Banks hold considerable number of shares in the companies on
a long-term basis and build strong relationship with the client firms. The
 28 CORPOR/\TE GOVERNA NCE

bank executives are also offered board membership. Thus, the c

.
gove rn ance sys tem in Japa n 1s a re Iat1ons
. h'
1p mo del based on sup
Otpa ta~
of the bank and the government. Pott:,
( 4) Participation of Emplo yees: Board membership in Japanese f
.
freq uently offered as a rewar d to Iong-servmg, [Link] ernpllttns·11
I Nearly 90 percen tofthe directors are senior managers or former co 0Yees.
I . . .
employees. This ensures part1c1 pat1on o f emp Ioyees in
. rnpan
the govern 'y
I .
the companies and extracts long term comm1. tmentto the firm . Unliket ance
or
I Analo- Saxon model based on primac y of the shareh olders the Jap
I b
model seeks to balance all stakeholders such as creditors, , anehe
employe:e
I managers and government. s,
I
(5) Unitary Board of Directors : The structu re of the board of direct
in Japanese model is the traditional unitary board where important ~rs

@
I cisions need action by the entire board. On the face of it, the structu e.
resembles the U.S. companies. But in practice, the boards of Japan's rnre
jor corporations repres ent the interest of the company as an integrate~
social unit, not the interes t of shareholders.
I (6) Contingency Model: Banks and
financial institutions do not exercise any
z
z direct power over a company as long as the company is run successfully
<
in terms of growth and market share. However, where there are signs
of poor performance and governance becomes suspect, the main bank
interve nes effectively by reviewing the investment plans and assumes

I I the role of oversight over the management.

The Japane se corpor ate governance model may be depicted as follows:

I Shareh olders Main Bank

i

I Board of
Directors

Preside nt

Managers
 CON CEPTUAL FRJ\MEWOIU<OF CO HPO llJ\TI·: r;Q VEl{NJ\ NCE 29

-$H4•i4'~r:.t=GJ ~
ri,e fa111ily-b <1sed model of corporate govern ance is prevalent in many emergin g
well under-develop ed countries of th e world particul arly in East Asia, So uth
,is . cl II E 1 .
Ainerica, Mi c e aSt, anc India. I
The striking features of family model are as
fo ll ows:
(1} owners_hip Pattern: In family-based model of corporate governance,
compame~are promoted, owned,ancl controlled by business famili es. The
shareholdmg pattern is highly concentrated in the hands of one family or
a fe_w lar~e inve~t_ors. Many families have developed the business from
its mceptton. lntttally, family businesses were set up with the internal
funds. As the enterprises grew with time, the funds are raised by banks
and ot~er_ financial institutions. Outside equity is also issued keeping
the ma1onty ownership of shares with the family.
(2) No Separation of Ownership and Control: In this model, the separation
ofownership and control does not exist as the controlling families direct-
ly or indirectly participate in day-to-day operations of the companies.
Controlling families appoint their family members or close associates as
the CEO or the MD. There are cases where directors of such companies >
manage the affairs of the companies as full -time executives or as the sole
proprietors.
i
~
@)
(3) Insignificant Role of Board of Directors: The boards of family-based
companies are usually staffed with family members. Outsiders may be
involved in the boards more to meet the regulatory requirement or to add
ornament value to the boards. The boards of directors in family firms do
not have significant role in the governance ofcompanies or oversight over
the executives. The role of directors is subservient to the family interest.
With reforms underway in most countries independent directors have
been introduced to the family dominated boards. However, the role of
independent directors has not taken a desired shape.
(4) Role of Banks: Banks and other financial institutions provide finance
to family owned and managed companies but do not exercise much
control over the firms . Although in some countries, financial institutions
and banks appoint their nominees on the boards of invested companies,
such nominees' directors more often are passive participants in board
processes. The financial institutions vote with their feet instead of mon-
itoring the assisted companies.
(5) Block-holder Governance: The governance system of family-based model
is based on block-holder governance wherein majority of share capital
is concentrated in the hands of one family or a few large investors. Most
 30 CO Hl'OIV\TE GO Vl-:HNAN CE

