PONCIANO, RALPH LOUISE GERON

BSBAOM301A

GOOD GOVERNANCE AND SOCIAL RESPONSIBILITY

03 Activity 2 (Part 2)

Explain the merits and limitations of each of the following corporate governance
theories. Is any one's governance theory superior to another?

a. Agency theory

The link between agents and principals is studied using agency theory. In a given
commercial transaction, the agent represents the principle and is supposed to operate
in the principal's best interests without regard for self-interest. The disparities in
interests between principals and agents may cause friction, since certain agents may
not always work in the principal's best interests. Miscommunication and disagreement
that results from this may lead to a variety of issues and unrest inside businesses.
Incompatible objectives can create a chasm between stakeholders, resulting in
inefficiencies and financial losses. The principal-agent dilemma arises as a result of this.
The Agency theory explains why humans, even against their choice, obey unexplained
directions. A theory, on the other hand, is less explainable than an explanation and
simply more complex than a definition. It will, however, assist someone if they are
proven guilty.

Because the principals or the shareholders are unable to appropriately oversee the acts
conducted by the agent, an agency problem may occur between managers and
shareholders or the managers. As a result, the agent may be motivated to follow their
own interests rather than the principal's best interests.

b. Stewardship theory

People are inherently driven to labor for others or for organizations to complete the
duties and obligations with which they have been entrusted, according to stewardship
theory. It claims that individuals are more collectively oriented and pro-organizational
than individualistic, and that as a result, they strive toward achieving organizational,
group, or societal goals because it provides them a better sense of fulfillment. As a
result, stewardship theory provides a framework for defining management incentives in
various types of organizations. The steward theory states that via company
performance, a steward preserves and maximizes shareholder capital. Stewards are
firm leaders and managers who work for the benefit of the shareholders, protecting and
increasing earnings. When the company achieves success, the stewards are happy and
driven. It emphasizes the need of employees or executives acting more independently
in order to optimize shareholder profits. Employees take responsibility for their tasks
and work hard at them.

The stewardship theory states that directors act as stewards and will not be concerned
with promoting their own economic interests, as the agency theory suggests, but rather
will act in the best interests of their company, and will act in a way that promotes
collectivist/organizational utility rather than self-serving benefits.

c. Stakeholder theory

Stakeholder theory included management's accountability to a wide range of

stakeholders. It argues that managers have a network of ties to service in their
enterprises, which includes suppliers, workers, and business partners. The idea focuses
on management decision-making, and all stakeholders' interests have inherent worth,
with no one group of interests thought to be more important than the others. The main
benefits of stakeholder theory are that it is not only a single model for resolving the
problem of identifying the proper objective of corporations, but it also considers
economic and ethical issues that lead to companies taking social responsibilities and
presenting fairness to all parties involved in the business. The theory is a healthy mix of
economics and ethics that allows a company to develop while also promoting societal
prosperity. According to the hypothesis, if directors are concerned about the interests of
shareholders, not only will stakeholder value improve, but society wealth will as well.

Some criticize stakeholder theory, stating that the group's interests are just too wide to
handle realistically. As the phrase goes, you can't please everyone, and the
requirements of certain stakeholders will inevitably take precedence over the interests
of others.
Is any one's governance theory superior to another?

Corporate governance theories are based on agency theory and the theory of moral
hazard implications, and they progress through stewardship theory, stakeholder theory,
resource dependence theory, transaction cost theory, and political theory to resource
dependence theory, transaction cost theory, and political theory.  These ideas are
separated from the causes and consequences of variables beyond the legal regulatory
framework, such as the composition of the board of directors, audit committee,
independence managers, senior management's job, and their social relationships.
These ideas are based on the causes and consequences of factors such as the board
of directors' and audit committee's configurations, the independence of directors, and
the role of senior management and their social relationships outside of the formal
regulatory framework.