Insight of Corporate Governance Theories

Wan Fauziah Wan Yusoff1 and Idris Adamu Alhaji

the term corporate governance mainly came due to the separation of ownership from the management
of companies. There are many theories that are applicable and related to corporate Governance and
they are

 Agency theory
 Stewardship theory
 Stakeholder theory
 Resource dependency theory
 Social contract theory
 Legitimacy theory
 Political theory

1. Agency theory: Management and ownership are separate in companies. for this
reason there is a problem called agency problem. That problem is clearly
defined by a theory that is called agency theory. This theory was first linked to
corporate governance by Berle and Means (1932). There are two parties in this
theory. the first one is the shareholders and the second one is the
management .shareholder are the owner of the company and the management
look after the company on behalf of the shareholder. As the management and
ownership are segregated there is a conflict of interest. To reduce the conflict of
interest there is a cost called agency cost .agency problem arises due to
information gap between the management and the shareholder .the
management has information that the shareholder do not have.

2. Stewardship theory: Stewardship theory states that management will work for
the interest of the shareholder who are the true owner of the company as the
management is a steward. They are not driven by self-interest and they protect
the shareholder’s interest.

3. Stakeholder theory: This theory tells us that the management has a lot of
responsibility to the stockholders of the company. The management takes care
of the interest of the stockholder not only the shareholder of the company. the
main stockholder of the company are shareholders, government and any other
person who’s has interest in the company. This theory states that the
management do not take any decision the violates the right of one stakeholder
to provide more benefits to another.

4. Resource dependency theory: this theory states that the board has the control
over resources needed by the management and they will deliver the resources
 to them whenever they need it most. Firm sometimes depend on the resources
that are from the outside of the company .it is the job of the board to make a
connection between the resources and the management to make sure that
there is continuous supply of resources.

5. Social contract theory: company and society has a social contract and the
corporate social responsibility is vital role of any corporate company. Managers
should take decision that are ethical, moral and that are nor harmful for the
society.

6. Legitimacy theory : According to legitimacy theory companies take every

possible actions to make their actions legitimate .they can make disclosure
about any particular incident to make it clear to the stakeholder. Basically this
theory is based on social contract theory .this theory also states that public
interest should be served at the first time rather shareholders interest.from this
point of view this supports the stakeholder theory. Many corporate disclosures
can be the result of this theory.

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