Theories Of Corporate Governance And Their Contribution To Effective Organization

Agency Theory

Discuss about the Corporate Governance And Stewardship.

In recent times, the corporate world has become a dominant sector of the society. Their reach have extended globally and influenced every nook and corner of the world. With the increase in globalization, companies are able to penetrate more markets globally. Government are not always able to control these corporations because of their power and dominance around the world. This where corporate governance comes into existence, to gain control over the changes in the environment globally. Corporate governance is a fixed set of guidelines that is used in governing the association between different organizations, stakeholders and shareholders (Tricker & Tricker, 2015). Corporate governance is needed to control the actions of an organization and to also to ensure that a proper process is followed to achieve the objectives of that organization. Corporate Governance stands on three pillars which are transparency, security and accountability. All of these pillars are very important in managing an organization and maintain good connection with the stakeholders of the company. These stakeholders are the shareholders, board of directors, employees and the managers of the company. This essay will elucidate on three theories of corporate governance and how those theories have contributed to the effectiveness of an organization. It will also shed light on one of the theories of corporate governance that is the stewardship theory and its contribution to the effective governance of different for-profit and non-profit organizations. The further paragraphs will also highlight the relationship of the values and beliefs of a leader to the effective governance of an organization.

The theories of corporate governance that are effective for managing an organization are agency theory, stakeholder theory and resource-dependency theory. The economic and institutional agency theory was proposed by the scholars Stephen Ross and Barry Mitnick respectively. Agency theory is explained as the relation between the principals and the agents (Wheelen et al., 2017). The principals are the stakeholders, whereas, the agents are the managers and directors. This theory says that the principals should delegate work to the agents that they hire to do work on their behalf. Decisions are taken by the agents in place of the principals and these decisions should be in benefit of the principal. However, it may happen that those decisions may not be in favour of the organization. There are various issues that come to light with this theory. Firstly, there arises a conflict of interest between the agents and the principals as both their goals are different from each other. There may be many instances where the agent might work in their own interest rather than that of the principal. This might lead to several issues between the agents and principals which can harm the organization to a great deal. Agents often hide many information from the principals which might hurt the interest of the organization and cause great financial loss. This makes the stakeholders unsure about the work that the agents are doing (Raelin & Bondy 2013). However, it is the job of the principals to ensure that the agents continue their work in a proper manner and keeping their interests in mind. For this there are certain things that the principals should do. Agency theory can be used to create incentives for the agents so that they become motivated to do their work. These incentives can help in urging the agents to work in interest of the principal and communicate in a clear way regarding any information about the organization. Any kind of incentive that can prove to be negative for the agents and the company should be eradicated and replaced with motivating incentives to ensure good quality work. The stakeholder theory was developed by Freeman in the year 1984. The stakeholder theory is a theory of corporate governance which states the effect that any kind of action in the organization has on the stakeholders of the corporation (Verbeke & Tung, 2013). This theory states that the managers and directors should always work in the interests of the stakeholders and thereby reducing any kind of conflict that might arise between the managers and the stakeholders. Unlike in that of agency theory, the managers are not serving the interests of the stakeholders but are trying to build a relationship with the chain of stakeholders who are the suppliers, creditors, auditors, customers and the public who are dependent on the organization. Stakeholder theory states that the managers should have no self-interest but strive to make the organization better to fulfil the interests of the stakeholders. The stakeholders are very much affected by the failure and success of the organization and hope that the organization will deliver the promised and desired value and interest (Ferrero, Michael Hoffman & McNulty, 2014). The organization must work collectively to produce good results for the stakeholders. The work should be done systematically with only one goal in mind and that is to ensure that the stakeholders can generate wealth and returns from the organization. These returns can be in the form of salaries, bonuses, dividends, extra orders and various others form for the stakeholders from which they might generate something profitable. The stakeholders are supportive towards the organization when it works in their favour and opposed when it does not. The stakeholder theory can be applied for the betterment of the organization as in striving to work for the benefit of the stakeholders, the organization have to bring about changes within itself which will also benefit the organization. This will help in an organized environment within the organization and also push the managers to do more profit earning work but keeping in mind the ethical values. Both agency theory and stakeholder theory looks at the benefits of the stakeholder, even though with different viewpoints. However, the resource dependence theory concentrates on the work of the board of directors and whether they are able to provide the necessary resources to the company. This theory creates a link between the outside resources provided by the environment and the competency of the directors in using those resources for the organization (Lückerath-Rovers, 2013). This theory is important for an organization because it is important for the director to gather the required resources before their competitors does. These resources are needed by the executives and employees to fulfil the goals that are provided by the organization. Without these resources the executives would not be able to do a fulfilling work for the organization and hence result in failure. These resources are the raw materials that are needed by the executives for the completion of their work. These materials can be proper training or proper advice and management techniques that are taught to the executives so that they can develop in their work process (Huybrechts, Mertens & Rijpens, 2014). This is necessary for the survival and progress of an organization and its people. Directors can be divided into four sections namely insiders, support specialist, business experts and community influentials. Insiders are the employees who have in the organization for a decent amount of time and can provide their expertise in general direction about the work of the organization. Business experts are the directors of different for-profit organizations who can provide valuable insight on strategies for business and decision making and also help solve various corporate problems. Support specialists are those people who have been working in their specialized field for a long time and can give information in their specialized field such as law, marketing, finance and many others. Community influentials are those people who influence the community such as political leaders, different social and community leaders and others.

