Corporate governance is defined as a system of policies, rules and regulations and procedures that is used in controlling and directing the functioning of a company. It is used to balance and safeguard the interests of the various stakeholders of a company. Corporate governance refers to the regulatory framework that is necessary to bind the operations and it gives direction to a company (Tricker, 2015). It is a very important aspect that deals with how a company functions. It increases accountability and responsibilities and helps in avoiding tactical blunders and issues that might hinder the progress of a company. The study throws light on the importance of corporate governance and the various theories and models based on corporate governance.
There are various theories and models that can be closely associated with corporate governance. These theories shed critical light on the concept and dimensions of corporate governance. Some of the important theories of corporate governance are:
The stakeholder’s theory refers to the theory and concept of management of organizations and the importance of business ethics. The theory depicts the importance of moral value and ethical practice while managing an organization. According to this theory, there are various stakeholders to a company like shareholders, suppliers, creditors, customers, government, competitors, etc. The theory stresses on the need of addressing the need and requirements of a stakeholders. The theory states there are various stakeholders that hold a specific quotient of interest, which is vested in the company. It is important that the company makes considerable effort to meet the needs and requirements of the stakeholders. The theory states the political-economic condition of a country has a radical and major influence on the stake of a country (Bridoux & Stoelhorst, 2014).
According to the shareholder’s theory, a company has no moral or social obligations other than to increase the profit of the company. The sole purpose of the company is to maximize the profit of the company. According to this theory, the managers are appointed as the agent of the shareholders and the obligations of the managers are to maximize the interest of the shareholders and strengthen their interests (Epstein & Buhovac, 2014).
Agency theory refers to a theory that deals with the relationship between principal and agent. The theory explains the fact that the principal determines the requisite job and the agent is vested with the responsibility of doing the task. Agency theory embarks on solving the issues that occurs in agency relationship. One of the common agency relationships refers to the relationship between the shareholders and the executives of the company (Bosse, & Phillips, 2016)
The stewardship theory stress on the fact that if managers are given the responsibility to act according to their discretion and decision making, then they will behave as responsible stewards or agent of the assets, they are accountable to. The theory believes in the fact that managers would be appropriate agents of the asset they represent and will act to the best of their ability (Schillemans, 2013)
Shareholder Theory sheds light on the fact that the main objective of a company is to maximize their profit and they have no specific moral or social obligations to follow. The managers have to serve the interests of the shareholders and make sure that they maximize the interests of the shareholders. The managers are the agents of the shareholders (Gibson 2012).
Shareholder Theory is an extension of agency theory and the theory states that both principal and the agent hold paramount importance. The Shareholder Theory maintains proper alignment with stakeholders Theory.
The theory propounds on the measures taken to increase the profits of a company. It depicts the necessary measures taken to reduce the transaction cost and the input costs involved. It is a normative theory, which asserts the fact that shareholders provide capital to the managers of the company, and therefore, it is the duty of the managers to maximize the interests of the shareholders.
The stakeholder’s theory states the fact that there are various stakeholders of a company and it is the duty of the company to look after the interests of the company. It is a normative theory and is based on moral and ethical practices that create awareness of the needs and interests of the various stakeholders of the company. There are factors, like political and economic factor that have an impact on the performance of corporate sectors and as such it does have an impact on the interest of the stakeholders. The theory analyses the methods and approach of managers in dealing with the stakeholders of a company. It is an important theory of corporate governance (Van, Du Bois & Jegers, 2012).
According to this theory, the managers are vested with two major responsibilities. One of the responsibilities is to make sure that there are violations of the rights and interests of all the stakeholders and the second is to create equilibrium in the rights and interest of the various stakeholders. The sole purpose of this is to ensure profitability of the company in the longer run. The overall responsibility of the company is not just profit maximization but it is also safeguarding interest of the stakeholders (Bridoux & Stoelhorst, 2014).
The theory is also criticised on the grounds, that it is practically improbable to follow this theory since there are clashes of interest, which creates disputes in the process.
The agency theory stresses on the fact that there is agency relationship between the principal and the agent. The agent represents the principal and is vested for promoting the interest of the principal. The theory throws light on the problem occurring in an agency relationship. The problems relate to clash of personal interests, issues dealing with information asymmetry, moral hazards etc. (Hannafey, & Vitulano, 2013).
The two types of agency theory are positivist agency theory and principal-agency theory.
The main source of issue that is highlighted by this theory is the clash of interest between the owners and the managers. It was propounded that was a requirement of transparency in the operations and objectives of the company (Hannafey, & Vitulano, 2013).
Stewardship Agency Theory
Stewardship Agency Theory states that the managers would act in the best interest and would act as best stewards of the assets they represent. This is based on the fact that if the managers are allowed to act according to their discretion. This theory ignores the negative attitude of human nature. (Schillemans, 2013). This theory ignores the principal agent problem. This theory stresses on the point that managers are custodians and agents of the assets of the company and not the shareholders.
Some of the best practices of corporate governance are listed below:
Principle 1: It is the duty of the company to declare the necessary roles and duties of the board of directors and the management
Principle 2: There should be effective size of the board of directors so that there is effective discharge of duties and responsibilities.
Principle 3: Companies need to encourage responsible and ethical practices and decision making
Principle 4: There should be proper arrangement in which the financial reporting of the company can be properly safeguarded (Beekes, Brown & Zhang, 2015).
Principle 5: There is a major need of timely and proper disclosure of information of the company. There should be transparency in the statements.
Principle 6: The rights of the shareholders should be respected (Beekes, Brown & Zhang, 2015).
Principle 7: A company should establish a system where there is proper management of risk and effective control.
Principle 8: There should be fair remuneration given to board of directors (Beekes, Brown & Zhang, 2015).
Bonds (clothing) company is an Australian company that manufactures sleep wear, hosiery and undergarments. One of the latest corporate governance issue that circulated the company was that the company had terminated a major portion of its employees, in order to save manufacturing costs. This mass level unemployment caused major uproar and protest was created by the public and by the sacked employees. There were reports that the quality of the product of the company had also declined. This encouraged the sacked employees to form together a company named Tuffys and Tuffetts, which worked as a major competitor of the company. The company compromised with the interest of the employees to promote the self-interest and increase the profitability of the organization ( Kathy, Tilt & Lester, 2012).
One of the corporate governance theories relating to this issue was the stakeholder’s theory. The stakeholder’s theory implies the safeguarding and promotion of the interests of the stakeholders. The stakeholders have interests vested in the companies and the companies are obligated to promote the interest of the people. Therefore, one of the factors that could be depicted is that employees are stakeholder of a company. Bonds (clothing) company terminated a mass number of employees in order to save manufacturing costs. This was unethical and it violated the rights and interest of the employees and on the other hand it contravened with the Australian Code of Governance practices (Beekes, Brown & Zhang, 2015).
It can be concluded that corporate governance practices are an important element in corporate structure and it is critical that organizations follow ethical practice and make conscious effort to safeguard and protect the interest of the stakeholders of the company. The Bonds (clothing) company is a depiction of this fact and highlight the importance of following and observing the corporate governance practices and understanding the theories of corporate governance.
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