of the f<1 niilies controlling th e conglomerate of firms

secure the·
viil co mpl ex own er_·ship stru_c tur~s such as pyramid,
cross-sha.-:t.) ntr,,
or inter-locking drrec tors hrps. 1 hese structures allow
the 0 1tlin 1

fa mili es to exer~isc a gre_a t d~a~of control over_ the

compan~~;~-~~li n:
sma ll sharehold111g. In mc1~y 111stances, controlling
shareholders esPit,
;i re families have control rights more than their cash 1
flow rights Vvhiq
1
(6) family Monitoring: The family-based model of corp
I
I
fill s th e market mechanism monitoring gaps. The
.
effec tive control over the [Link]. The [Link] busi
orate gov
fami ly pro e_rnan c~
Vides
ness is less ctr- an
by the short-term outlook. It also creates wealth
although for the fa 1"'~n
to be handed down to the next generation.
tn1ly
(7) Principal-Principal Conflict: The agency
problem in family-b
model of corporate governance is principal-princip
al conflict diff asect
from principal-agent conflict of market-based mod
el. In these coerent
nies, controlling shareholders which are the families
. . have high incern~a-
to extract priv ate benefits through related party transactions betwnt1ve
affiliated companies. Owners also indulge in tran
one company to another by selling assets at lowe
sferring wealth
r than market price
fr:~
There is diversion of funds of companies to fami
ly interest. Throu ~
pyramid and cross-holding structures, families gain
wealth by setti~
unfair terms for intra-company transactions. This
gives rise to conflicto~
inte rest between the controlling and minority shar
eholders. Families in
this system more often expropriate the minority shar
eholders' interest.
So, the agency problem in family-based model of
corporate governance
is principal-principal conflict as pointed out by Mor
ck and Yeung (2003):
"In family business group firms, the concern is
that mangers may act
for the controlling family, but not for shareholders
in general. These
agency issues are the use of pyramidal groups to
separate ownership
from control, the entr ench men t of controlling fami
lies, and non-arm's-
length transactions (aka 'tunneling') between relat
ed companies that
are detrimental to public investors."
Challenges of Family Model
The family model poses certain challenges othe
r than the expropriating the
minority interest. The entr epre neur ship and skill
s of the founder may not be
replicated down the generation. It is often said that
the first generation founds
the business, the second generation builds it and the
third generation dissipates
it. Further, there may be tensions within the busi
ness leading to divisions.
9iverse views within the family regarding running
of the family business may
1amper the smooth functioning of the company. Man
y family concerns in some
 CONCEPTUAL FRA MEWORK OF CORPORATE GOVERNANCE 31

jurisdiction~ hav~ form~d family councils consisting of family members to resolve

the contentwus ,~sue~ m the best interest of the family and the company. The
bigger challenge m th1 s model is to incorporate sound corporate governance
ractices and to manage the companies by the professional managers in view
~f complexities of modern business.

Dimension Market/Out- Bank/Insider Model Family-based

sider/ Model
Anglo-Ameri-
can Model
-
-
Key Players Managem ent,
in Corporate directors, share-
Germany
Banks, block
Japan
Main Bank, Business Fami-
holders of Keiretsu (busi- lies, regulatory
Governance holders (espe- shares, other ness groups) , agencies and
dally institu- corporation s manageme nt stock exchanges.
tional inves- and workers. and the gov-
tors), regulatory ernment.
agencies and
stock exchanges.
Focus of Cor- Shareholders Stakeholders Relationship Business Family
porate Gov-
ernance
Stake of Low High High Initially high, but
Control Fi- may vary as bank
nancing and outside eq-
uity financing is
obtained.
Ownership Dispersed Concentrat- Concentrated Concentrated
of Equity ed
Main Share- Institutional Block Share- Family Groups, Families, lnstitu-
holders Shareholders - holders and Banks and the tional Investors
Pension Funds, Banks Government and Retail Share-
Mutual Funds holders
etc.; Retail
Shareholde rs
Equity Mar- Large, highly Less liquid Less Liquid Small, less liquid
ket liquid
Companies Large Not so large Not so large Comparatively a
Listed at small number of
Stock-Ex- listed companies
changes
Sharehold- Strong Weak Weak Weak for outside
ers Rights shareholders
 32 CORPORAT E GOVERNAN CE

