Theories Of Corporate Governance - Click For Free Sample

Question: Discuss about theTheories of Corporate Governance. Answer: Introduction: Corporate governance can be defined as a set of structures and processes for directing and controlling an organization. The rules usually govern the relationship between the management, stakeholders and shareholders. Corporate governance has several other definitions and interpretations; however there are theories explaining how the governance operates. The common theories are the agency theory, stewardship theory and the stakeholder theory(Aziri, 2014). Agency theory involves a relationship between the company principles like the shareholders and the companys agents like the executives and managers. The shareholders hire the agents to handle their work for them as they are the principles of the company. The directors and the managers are considered the shareholders agents in this theory. The cooperation is between the shareholders and the managers(Berndt, 2013). Also, the managers or employees in the organization using agency theory are usually to make decisions in the principals interest. However, sometimes it doesnt happen like that and some of them make it based on self interest. The theory has cases where agents succumb to the self interest and adopt opportunistic behavior easily failing to meet principles interests. The theory was majorly for separating ownership and control; therefore the agents could focus on projects with high returns and fixed wages. The theory provides a challenging structure as the agents should provide g ood governance and also tend to the needs of shareholders. The ownership and management are able to cooperate and have their interests attended too(Bosse, 2016). Stewardship theory can be related to a steward protecting and maximizing the wealth of shareholders through good performance of the firm. Stewards are the executives and managers of the company that work for the shareholders. It is different from agency theory as individualism is not practiced here and rather involves integration of the organization goals and that of the stewards. The success of the organization satisfies the stewards and they promote autonomous actions of executives in the company for better results. The performance of the firm and the profits of shareholders are the managers priorities. The theory also suggests the unifying of the roles of the chairman and the CEO to reduce on the agency costs. However, combining these theories is more successful than using one theory for governance(Calabr, 2013). The stakeholders theory can be described as a group or individual that affects or is affected by the achievement of objectives drawn by an organization. It differs from the agency theory of where managers work and serve stakeholders and rather involves managers having a network of relationship to attend to. The network involves employees, suppliers and business partners. All the groups interested in the company are attended to and mostly usually affect the process of making decisions. The theory has a major focus on managerial decision and all the interests of the shareholders are of intrinsic value therefore no set of their interests can dominate the other(Dignam, 2016). The case of Walt Disney involves the application of all the three theories. Agency theory is evident in the companys organization when Michael Eisner becomes the CEO of the company. Even though he is successful, some of the decisions seem to be of his self interest lie hiring and firing his best friend Michael Ovitz. There are claims that he had ruled in an independent way that even made the principles uncomfortable like Walts nephew. However, the companys success was great based on the tactics he used to approach the market. Stewardship theory was also applied in the company through both of the CEOs(Frias Aceituno, 2013). They both had two roles of the chairman and the CEO, as recommended by the stewardship theory. Also, considering how Robert Iger approached management and dealing with the business activities, the involvement and cooperation of the managers and employees of the company indicate the theory(Sapra, 2014). He also had concern for the people working for the organizat ion, an essential element of the stewardship theory. The stakeholders theory is also indicated a little bit by Robert Iger through the way he is concerned about all the groups gaining from the companys success. The integration of the interests of the managers, employees and the principles prove the application of the theory. Using the three theories to manage the company can be the reason for Walt Disneys success despite the challenges. Michael Eisner served as a good CEO but his ways of management made the board remove him(Sapra, 2014). Importance of the Management Board in Governance The board in governance has three major roles, establishing policies, making strategic and significant decisions and the overseeing of organizations activities. The board makes the policies that are necessary to complete the other two roles. The policies define the focus of the organization and differentiate the responsibilities of the management and board. Policies that are well written usually lead to a more efficient board. The policies are reviewed or amended every year to ensure the management and performance of companies is kept in check . Through the functioning and roles of the board, successful performance is usually attributed to good policies(Stulz, 2014). The board also makes decisions that affect the mission, vision and strategies of the organization. Issues that are significant like agreement to make great deals with other companies or issues to deal with the CEO of the company. The Walt Disney decision by the board to remove Michael Eisner and have Robert Iger as the new CEO proves how he board was important in that case. The decision is considered a prime one, and only the board is