Discuss about the Concept of Governance and Stewardship.
The concept of “Corporate Governance” is a nascent one and has gained popularity only in the recent times owing the development of various kinds of legislations, economic norms, political factors and other norms which significantly impact the business world (Thomsen & Conyon, 2012). The various business enterprises of the world have developed their own system of governance by taking into effective consideration the legislations which regulate the business operations of the various business enterprises of that particular nation (Du Plessis, Hargovan & Harris, 2018). Therefore, the various business enterprises in the present times govern their enterprises in the manner that a sovereign would govern his or her nation depending on the set rules formulated as well as implemented by them for the effective performance of their enterprise (Du Plessis, Hargovan & Harris, 2018). Many experts thus are of the viewpoint that the concept of corporate governance is the mechanism or the set of rules by means of which the actions as well as the various processes of a particular corporation are controlled and regulated (Acharya et al., 2012). The process of internationalization and also the wide range of nations with different rules as well as regulations for the conduct of business in the various nations in which they are operational have made it imperative for the corporation to develop a uniform set of regulations and rules for the purpose of control and the regulation of business activities (Benn & Dunphy, 2013). Therefore, it would be apt to say that the concept of corporate governance helps the corporations to eliminate or mitigate or eradicate the high level of confusion which would have followed on the score of the business operations of the corporation in the different nations of the world had it not followed a uniform form of corporate governance (Brammer, Jackson & Matten, 2012). This paper will discuss about corporate governance in the light of the various kinds of theories as well as frameworks related to this particular concept which have gained prominence in the recent times.
The recent prominence which the concept of corporate governance has given rise to various theories of corporate governance theories. Some of the most commonly used theories of corporate governance are the Agency Theory, the Stewardship Theory, Resource-Dependence Theory, Stakeholder Theory, Transaction Cost Theory, Political Theory and others (Khan, Muttakin & Siddiqui, 2013). These theories focus on the diverse aspects of the concept of corporate governance and thus it is generally seen that these theories are being used by the various business corporations depending on the requirements of their business. However, it is generally seen that most of the business corporations try to take the help of the Agency Theory for the purpose of the effective governance of their corporation. The primary focus of this particular theory is on the various shareholders as well as the agents who are associated with a particular business enterprise (Goergen, 2012). This particular theory can be seen as a development of the economic theories propounded by Alchian and Demsetz (1972) and Jensen and Meckling (1976) (Goergen, 2012). Thus, this particular theory tries to explore the relationship between the various important entities of a particular corporation like the owners of the corporation and the managers who are associated with the corporation and also the relationship between the managers and the individual executives who form an integral part of the corporation (Masulis, Wang & Xie, 2012). As per this particular theory, the shareholders are the owners of a business corporation and they hire the various managers as well as the other prominent officials of the corporation with the objective that the work of the corporation can be effectively performed (Masulis, Wang & Xie, 2012). It is precisely this particular relation between the shareholders and the agents appointed by the shareholders which this particular theory tries to explore.
The Agency Theory presupposes that the various managers as well as the other important officials appointed by the shareholders of the corporation who are their agents within the framework of the corporation are likely to act in their interests and thus further the prospects of the corporation as well as the interests of the shareholders in a positive manner (Jo & Harjoto, 2012). Many experts are of the viewpoint that the primary reason why the majority of the business enterprises take the help of this particular theory for the process of their governance is to reduce the gap between the interests of the shareholders and the interests of the various managers as well as the other important entities who are associated with the concerned enterprise in the best possible manner so as to further enhance the prospects of the enterprise in the best possible manner (Acharya et al., 2012). However, in the recent times it is seen that this particular theory of corporate governance has come under much criticism on the score of various factors. The majority of the critics have identified two major shortcomings of this particular theory of corporate governance, firstly, it is generally seen that the long term use of this particular theory reduces the level of corporation among the different shareholders and the managers who are associated with the enterprise (Harford, Mansi & Maxwell, 2012). Secondly, this particular theory fails to take into effective consideration the self-interest factor of the diverse managers as well as the employees who are associated with the enterprise (Harford, Mansi & Maxwell, 2012). Therefore, it is generally seen that the individual goals as well as the objectives of the employees and the managers are not always in alignment with the goals and the objectives of the shareholders associated with the concerned enterprise. This particular disparity affects the performance level of not the individual managers as well as the employees who are associated with the concerned enterprise but the overall performance level of the concerned enterprise as well.