Dimension Market/Out- Bank/Insider Model

Family.b
sider/ Model ase~
Anglo-Ameri-
can Model
Germany Japan
Ownership Dispersed Concentrated Concentrated Concentrat
.h
of Debt with Univer- with the con- wit few 6ed
sal Banks. sortium of . an 1.
and Finan . 1\1
Bank holding banks led by . Cial i
stitutions. n.
is historical the Main Bank.
and strate- It is based on
gic based on long-term re-
long-term re- lationship.
lationships.
Creditors Strong Strong for Strong as Strong but legal
Rights close credi- creditors and enforcement .
IS
tors banks as these s_low, costly anct
!
are linked time consuming. 1

I with the busi-

@
z ness groups.
z 1

I
Agency Con-
Shareholders Bank vs. Bank vs. Man- ~ontrollin? farn- 1
flict vs. Management Management agement Ily vs. minority
r------t--------i,------t-------t--- shareholders
--=--- '
Board of Single Tier of Two - Tier Single Tier Single Tier
Directors Board Boards-Su-
Structure p e rv is o ry
Board and
Management
Board
Composition Majority of non- Mostly insid- Directors ap- With corporate
of Board of executive inde- ers appoint- pointed by governance re-
Directors pendent direc- ed by the the business forms, the boards
tors appointed Main Block groups based of listed com-
through the Shareholder on relation- panies are re-
Nominatio n ship. Consists quired to have
Committee of of Government majority of the
the Board by Officials, Bank boards consist of 1

the Sharehold- Officials and independent di- 1

ers. long serving rectors but these

l employees. are appointed by

the families or
the controlling
groups. J
 CONCEl'TU/11. Fl(/\MEWOHI( OF CUHl'OH/\TE GOVEHN/\NCE 33

otrnenston Market/Out- Bank/Insider Model Family-based

sider/ Model
Anglo-Amcrl-
can Model
Germany Japan
1---- Important Limited but be-
flole of Limited Limited
aoard of coming impor·
Directors tant with the
corporate gov-
ernance reforms
underway.
._.-
participa- Absence of par- Participation Long-serving Absence of par·
tion of ticipation of of workers and commit- ticipation of em·
Employees employees and and employ- ted employees ployees in stra-
workers in stra- ees at the are offered tegic decision
tegic decision level of the Board mem- making.
making. board berships.
Hostile Quite prevalent Limited Limited Almost absent
Takeovers

The governance model in Kautilya's Arthashastra offers a deep and complex

framework that emphasises ethical leadership, justice, and the welfare of the
people, which continues to be relevant today. Kautilya's vision of governance
involves a careful balance between power, responsibility, and public welfare.
Below are key aspects of governance as discussed in the Arthashastra:
(0 Role of the King and Council of Ministers
♦ Kautilya emphasises that the king should not act arbitrarily but seek the
· counsel of his ministers, especially a Council of Ministers. This council
is vital as it offers guidance in decision-making and implementation.
♦ The king is advised to heed the counsel of a state-priest who ensures
that the king remains on the path of dharma (righteousness) and does
not deviate from his duties.
♦ The ministers play a crucial role in not just advising but also in the ex-
ecution of decisions. The king's success in governance depends largely
on the competence and efficiency of his ministers.
(i,) Social Justice and Welfare
♦ l<auti lya's vision of governance is deeply tied to the idea of social justice,
aiming for the highest development of the individual within society. The
 34 CORPORATE GOVERNANCE

king is expected to ensure that social harmony exists within rel .

such as father-son, husband-wife, and guru-disciple. at10 nsn,.
'
♦ He highlights the equal rights of men and women, the pr t
. o ecr1
Brahmins, and the severe consequences for hemous crimes. 0n .

