REVIEW SIX CONTEMPORARY THEORIES OF
CORPORATE GOVERNANCE. ALIGN THE RELEVANT
ONES TO CORPORATE GOVERNANCE PRACTICES IN A
QUOTED NIGERIAN COMPANY. HIGHLIGHT
IDENTIFIED CHALLENGES AND PROFER SOLUTIONS
NAME:
MATRIC NO:
COURSE CODE:
COURSE TITLE:
LECTURER:
Adebayo Adetola
189025045
FIN 815
Management of Financial Institutions 1
Dr. Samson Ogege
Introduction
Corporations have become very powerful and dominant institution in the world we are
today. They have reached to every corner of the globe in various sizes, capabilities and
influences. Their governance has influenced economies and various aspects of social
landscape. Moreover with the emergence of globalization, there is the threat of
eradication of social, political, or cultural practices from their native places and
populations and less of governmental control, which results is a greater need for
accountability (Crane and Matten, 2007). Hence, corporate governance has become an
important factor in managing organizations in the current global and complex
environment.
Besides the aforementioned, the scandals in Enron, WorldCom, Cadbury Nigeria Plc,
Intercontinental Bank, Afribank, and Oceanic Bank have reiterated the value of good
governance practices in corporations
In order to understand corporate governance, it is important to highlight its definition.
Even though, there is no single accepted definition of corporate governance but it can be
defined as the system by which companies are directed and controlled. Boards of directors
are responsible for the governance of their companies. The shareholders’ role in
governance is to appoint the directors and the auditors and to satisfy themselves that an
appropriate governance structure is in place.
The responsibilities of the board include setting the company’s strategic aims, providing
the leadership to put them into effect, supervising the management of the business and
reporting to shareholders on their stewardship.
Corporate governance is therefore about what the board of a company does and how it
sets the values of the company, and it is to be distinguished from the day to day
operational management of the company by full-time executives.
But good governance can have wider impacts to the non-listed sector because it is
fundamentally about improving transparency and accountability within existing systems.
One of the interesting developments in the last few years has been the way in which the
‘corporate’ governance label has been used to describe governance and accountability
issues beyond the corporate sector.
Corporate Governance could also be the process of decision making and the process by
which decisions are implemented in large businesses is known as Corporate Governance.
There are various theories which describe the relationship between various stakeholders
of the business while carrying out the activity of the business.
Theories of Corporate Governance
 Agency Theory
 Stewardship Theory
 Resource Dependency Theory
 Stakeholder Theory
 Transaction Cost Theory
 Political Theory
Agency Theory:
Agency theory defines the relationship between the principals (such as shareholders of
company) and agents (such as directors of company). According to this theory, the
principals of the company hire the agents to perform work. The principals delegate the
work of running the business to the directors or managers, who are agents of
shareholders. The shareholders expect the agents to act and make decisions in the best
interest of principal. On the contrary, it is not necessary that agent make decisions in the
best interests of the principals. The agent may be succumbed to self-interest,
opportunistic behavior and fall short of expectations of the principal. The key feature of
agency theory is separation of ownership and control. The theory prescribes that people
or employees are held accountable in their tasks and responsibilities. Rewards and
Punishments can be used to correct the priorities of agents.
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 stewards are
satisfied and motivated when organizational success is attained. It stresses on the
position of employees or executives to act more autonomously so that the shareholders’
returns are maximized. The employees take ownership of their jobs and work at them
diligently.
Resource Dependency Theory:
The Resource Dependency Theory focuses on the role of board directors in providing
access to resources needed by the firm. It states that directors play an important role in
providing or securing essential resources to an organization through their linkages to the
external environment. The provision of resources enhances organizational functioning,
firm’s performance and its survival. The directors bring resources to the firm, such as
information, skills, access to key constituents such as suppliers, buyers, public policy
makers, social groups as well as legitimacy. Directors can be classified into four
categories of insiders, business experts, support specialists and community influential.
