Name: Sana Shahid

Roll No: 18-28013

Report and Governance

Prepare a paper analyzing the various theories that have been applied to the understanding
of corporate governance. Are they in conflict or are they rather different perspectives of
the phenomena?

Various theories in corporate governance are:

 Agency Theory
 Stewardship Theory
 Shareholder Theory
 Stakeholder Theory
 Resource Dependency Theory
 Transaction Cost Theory
 Political Theory

Agency Theory

Agency theories arise from the distinction between the owners (shareholders) of a company or an
organization designated as "the principals" and the executives hired to manage the organization
called "the agent." Agency theory argues that the goal of the agent is different from that of the
principals, and they are conflicting. The assumption is that the principals suffer an agency loss,
which is a lesser return on investment because they do not directly manage the company. Part of
the return that they could have had if they were managing the company directly goes to the
agent.

Steward Ship Theory

Steward ship theory is opposite to agency theory. Stewardship theory articulates that managers
are hired for handling the firm’s operations in a well manner and a manager’s achievement and
success is measured by satisfaction he gets from the performance of the firm; therefore the
manager’s primary objective is to maximize the firm value. Major difference between agency
theory and stewardship theory is that the stewardship theory replaces the lack of trust on
managers whereas agency theory refers to authority and monitoring to maintaining the
inclination of ethical conduct.

This theory argues that Executive (insider) directors have more knowledge about their companies
and are more likely to enhance the performance of their organizations instead of non-executive
(outsider) directors. Outside directors only enhance the decision making of the board. It says that
managers and inside directors are best to serve and act in favor of shareholders in any
circumstances. Inside directors have excessive knowledge of company matters due to greater
access of secret information as compare to independent directors.

Shareholder Theory

The shareholder theory was originally proposed by Milton Friedman and it states that the sole
responsibility of business is to increase profits. It is based on the premise that management is
hired as the agent of the shareholders to run the company for their benefit, and therefore they are
legally and morally obligated to serve their interests. The role of shareholder theory can be seen
in the demise of corporations such as Enron and World com where continuous pressure on
managers to increase returns to shareholders led them to manipulate the company accounts.

Stakeholder Theory

Stakeholder theory, on the other hand, states that a company owes a responsibility to a wider
group of stakeholders, other than just shareholders. A stakeholder is defined as any person/group
which can affect/be affected by the actions of a business. It includes employees, customers,
suppliers, creditors and even the wider community and competitors. Stakeholder theory
proposed that it is management’s duty to make sensible decisions and put their best efforts in
attaining the benefits that satisfy all stakeholders.

Resource Dependency Theory

Resource depending theory concentrates on role of board that help to secure and acquire the
crucial resources of the organization by their external linkage to the environment. Through these
linkages, it brings in different resources, such as information, skills, access to key constituents
like supplies of raw material, buyer of outputs, public policy makers, social groups as well as
legitimacy. So, under this theory, board of directors is the key source of various resources that
different resources provision enhances organization operation, firm’s performance and
organizational life.

It further explained that board of directors bring resources for the firms namely necessary
information, expertise, provide access to business stakeholders in which key suppliers,
customers, policy makers, legal advisors and social groups are on the top. Generally, resource
dependence theory argues the availability of efficient skills of boards that are involved in the
accessibility of resources. On one hand, agency theory suggests the important of boards in
monitoring the managerial activities, on the other but resource dependence theory highlighted
another role of board directors as the resource providers.

Transaction Cost Theory

Transaction cost theory is a variant of agency theory. It is based upon the fact that costs may
arise when you hire someone else to act upon your behalf like elect directors to perform business
operations you own. Corporations could save costs by performing tasks within the organization
instead of focusing entirely on externals. Theory states that managers operate under bounded
rationality and they are self-interest seeking. In other words we can say that both the top
management and director act for the intention to enhance their own wealth instead of
shareholder’s wealth.

Political Theory

The political theory suggests that the both the government and corporate sector determine the
delegation of power and authority to managers of a particular organization and their relationship
towards other stakeholders. The major concern of the political theory is how ownership is
distributed between the shareholders of a firm may influence the decision making into the firm
and its corporate governance structure. It emphasizes on the approach of developing voting
support from firm’s shareholders instead of purchasing of voting power to influence company
management.

Are theories in conflict or are they rather different perspectives of the phenomena?

In my point of view these theories are the different perspective of the same phenomena. Like
agency theory argues that when you hire another person he will only safe guard his own
incentives and the narrative of the transaction cost theory is also that hiring another person will
cost you more so it is better that a shareholder must look after his own interests but steward ship
theory suggests that the person sitting inside the organization can look over your interests in a
more better way because he have more knowledge not only about the company but also about the
competitors as well. He possesses information regarding all the secrets of the organization so he
is in a better position to make wise decisions on investor’s behalf. Similarly share holder theory
says that a company’s sole job is to look after the interests of the shareholders but stakeholder
theory argues that every action of the company creates an impact on its stakeholders as well.
Organization should take into account the interests of all i.e. employees, government, suppliers,
customers etc. In resource dependency theory it is said that the board of directors are assets of
the company because they bring in skills, expertise and uses the shareholder’s fund in a wise way
but agency theory says that their main job is just to monitor the managerial activities.