♦ In governance, the happiness and welfare of the people are .

connected to the king's well-being, reinforcing the principle thailteq,
ruler must prioritise the needs of the people over his own. ago,
(iii) Justice and Administration
♦ Kautilya outlines the importance of justice, which must be ad minis
according to four key principles: righteousness, evidence, hist~;;r
context, and the law. Governance, he asserts, must be fair and bal ~
ancer
♦ His system of governance is hierarchical, with specific duties re ·
sibilities, and qualifications for each role in the administrativ~ sy:~or
This includes a strong emphasis on accountability. e¼
(iv) Ethics and Anti-Autocracy
♦ A central theme in Kautilya's governance model is the idea of [Link]
@
z
stresses the need for the ruler to be honest and responsible, managin·
2
<
the state's resources with wisdom. c
~
X
♦ Kautilya firmly opposes autocratic rule, advocating for systems where
~
power is not concentrated in a single individual but is distributed acros,
a network of accountable officials. ·
♦ His governance model fosters transparency and checks on power
through constant vigilance, especially through the use of spies ano
other forms of surveillance.
(v) Economic Principles
♦ Economic Self-Sufficiency: Kautilya recognises the importance of a
strong economy as the foundation for a stable polity. He asserts that
the king's control over the state's wealth ensures his authority ii
unchallenged.
♦ Taxation:Kautilya advocates for reasonable taxation. High taxes, accord·
ing to him, lead to tax evasion, while low taxes can increase revenue by
fostering a sense of fairness and compliance.
♦ He also stresses the importance of consumer protection and equitable
pricing, reflecting his concern for social welfare.
♦ Kautilya's economic principles emphasise social welfare, with the state
expected to be proactive in helping the poor and needy.
 CONCE PTUAL FRAM EWORK OF COHPORJ\TE GOVERNA NC E 35

(vtl Role of Education and Human Capital

♦ l<autilya underscores the significance of education for the advancement
of society. He advocates for state-provided grants to encourage education
and the dissemination of knowledge, seeing it as essential for societal
progress.
(vii) Conservation of Natural Resources
♦ The Arthashastra includes an aspect of governance that deals with the
protection of natural resources, a theme that remains highly relevant
today. This reflects Kautilya's forward-thinking approach to managing
the resources sustainably.
(viii) Applications to Modern Governance
♦ Economic Policies: Kautilya's focus on economic self-sufficiency and
revenue generation is directly applicable to modern governance, partic-
ularly in managing budgets and economic growth. He emphasizes that
a state's power is largely derived from its economic capacity.
♦ Efficiency and Integrity in Administration: Kautilya stresses the im-
portance of merit-based selection ofadministrators and their continuous ....
;:;
monitoring. This idea remains relevant today in the context of improving f
governmental and bureaucratic efficiency. ~
2
♦ Leadership and Decision Making: Kautilya's views on decision-making ©
and leadership have practical applications in modern organisations. He
warns against delay and indecision, advocating for prompt and effective
action. He also emphasises the importance oflistening to and considering
the needs of the people (or employees, in a corporate context).
(ix} Good Governance and Stability
♦ For Kautilya, good governance is not just about fulfilling the basic needs
of the citizens, but also about ensuring stability, which he believes is
central to the strength of a state.
♦ Kautilya's governance model stresses the importance of ethical
behaviour, the rule of law, and the king's responsibility to ensure the
welfare of the people. This ties into the broader concept of good gover-
nance, which Kautilya defines as a system where the ruler's happiness
is linked to the happiness and well-being of the subjects.
(x} Communication and Accountability:
♦ Kautilya advises that effective communication is key to leadership, and
leaders should maintain open channels of communication with their
subjects. Trust is built through transparency and willingness to answer
queri es and provide clarity.