Corporate Governance 5e

Christine A. Mallin

Chapter 2
Theoretical Aspects of Corporate
Governance

© Christine A. Mallin 2016

 Learning objectives

• To understand the various main theories that

underline the development of corporate
governance
• To be aware of the impact of the form of legal
system, capital market, and ownership
structure on the development of corporate
governance

Mallin: Corporate Governance, 5th edition

 Summary of theories

• Agency theory
• Transaction costs economics
• Stakeholder theory
• Stewardship theory
• Class hegemony
• Managerial hegemony
• Path dependence
• Resource dependence
• Institutional theory
• Political theory
• Network governance

Mallin: Corporate Governance, 5th edition

 Agency theory

• Agency theory identifies the agency

relationship where one party, the principal,
delegates work to another party, the agent. In
the context of a corporation, the owners are
the principal and the directors are the agent.

Mallin: Corporate Governance, 5th edition

 Agency theory

• The work of Jensen and Meckling (1976) and

Jensen (1983) was important to the
development of agency theory.
• Much of agency theory as related to
corporations is set out in the context of
ownership and control as described in the
work of Berle and Means (1932).

Mallin: Corporate Governance, 5th edition

 Transaction cost economics

• Transaction cost economics (TCE) views the

firm itself as a governance structure. The
choice of an appropriate governance
structure can help align the interests of
directors and shareholders.
• The work of Coase (1937), Williamson
(1975,1984) and Hart (1995) contributed to
the development of TCE

Mallin: Corporate Governance, 5th edition

 Stakeholder theory

• Stakeholder theory takes account of a wider

group of constituents rather than focusing on
shareholders. Where there is an emphasis on
stakeholders then the governance structure
of the company may provide for some direct
representation of the stakeholder groups.

Mallin: Corporate Governance, 5th edition

 Stewardship theory

• Stewardship theory views directors as the

stewards of the company’s assets and so
they will be predisposed to act in the best
interest of the shareholders.
• Donaldson and Davis (1991) contributed to
the development of this theory.

Mallin: Corporate Governance, 5th edition

 Class hegemony

• According to class hegemony, directors view

themselves as an elite at the top of the
company and will recruit/promote to new
director appointments taking into account how
well new appointments might fit into that elite.

Mallin: Corporate Governance, 5th edition

 Managerial hegemony

• According to managerial hegemony, the

management of a company, with its
knowledge of day-to-day operations, may
effectively dominate the directors and hence
weaken the influence of directors.

Mallin: Corporate Governance, 5th edition

 Path dependence

• Corporate structures depend on the

structures with which an economy started.
• May be structure driven and rule driven.
• Bebchuk and Roe (1999) made a significant
contribution to the development of a theory of
path dependence.

Mallin: Corporate Governance, 5th edition

 Resource dependence

• Directors connect the company to the

resources needed to achieve corporate
objectives.
• Resource dependence theory has
implications for various key areas including
the optimal structure of organizations and the
recruitment of board members and
employees.

Mallin: Corporate Governance, 5th edition

 Institutional theory

• Institutional environment influences societal

beliefs and practices which impact on various
‘actors’ within society.
• Different countries/cultures may react
differently to the same challenge/event.

Mallin: Corporate Governance, 5th edition

 Political theory

• Political theory significantly influences

ownership and governance structures.
Includes, inter alia, impact of government,
law, justice system, etc. on society.
• Roe (2003) made a significant contribution to
the development of this theory.

Mallin: Corporate Governance, 5th edition

 Network governance

• A structure of network governance would allow

for superior risk management.
• Jones et al (1997), and Pirson and Turnbull
(2011) contributed to the development of
network governance which is seen as a logical
way to extend the science of cybernetics to
organizations.
• Aspects include organic and more informal
structures/processes rather than a rigid
bureaucratic approach.

Mallin: Corporate Governance, 5th edition

 Culture

• A focus on culture and its impact on the

development of corporate governance theory
and practice is gaining prominence.
• An appropriate corporate culture will help
ensure integrity within the company and
should limit dysfunctional and dishonest
behaviour, which is detrimental to the
company, its shareholders and other
stakeholders, and the environment in which it
operates.

Mallin: Corporate Governance, 5th edition