The Stakeholder Theory, on the other hand, takes into consideration the needs and the requirements of the shareholders who are associated with the business enterprise. The prototype model of this particular theory was developed in the year 1970 however the full-fledged use of this theory began after the year 1984 because of the extensive research works of Freeman and others (Wintoki, Linck & Netter, 2012). The shareholders associated with a particular business enterprise are the individuals who had invested a considerable amount of capital in the business process of the concerned enterprise and thus they take an active interest in the business process as well as the operations of the concerned enterprise (Wintoki, Linck & Netter, 2012). Thus, the primary focus of this particular theory of governance is on maximizing the interests of the shareholders who are associated with the enterprise. Many experts are of the opinion that this particular theory of corporate governance is drastically different from the Agency Theory which views the various managers as well as the other important officials associated with the concerned business enterprise to be the agents of the shareholders (Acharya et al., 2012). This particular theory states that the different managers as well as the other important entities associated with a particular enterprise need to serve “a network of relationships”, namely, the suppliers, the business partners, employees, shareholders and others for the effective performance of the concerned enterprise (McCahery, Sautner & Starks, 2016). Furthermore, this particular theory at the same time also states that the managers need to identify the shareholders who are more deserving than the others and whose needs as well as requirements need to be fulfilled on priority basis. Therefore, it would be apt to say that according to the precepts of this particular theory not all the shareholders associated with a particular business enterprise are of equal importance or wield the same kind of influence over the enterprise and thus they needed to be treated accordingly by the concerned managers and the other important entities associated with the business enterprise (McCahery, Sautner & Starks, 2016).
The Shareholders Theory in the recent times has come under much criticism in the recent times on the score of various reasons. Firstly, the various experts are of the viewpoint that the prioritizing the needs of the various shareholders who are associated with a particular business enterprise is likely to divert the focus of the concerned enterprise from the other important aspects of their business process (Claessens & Yurtoglu, 2013). Furthermore, it is generally seen that the sole focus of the various shareholders associated with a particular enterprise is on enhancing the profit margin gained by them (Claessens & Yurtoglu, 2013). Therefore, the organizations often end up taking the help of various kinds of unethical practices for the process of enhancement of their profit margin which is completely against the norms of the business world.
The “Resource Dependency Theory” is another theory of corporate governance which has gained significance in the present day business world. It is significant to note that whereas the focus of the Agency Theory and the Shareholder Theory is on the shareholders and the managers who are associated with a particular business enterprise the focus of the “Resource Dependency Theory” is on the various board directors and other important entities of the enterprise (Stout & Blair, 2017). Thus, according to this particular theory the various board directors and the other members of the team of board directors are imbued with the responsibility of providing the adequate resources be it the physical resources, namely raw materials, labor and others or the intellectual resources like the intellectual property, brain power and others for the effective functioning of the concerned enterprise (Stout & Blair, 2017). Therefore, as per this particular theory of corporate governance the various members of the board of directors are not only required to identify the resources which would be helpful for the development of the concerned enterprise but at the same time take adequate measures for the procurement of them. Experts as well as the various business leaders have identified several benefits for the use of this particular theory within the framework of the various business enterprises, firstly, the allocation of resources which is being done by the members of the board of directors is strictly in accordance with the external business environment as well as the requirements of the enterprise (Harford, Mansi & Maxwell, 2012). Secondly, the use of this particular theory enables the members of the board of directors to provide various kinds of important resources to the enterprise like financial resources as well as the legal resources which are needed to enhance the prospects of the concerned enterprise (Harford, Mansi & Maxwell, 2012).
