Theories of Corporate Governance

(a) Agency Theory

According to this theory, managers act as ‘Agents’ of the corporation. The owners set the
central objectives of the corporation. Managers are responsible for carrying out these
objectives in day-to-day work of the company. Corporate Governance is control of
management through designing the structures and processes.

In agency theory, the owners are the principals. But principals may not have knowledge or
skill for getting the objectives executed. Thus, principal authorizes the mangers to act as
‘Agents’ and a contract between principal and agent is made. Under the contract of agency,
the agent should act in good faith. He should protect the interest of the principal and should
remain faithful to the goals.

In modern corporations, the shareholding is widely spread. The management (the agent)
directly or indirectly selected by the shareholders (the Principals), pursue the objectives set
out by the shareholders. The main thrust of the Agency Theory is that the actions of the
management differ from those required by the shareholders to maximize their return.

The principals who are widely scattered may not be able to counter this in the absence of
proper systems in place as regards timely disclosures, monitoring and oversight. Corporate
Governance puts in place such systems of oversight.

(b) Shareholder Theory

According to this theory, it is the corporation which is considered as the property of

shareholders. They can dispose off this property as they like. They want to get maximum
return from this property.

The owners seek a return on their investment and that is why they invest in a corporation. But
this narrow role has been expanded into overseeing the operations of the corporations and its
mangers to ensure that the corporation is in compliance with ethical and legal standards set
by the government. So the directors are responsible for any damage or harm done to their
property i.e., the corporation. The role of managers is to maximise the wealth of the
shareholders. They, therefore should exercise due diligence, care and avoid conflict of interest
and should not violate the confidence reposed in them. The agents must be faithful to
shareholders.

(c) Stakeholder Theory

According to this theory, the company is seen as an input-output model and all the interest
groups which include creditors, employees, customers, suppliers, local-community and the
government are to be considered. From their point of view, a corporation exists for them and
not the shareholders alone.

Different stakeholders have different self-interest. The interests of these different stakeholders
are at times conflicting. The managers and the corporation are responsible to mediate
between these different stakeholders interest. The stake holders have solidarity with each
other. This theory assumes that stakeholders are capable and willing to negotiate and bargain
with one another. This results in long term self interest.

The role of shareholders is reduced in the corporation. But they should also work to make
their interest compatible with the other stake holders. This requires integrity and managers
play an important role here. They are faithful agents but of all stakeholders, not just
stockholders.

Stewardship Theory

The word ‘steward’ means a person who manages another’s property or estate. Here, the
word is used in the sense of guardian in relation to a corporation (this theory is value based).
The managers and employees are to safeguard the resources of corporation and its property
and interest when the owner is absent. They are like a caretaker. They have to take utmost
care of the corporation. They should not use the property for their selfish ends. This theory
thus makes use of the social approach to human nature.

The managers should manage the corporation as if it is their own corporation. They are not
agents as such but occupy a position of stewards. The managers are motivated by the
principal’s objective and the behavior pattern is collective, pro-organizational and
trustworthy. Thus, under this theory, first of all values as standards are identified and
formulated. Second step is to develop training programmes that help to achieve excellence.
Thirdly, moral support is important to fill any gaps in values.

Models of Corporate Governance

Models of corporate governance are, at their most basic level, the set of norms, procedures,
procedures, policies, and rules that influence how individuals direct, administer, and manage
a company. It represents a resolve on the part of the organization to uphold accountability,
diversity, transparency, and fairness. Additionally, it alludes to the connections between
business objectives and stakeholders.

This obligation primarily rests with the board of directors of a corporation. Aiming to reduce
conflicts of interest and guarantee that all shareholders are handled fairly, this system of
checks and balances. However, this delicate power equilibrium depends on three important
anchors.

Models of corporate governance involved in this triangle connection are the board of
directors, management, and shareholders. While each has specific duties, they all must
cooperate for the system to be successful and balanced.

Indian Model

In Indian models of corporate governance The Securities and Exchange Board of India

(SEBI) played an important role. The newly created SEBI Act of 1992 presented two issues
and provided statutory powers Protection of investors and Market expansion.

In India, SEBI is essential to business governance. These British advancements had a big
impact on India. The Confederation of Indian Industries (CII) established a National Task
Force under the leadership of Rahul Bajaj, who in April 1998 presented a document titled
“Desirable Corporate Governance in India – a Code”.
The Securities and Exchange Board of India (SEBI) then named a Committee with Kumar
Mangalam Birla as its chairman. On May 7, 1999, this committee submitted its report, which
included 19 mandatory and 6 optional suggestions. In order to execute the report, SEBI
mandated that the Stock Exchanges add a unique clause 49 to the Listing Agreements.