Stakeholder Theory:
Stakeholder theory incorporated the accountability of management to a broad range of
stakeholders. It states that managers in organizations have a network of relationships to
serve – this includes the suppliers, employees and business partners. The theory focuses
on managerial decision making and interests of all stakeholders have intrinsic value,
and no sets of interests is assumed to dominate the others.
Transaction Cost Theory:
Transaction cost theory states that a company has number of contracts within the
company itself or with market through which it creates value for the company. There is
cost associated with each contract with external party; such cost is called transaction
cost. If transaction cost of using the market is higher, the company would undertake that
transaction itself.
Political Theory:
Political theory brings the approach of developing voting support from shareholders,
rather by purchasing voting power. Hence having a political influence in corporate
governance may direct corporate governance within the organization. Public interest is
much reserved as the government participates in corporate decision making, taking into
consideration cultural challenges (Pound, 1993). The political model highlights the
allocation of corporate power, profits and privileges are determined via the
governments’ favor. The political model of corporate governance can have an immense
influence on governance developments. Over the last decades, the government of a
country has been seen to have a strong political influence on firms. As a result, there is
an entrance of politics into the governance structure or firms’ mechanism (Hawley and
Williams, 1996).
Challenges and Solutions to Agency Problem
To proceed with the evaluation, it is essential to explain why agency theory is examined
in this study. Hart (1995) theorised that corporate governance concerns develop when
two conditions exist. The first condition is the existence of an agency problem. Indeed,
Hart (1995) remarked that corporate governance is irrelevant in the absence of agency
concerns. It could therefore be rationalised that the existence of agency problems
provides the platform for corporate governance scholarship. On this basis, this research
engages in a brief discussion of agency theory.
We have seen that in corporate form of business, there is separation of ownership and
business. This creates a unique type of problem known as Agency Problem. The
problem of Principal-Agent is universal. Agents (Managers) are expected to work for
the benefit of principal (owners) and take decisions that are beneficial for the principal.
However often agents take decisions that are beneficial for themselves. When
ownership and business is separated, the managers are expected to act for the benefits of
the owners. However, there is chance that managers may pursue certain alternative
objectives that are beneficial to themselves rather than owners. The conflict is called
Agency Problem.
Another challenge as noted in Jensen and Meckling (1976), is the divergences in what
constitutes the ‘firm objective’ for both parties. Figure 3 suggests that management
tends to pursue objectives different to those of its shareholders. Incidences of corporate
scandals reinforce the view that what constitutes the ‘firm objective’ for agents may be
inconsistent with that of their principals (Eisenhardt, 1989).
Mitigating Agency Problem
One solution to mitigate the agency problem is to appoint the honest and ethical
managers. But question is how to determine whether a manager is honest/ethical or not.
Thus there is need to do something beyond appointment of managers.
 Traditionally auditing was instituted to resolve the agency conflict. Auditors are
expected to work on behalf of owners and examine the conduct of business run
by managers and submit the report to owners. However the auditing is restricted
to financial auditing which can unearth the financial frauds. But it cannot
question the managerial efficiency.
 In addition to auditing, the corporate governance is used to resolve the agency
conflict. Under the corporate governance, the emphasis is on the board including
the appointment of directors for the board, who are expected to be independent
and expert in their fields. In addition, the board forms sub-committees to have
more close interaction with management.
List of References
Crane. A and Matten. D. (2007) “Business Ethics” (2nd Ed). Oxford University Press.
Eisenhardt, K. M. (1989). Agency theory: an assessment and review. Academy of
Management Review, 14(1), 57-74.
Hart, O. (1995). Corporate governance: some theory and implications. The Economic
Journal, 105(430), 678-689.
Hawley, J.P. and Williams, A.T. (1996) “Corporate Governance in the United States: The
Rise Of Fiduciary Capitalism”. Working Paper, Saint Mary's College of
California, School of Economics and Business Administration
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: managerial behavior,
agency costs and ownership structure. Journal of Financial Economics, 3(4), 305360.
Pound, J. (1993) “Proxy Contest And The Efficiency Of Shareholder Oversight”. Journal
of Financial Economics, Vol. 20, pp. 237-265