Question

Discuss the following theories in relation to corporate governance:

1. Stewardship Theory
2. Agency Theory
3. Stakeholder Theory
4. Corporate Governance Theory
5. Control Theories (CT)
6. Transaction Cost Economics Theory

Answer 1

• Stewardship Theory

The Stewardship Theory states that a steward protects and maximizes the assets of shareholders through performance. The executives are company executives and managers who work for the shareholders, protect the shareholders and make a profit. Stewards are satisfied and motivated when organizational success is achieved. This emphasizes the position of the employee or executive to act more autonomously so that the shareholder’s returns can be maximized. Employees own their jobs and work hard on them.

• Agency theory

Agency principles define the relationship between a principal (such as a company shareholder) and agents (such as a company director). According to this principle, the headmaster of the company hires agents to do the work. The principal assigns the task of running the business to the director or manager, who is the agent of the shareholder. Stakeholders expect agents to act and make decisions in the best interests of the principal. Conversely, agents do not have to make decisions in the principal's interest. The agent may fall prey to selfish, opportunistic behavior and fall short of the principal's expectations. The main feature of agency theory is the separation of ownership and control. Theory implies that people or employees are responsible for their actions and responsibilities. Rewards and education can be used to improve agents' priorities.

• Stakeholder theory

Stakeholder theory includes a wide range of stakeholders for management responsibilities. That said, managers in organizations have a network of service providers - including suppliers, employees and business partners. The theory focuses on managerial decision-making and is the core value of all stakeholders ’interests and is not assumed to be of any interest to dominate others.

• Corporate governance

Corporate governance is the decision-making process and the process by which decisions are made in large businesses is known as corporate governance. There are several theories that describe the relationships between different stakeholders of a business when carrying out business activities. Thus, the management of large enterprises is called corporate governance. Companies are social organizations and have certain social responsibilities. Coordination is needed in many groups of people known as stakeholders. Stakeholders are owners, managers, workers, suppliers, creditors, customers, competitors, the government and even society at large.

The corporate nature of the business raises large capital from the people; So millions of shareholders are contributing little capital. Due to low shareholder contribution, it is not possible for the shareholders to run the business on a day-to-day basis. Thus, the corporate type of business between the owner and the business brought about a new existence called management. This management consists of professional managers who manage the company and make important decisions.

• Control theory

Control theory helps to maintain a performance management system by defining the types of control between the organization and the system within it. According to the control theory, the actions of all systems must conform to the overall objectives and goals of an organization. Control theory focuses on control mechanisms that must be applied at all levels of the organization.

There are different types of controls that an organization can use to achieve the desired results such as:

1. Organizational structure,
2. Behavioral controls such as organization norms and policies or
3. Efficiency measurement system.

• Transaction cost theory

Transaction Cost Theory states that a company has contracts in the company or market that create value to the company. Corresponds to the price associated with each agreement made with the external party; Such a price is called transaction cost. If the transaction cost of using the market is high, the company will do the transaction itself.