Stakeholder Theory

The stewardship theory is also a theory of corporate governance which describes that a steward is one who protects and increases the wealth of the shareholders of an organization by improving the performance of an organization and in turn increasing the utility of the steward itself. In this theory, the stewards are the senior executives and the managers of the company who works hard to increase the profit of the shareholders and protect the organization from suffering any loss so that the shareholders are not affected (Al-Janadi, Rahman & Omar, 2013). The stewardship theory does not believe in an individualistic approach but on the management acting as a group to work together to fulfil the goals and objectives of the organization. Only when these objectives are attained, will the top management feel the success and fulfilment with their work. The executives and employees work towards these goals and to attain maximum financial profit to safeguard the reputation of the firm and also the shareholders. Hence, it is also derived that the collective performance of the firm can also evaluate the individual performances of the employees, which makes them give their complete dedication and ability in the work at hand. Stewardship theory also argues that better profit can be derived if the roles of the CEO and chairman and merged (Wanyama & Olweny, 2013). This would not only save the cost of the agency but also incur greater riles in terms of being stewards to the shareholders. It has been found that greater success have been achieved when these roles were unified rather than when they were separate. The stewardship theory is used to achieve effective results in non-profit and for-profit organizations. In for-profit organizations the corporate governance is done in such ways that the directors and employees work independently to work for the betterment of the organization. It also acts in such a way that all non-employee board members should also be knowledgeable about the financial condition of the organization. This helps in understanding the current scenario of the organizations and how this can help to achieve more profit for the shareholders. In a for-profit organization satisfying the shareholder is a major aim because the organization runs on the support of the shareholders and by incurring profit for them as well as for the organization itself. The stewardship theory also argues on the fact that power should be designated to one person so that the management is more manageable and more effectiveness is derived from the application of the theory and the actions of the steward. On the other hand, in non-profit organizations, the structure is the same as that of a for-profit organization. The power is designated to one person who takes the decisions that needs to be done for the betterment of the organization. The major difference between these two organizations is the fact that non-profit organizations have certain missions to complete instead of working for the shareholders. Stewardship theory helps the for-profit organizations to take decisions regarding the profit of the shareholders and non-profit organizations to take steps for the fulfilment of the mission for which the organization is formed. 

Resource-dependency Theory

Value is an important quality that a good leader should definitely possess. Having good values in a leader is mandatory because it defines the worth and quality of the person. It is important to be able to differentiate the right from the wrong and should be able to do it in their actions and communications with other people. Good values should be incorporated in a leader and should be used while making decision regarding the organization. The values that are absorbed while growing up in a society defines the character of the person. The character of a person is what determines their future. Hence, the character of a leader will define the future of an organization. Values are incurred through different ways like by experience from the world, gaining knowledge gradually and by the influence of the society around the person (Nelson, 2014). A leader should always incorporate those values which defines his character and are also important in his life. It is of utmost importance that the leader portrays his values and beliefs in his workplace every day so that it is visible to the employees and they can gain trust on the leader. If a leader is the one stopping the employees from working truthfully, then me must also be the one who does it himself. Only then will he be able to influence those who work with and underneath him. Therefore, it is said that good values should always be present in a leader. This helps the leader to understand the different beliefs and values of the society, even if he is not always in sync with them. However, being aware of the different philosophies in the society is important as it helps in the success of the organization. Awareness helps in the decision making and in understanding which decision will affect the organization positively or negatively. Having good beliefs helps in good governance as a leader who has a good belief and value will be able to lead the organization in the right direction. A person with values will also be able to choose the ethical way to good governance and incorporate the same values among the employees. The employees will also be able to rely on the leader for their work and also communicate with the leader. There are certain values that a good leader should possess which can be good for the decision making of the company. Firstly, the leader should have respect for others and also be able to earn respect from others by treating them with empathy. Secondly, the leader should always fulfil the promises that he makes to his employees and not break their expectations. Thirdly, the leader should always work to help the employees grow and develop in the organization. Fourthly, the leader should make personal efforts to create a difference in the organization and not just depend on the efforts of the employees. Lastly, a leader should always be humble and aware of their own shortcomings and try to rectify it.

Stewardship Theory

It is important for every business to be conducted ethically and gain the trust of the customers and the other shareholders. This gives a good reputation to the company and maintain their profits. The ethical principles of a business states that every stakeholders is treated equally and fairly without any biasness or discrimination. The interests of the stakeholders should be the priority. Every ethical organization will have a clear communication with the stakeholders and not hide any information from them. There should be no bureaucracy in the organization and there should be good control within the organization and its people. Finally the organization should be in compliance with the laws of the federal and state government. Following these ethics will help the organization to maintain their goodwill and build a good image among the stakeholders. This will help in the good corporate governance of the organization.

It has been concluded that good governance is needed to get an organization to run smoothly. Good corporate governance guidelines are needed to make sure that an organization is managed in a good way. There are three theories that describe the governance of a corporation. Agency theory states that principals hire agents to perform tasks according to the wishes of the principals. Stakeholder theory states that the actions of the organizations has direct effect on the stakeholders. Resource-dependency theory states that it the responsibility of the manager to gather the necessary resources for the betterment of the employees and the organization. These theories are what describe the different kind of governance that an organization can uphold. One of the main theories of corporate governance is the theory of stewardship. This theory depicts that a steward who is the manager works with the aim to protect and incur wealth for the shareholders. The steward works hard to maintain the value of the organization and to make sure that the shareholders do not suffer due to the actions of the steward or the employees of the organization. This essay also shed light on the relationship that is between the values and beliefs that is possessed by a leader and the effect that corporate governance has on various organizations. Having good values is very important to lead a good and successful team and organization. Hence, it can be deduced from the essay that good corporate governance is based on the combined efforts of the top management and the employees to work for the shareholders.

References:

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