Theoretical Approaches to

Corporate Governance
Theories of Corporate Governance
Organizational efficiency
Management and organizational theories
Contents
Transaction cost economics
Agency theory
Stewardship theory
Stakeholder theory
Resource based approach
Dynamic capability approach
Transaction cost economics
Introduced by Oliver Williamson (Nobel Prize Awardee; 1975), who built on the path-breaking
work of Ronald Coase (1937)
A central theory in the field of Strategy
Addresses questions about why firms exist in the first place (i.e., to minimize transaction costs),
how firms define their boundaries, and how they ought to govern operations
Individual transaction as the starting point (the synapse between the buyer and the seller; Why
are some transactions performed within firms rather than in the market
Though Ronald H. Coase, in 1937, was the first to highlight the importance of understanding the
costs of transacting, TCE as a formal theory started in earnest in the late 1960s and early 1970s
as an attempt to understand and to make empirical predictions about vertical integration (“the
make-or-buy decision”)
Transaction cost economics
Addresses fundamental questions such as how should a complex contractual relationship be
governed to avoid waste and to create transaction value
Has expanded to become one of the most influential management theories, addressing not only
the scale and scope of the firm but also many aspects of its internal workings, most notably
corporate governance and organization design
As a theory of organizational efficiency, calls for identifying the comparatively better
organizational arrangement, the alternative that best matches the key features of the
transaction
Agency Theory
Originally proposed by Stephen Ross and Barry Mitnick, used to explain and resolve issues in the
relationship between business principals and their agents
Attempts to explain and resolve disputes over priorities between principals and their agents
Principals rely on agents to execute certain transactions, particularly financial, resulting in a difference in
agreement on priorities and methods.
The difference in priorities and interests between agents and principals is known as the principal-agent
problem.
Resolving the differences in expectations is called ‘reducing agency loss’
Performance-based compensation is one way that is used to achieve a balance between principal and
agent.
Common principal-agent relationships included in agency theory include shareholders and management,
financial planners and their clients, and lessees and lessors.
Stewardship Theory
A framework which argues that people are intrinsically motivated to work for others or for
organizations to accomplish the tasks and responsibilities with which they have been entrusted
Argues that people are collective minded and pro-organizational rather than individualistic and
therefore work toward the attainment of organizational, group, or societal goals because doing
so gives them a higher level of satisfaction
Provides one framework for characterizing the motivations of managerial behavior in various
types of organizations
STEWARDSHIP
THEORY
The steward theory states that a steward protects and
maximises shareholders’ wealth through firm
Performance.

Stewards are company executives and managers

working for the shareholders, protects and make profits
for the shareholders.

The employees take ownership of their jobs and work at

them diligently.
STAKEHOLDER
THEORY
A stakeholder is anyone who has an interest in a project,
business or organization.

Stakeholder theory addresses business ethics, morals

and values when managing stakeholders involved with a
project or organization. It seeks to optimize relations
with stakeholders, thereby improving efficiencies
throughout the project or organization
Stakeholder Theory
A company is seen as an open institution, where expectations of all categories involved in company’s
decision converge
The challenge to the Board is to satisfy all stakeholders balancing the potentially conflicting interests of all
of them.
A view of capitalism that stresses the interconnected relationships between a business and its customers,
suppliers, employees, investors, communities and others who have a stake in the organization. The theory
argues that a firm should create value for all stakeholders, not just shareholders.
In 1984, R. Edward Freeman originally detailed the Stakeholder Theory of Organizational Management
and Business Ethics that addresses morals and values in managing an organization.
His award-winning book ’Strategic Management: A Stakeholder Approach’ identifies and models the
groups which are stakeholders of a corporation, and both describes and recommends methods by which
management can give due regard to the interests of those groups.
SHAREHOLDER
THEORY
According to Shareholder theory, the only duty of
a corporation is to maximize the profits accruing
to its shareholders.

A corporation should not engage in any type of

philanthropy, since that is not its purpose.
Instead, the corporation can deliver dividends to
its shareholders, who then have the option to
donate the money for philanthropic purposes, if
they choose to do so
Resource-based Approach
According to resource-based theory, organizations that own “strategic resources” have
important competitive advantages over organizations that do not.
Some resources (such as cash and trucks) are not considered to be strategic resources because
an organization’s competitors can readily acquire them.
A resource is strategic to the extent that it is valuable, rare, difficult to imitate, and non-
substitutable.
Organizations should look inside the company to find the sources of competitive advantage
instead of looking at competitive environment for it.
RESOURCE BASED APPROACH

It is an approach to achieving  competitive advantage that emerged in According to this approach, it is much more feasible to exploit
1980s and 1990s. external opportunities using existing resources in a new way rather
than trying to acquire new skills for each different opportunity. 
VRIO Framework
DYNAMIC CAPABILITY APPROACH
DC may be considered as a source of competitive advantage (Teece, Pisano & Shuen, 1997)
Emerged as both an extension to and a reaction against the inability of the resource-based view
(RBV) to interpret the development and redevelopment of resources and capabilities to address
rapidly changing environments.
DCs are responsible for enabling organizations to integrate, marshal and reconfigure their
resources and capabilities to adapt to rapidly changing environments.
DCs enable an organization to reconfigure its strategy and resources to achieve sustainable
competitive advantages and superior performance in rapidly changing environments.
Goes beyond the idea that sustainable competitive advantage is based on a firm’s acquisition of
valuable, rare, inimitable and non-substitutable (VRIN) resources. 
DYNAMIC CAPABILITY
APPROACH
Dynamic capability is a theory of competitive
advantage.
Dynamic Capability can be defined as the firm’s
ability to integrate, build, and reconfigure
internal and external competences to address
rapidly changing environments.
Tied to original business models and practices,
making them difficult to imitate, and they
enable creation, extension, and modification
within an organization
Referred as ‘Signature processes’ by Lynda
Gratton and Sumantra Ghoshal
Thank You!