The Stewardship Theory is another important corporate governance theory which is being utilized by the business enterprises to enhance the organizational effectiveness of the concerned organization. This particular theory propounded by Davis, Schoorman and Donaldson in 1997 takes the help of the subjects of psychology as well as sociology for the process of the effective governance of the organization (Chen, Lu & Sougiannis, 2012). Thus, this particular theory views the various managers associated with a particular enterprise as the stewards of the shareholders within the framework of the enterprise (Chen, Lu & Sougiannis, 2012). Therefore, the primary role of the various managers as the stewards of the shareholders within the framework of the enterprise should be to further enhance the performance level of not only the individual employees but at the same time the overall performance level of the concerned enterprise with the objective to maximize the interests of the shareholders and thereby prove their utility as the stewards of the shareholders. Many experts are of the viewpoint that although the primary focus of both the Agency Theory as well as the Stewardship Theory is on the maximization of the interests of the shareholders who are associated with the concerned enterprise however the Stewardship Theory seeks to attain this particular concept through its insistence on the enhancement of the performance of not only the individual employees associated with the concerned enterprise but the overall performance level of the enterprise itself (Acharya et al., 2012). Thus, the Stewardship Theory is being used by the various business enterprises for the enhancement of their overall performance as well as the effectiveness of the concerned enterprise. One of the major benefits which this particular theory provides to the various business enterprises is its emphasis on the concept of organizational performance. This theory identifies the fact that the enhancement of the overall performance of the organization is necessary for the process of the enhancement of the net profit gained by the concerned organization and thereby the maximization of the interests of the various shareholders associated with the organization. The primary focus of the various non-profit organizations is to provide effective services to the people from the different parts of the world whereas the primary focus of the various shareholders associated with the for-profit organizations is on the enhancement of the net profit gained by the concerned organization (Acharya et al., 2012). Thus, following the various precepts of this particular theory the various organizations of the present times try to take the help of the strategy of “Total Quality Management” not only for the maximization of the performance each of the entities associated with the concerned enterprise but at the same time to enhance the effectiveness of the concerned enterprise (Brammer, Jackson & Matten, 2012). Therefore, it would be apt to say that the use of the Stewardship Theory has helped the various business enterprises in a significant manner not only to enhance the performance level of the concerned enterprise b ut at the same time to enhance its effectiveness as well.
The various leaders associated with a particular business enterprise play a very vital role within the framework of that particular enterprise. Many experts are of the viewpoint that it is very important that the various leaders of the present times should have vision as well as mission for the enterprise with which they are associated with (Khan, Muttakin & Siddiqui, 2013). Thus, it becomes very important that the vision as well as the mission of the leader is in alignment or synchronization with the vision as well as the mission of the enterprise for which he or she is currently working. Moreover, it is also necessary that the leader has sufficient amount of knowledge about the corporate governance policies as well as norms of the business enterprise for which he or she is working in a bid to enhance the effectiveness of the concerned enterprise (Hermalin & Weisbach, 2012). The “Biblical Theory of Leadership” thus becomes an important one for the various business leaders of the present times. Bredfeldt (2006) is of the opinion that a leader should consider the various entities who are working with him or her as the divine images of God Himself. Thus, a particular leader is required to deal with the various individuals who are associated with him or her as well as the enterprise in a manner in which he would deal with God Himself for the purpose of the enhancement of the effectiveness of the concerned enterprise. Furthermore, the concerned leader is at the same time required to follow the various ethical theories of Utilitarianism, Moral Virtue Theory, Justice Theory and others not only for the improvement of the performance level of the individual employees but also to increase the effectiveness of the concerned enterprise (Hermalin & Weisbach, 2012). A thorough knowledge about these theories as well as practices is likely to help the leader in a significant manner not only to make sound ethical decisions but at the same to lead in a better manner which is in turn likely to help the enterprise in a significant manner.
To conclude, the concept of corporate governance has gained a considerable amount of significance in the recent times and thus the various business enterprises are increasingly taking the help of this particular concept for the effective management of their business enterprises. Furthermore, the recent popularity gained by this particular concept and also its increasing use by the various business enterprises can be ascribed to the rise of the various theories related to this particular concept like the Agency Theory, the Stewardship Theory, the Shareholder Theory, Resource based Theory and others. Thus, it is generally seen that the various business enterprises are increasingly taking the help of these theories not only for the effective governance of their business enterprises but at the same time to enhance the effectiveness of their enterprise.
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