Question

Describe the agency theory and resources dependence theory of corporate governance. What are their similarities and what are their differences ?

Answer 1

AGENCY THEORY:-

1.according to this theory ,there is a distinction between the owners of an organization ( PRINCIPALS) and the personnel reponsible for managing organization work (AGENTS).

2.their goals are different from each other and share a conflicting interest: if principals are responsible for managing the company, they would have earned higher returns because part of the return in attributed to the agents for their services.

3.a board is estabilished under this theory which is responsible for supervision, monitoring of performance of agents , exercising strict controls in order to protect the interests of the principals .

RESOURCE -DEPENDENCE THEORIES:-

1.according to this theory board act as resource to provide financial, human and intangible support to the executives.

2.the p[rimary objective of this theory is to improve organizational performances and giving greater autonomy to the executives to make most of the decisions with the approval of the board.

SIMILARITIES:-

1.there is an active relationships between the principals and agents of the company.

2.principals act as owner of the organisation , while agents are responsible for the operations of the company.

DIFFERENCE :-

IN agency theory board is actively involved in managerial decision making process while in resource dependence theory most of the decisions are taken by the executives with just the recommendations of the board.