able to intervene in such cases. The board also oversees everything ensuring that things are in proper manner for efficient functioning of the company(Westphal, 2013). Some of the additional responsibilities of the board involve overseeing the management and finances of the organization. The board also establishes the ethical standards in the policies they implement. These ethical standards are also determined by the performance and behavior of board members. Selecting a CEO and monitoring his progress and how he performs is a major role for the board of governance. In fact, selecting the CEO and establishing the correct direction for the organization are the critical roles of the board(an Puyvelde, 2012). The board is therefore considered important as it ensures success of an organization while also ensuring management performs as required. Managing finances, editing the policies and sometimes decisions like removing the CEO for the best interest of the company prove importance of the board in excellent performance of a firm(Westphal, 2013). Disagreements among top officials in a firm or issues that bring a lot of controversy are left for the board to make significant final solutions. The board also has the role of approving critical decisions made by the management of the company. These roles ensure proper governance and implementation of decisions that improve the performance of the company(an Puyvelde, 2012). Weaknesses in Governance The board of directors is in charge of managing the business of the shareholders and running the daily operations. However, the board and management team of the cooperation might have some weaknesses. One weakness that is common with corporations is the principal agent conflict. The conflicts usually arise when the agents have different interests from the principles initial plans . The conflict can lead to disagreements; therefore the board must be able to handle such situations(Dignam, 2016). The board also might be faced with weaknesses like being tempted to micromanage their issues and divert to irrelevant issues. Diversion from the goals of the company leads to lower production of the board and really affects performance. Another issue is the existence of an ineffective nominating committee. Nominating committee has actions that impact the organization for a long time and therefore needs to be efficient(Berndt, 2013). The board also requires proper insight into issues and should be able to remove unproductive members from the group for better performance. Moreover, plans for rotation should be able to manage entrance of new ideas into the company. Orienting both new and old members is a role the board should not forget. The board has weakness in orientation, rotation, and sometimes functioning without a strategic plan. Some boards fail to practice their power and adjust how the organization functions even if it involves removing the CEO(Frias Aceituno, 2013). The lagging behind by board members to fully participate and ensure effective company performance should be checked by the principles. The owners of the company are able to keep check like the way Malts Nephew insisted on the removal of Michael Eisner. Critical decisions that are a role of the board might fail to be attended to or implemented and this affects how the organization functions. The board is supposed to respond to all major issues together with committees formed to ensure most issues are attended to(Berndt, 2013). Proper insight into the companys functioning and the management of finances should be a role of the board. Some boards do not focus on the major issues, hence leads to poor performance. The board has a role of governance and should act in all powers to fulfill interests of the organization. Corporate governance is quite technical and has its approaches and theories; however a proper functioning board with correct theories of governance ensures a lot of success for an organization(Stulz, 2014). References An Puyvelde, S. C. R. D. B. C. a. J. M., 2012. The governance of nonprofit organizations integrating agency theory with stakeholder and stewardship theories. Nonprofit and Voluntary Sector Quarterly, 41(03), pp. .431-451. Aziri, B. V. N. a. V. T., 2014. April. Corporate Governance in the Republic of Macedonia. In International OFEL Conference on Governance, Management and Entrepreneurship, Volume Centar za istrazivanje i razvoj upravljanja doo., p. 316. Berndt, M., 2013. Global differences in corporate governance systems: theory and implications for reforms. s.l.:Springer-Verlag.. Bosse, D. a. P. R., 2016. Agency theory and bounded self-interest. Academy of Management Review, 41(2), pp. 276-297. Calabr, A. a. M. D., 2013. How do boards of directors contribute to family SME export intensity? The role of formal and informal governance mechanisms. Journal of Management Governance, 17(2), pp. 363-403.. Dignam, A. a. G. M., 2016. The globalization of corporate governance. Routledge.: s.n. Frias Aceituno, J. R. L. a. G. I., 2013. The role of the board in the dissemination of integrated corporate social reporting.. Corporate Social Responsibility and Environmental Management, 20(4), pp. 219-233. Sapra, H. S. A. a. S. K., 2014. Corporate governance and innovation: Theory and evidence. Journal of Financial and Quantitative Analysis, 49(04), pp. 957-1003.. Stulz, R., 2014. Governance, risk management, and risk-taking in banks (No. w20274). s.l.:National Bureau of Economic Research. Tricker, B., 2015. Corporate governance: Principles, policies, and practices. USA: Oxford University Press. Westphal, J. a. Z. E., 2013. A behavioral theory of corporate governance: Explicating the mechanisms of socially situated and socially constituted agency. The Academy of Management Annals, 7(1), pp. 607-661. Zattoni, A. D. T. a. J. W., 2013. Developing corporate governance theory through qualitative research. Corporate Governance: An International Review, 21(2), pp. 119-122.