A study by the Ganguly Committee on enhancing corporate governance in banks and

financial institutions was released in April 2002. A Committee on Corporate Audit and
Governance was established by the Central Government, with Mr Naresh Chandra serving as
its chairman. On December 23, 2002, this committee presented its report.

Finally, SEBI named a second Corporate Governance committee, this one headed by N.R.
Narayan Murthy. On February 8, 2003, the committee delivered its findings to SEBI. The
Listing Agreement’s clause 49 was subsequently amended by SEBI and is now in effect as of
January 1, 2006.

By amending the Companies Act three times between 1999 and 2002, some of the
suggestions made by these different committees received legal recognition. The Central
Government established an expert committee in December 2004 with the goal of preparing
company law for competition with businesses in developed nations. Dr Jamshed J. Irani
served as the committee’s chairman.

On May 31, 2005, the Committee delivered its findings to the Central Government.
According to the Central Government’s announcement, Dr Irani’s Committee Report would
be used to significantly revise the company legislation. The business community is
anticipating changes to company legislation.

Following the scandals involving Enron, Xerox, and WorldCom overseas, Tata
Finance/Ferguson, Satyam, telecom frauds by a select few companies, and black money
laundering by a select few domestically, corporate governance has once again come under
media and public scrutiny in India.

Better corporate practices, which are crucial to enhancing efficiency and surviving global
competition, can no longer be ignored by Indian businesses due to the opening of the markets
following market liberalization in the early 1990s and India’s integration into the global
economy.

Indian investors are now wondering whether our institutions and processes are strong enough
to guarantee that similar incidents won’t occur again or if the corporate sector in India has
reached a mature enough stage to engage in effective self-regulation. These changes tempt us
to reexamine the efficiency of India’s corporate governance systems and structures.

The amount of foreign institutional investment (FII) and foreign direct investment (FDI) into
India has multiplied as a result of economic freedom and globalization. Indian businesses are
becoming more and more common on foreign stock markets. The international financial
markets are another source of low-cost capital for Indian businesses with ADR/GDR
problems.

Companies today must deal with younger, more demanding shareholder and stakeholder
groups from India and around the world who expect greater disclosure, more transparent
justifications for important decisions, and, above all, a better return on their investment. The
need for Indian boards to make sure that corporations are managed in the best interests of
these extremely demanding international stakeholders has therefore grown.

German Model

Since the early 19th century, industrialization in Germany has been well-known. Over the last
five decades, Germany has exported a significant amount of high-tech equipment. Rich
German families, small shareholders, banks, and international investors provide the industries
with funding. Large private bankers who invested in the industry had more influence over
how those industries were managed, which resulted in subpar performance.

Germany has been thinking about proper Models of corporate governance practices since the
second part of the 19th century. German company legislation from 1870 established a dual
board structure to protect the public and small investors. Information and transparency were
major themes in the company legislation of 1884. The legislation also required a minimum
turnout at any company’s inaugural shareholders meeting.
Canadian Model

There have been French and British settlements in Canada. These cultures were passed on to
businesses. The cultural context of these sectors had an impact on later developments. French
commerce has a significant impact on the nation.

Rich families dominated Canada’s businesses in the 19th century. Rich Canadian families
have sold their assets over the past 50 years during times of market boom. Canada’s industry
structure now matches that of the United States.

Industries in Canada have changed over the past 40 years in the following areas. The number
of family-owned businesses are growing, the Utilization of modern technology, Increased
business endeavours, The beginning of company governance early on and Spread ownership
from previous colonial rulers.

UK and American models of corporate governance

The Sarbanes Oxley Act (SOX), which was specifically created to make US corporations
more accountable to their stakeholders.

The Act aims to restore investor confidence by establishing good corporate governance
practises to stop corporate scams and frauds in business corporations, to increase accuracy
and transparency in financial reporting, and accounting services for listed companies, to
foster corporate responsibility, and to promote independent auditing.

The Act’s applicability stretches to other units registered with the Securities Exchange
Commission as well as privately held US businesses. However, they are connected by a
similar theme—namely, the importance of good governance. Effective corporate governance
cannot be achieved unless corporate governance is integrated with strategic planning and
shareholders are prepared to bear the extra required costs.

The aforementioned occurrences promoted the growth of the current situation, in which
various aspects of the Sarbanes Oxley Act are discussed, along with its effects, restrictions,
and internal control following its passage and what lies beyond its compliance.
The act’s numerous applications in fields like IT, the charge schedule of the Big Four
accounting firms, mid-size accounting firms, supply chain management, and insurance are
also covered.