Corporate governance is about how companies are managed and controlled. It ensures that companies are run in a way that is fair, transparent, and accountable to everyone involved, including shareholders, employees, customers, and the community.
Several theories explain how corporate governance works:
1. Agency Theory
This theory explains the relationship between owners (shareholders) and managers. Shareholders hire managers to run the company, but managers might sometimes act in their own interest rather than working for the benefit of the owners. To avoid this, companies use tools like performance-based pay, audits, and strong boards of directors to make sure managers act in the shareholders’ best interest.
2. Stewardship Theory
Unlike agency theory, stewardship theory assumes that managers are trustworthy and will act in the company’s best interest. It suggests that managers take responsibility for the company’s success because they feel a sense of duty and ownership. This theory promotes trust and cooperation between managers and shareholders.
3. Stakeholder Theory
This theory looks at everyone who is affected by a company’s actions, not just shareholders. It includes employees, customers, suppliers, and even the community. Stakeholder theory says that companies should balance the needs of all these groups, rather than focusing only on making money for shareholders. It promotes fairness and sustainability in business decisions.
4. Resource Dependence Theory
This theory focuses on how companies need resources from the outside world to survive, like money, knowledge, or partnerships. Boards of directors play an important role in helping the company secure these resources through their connections and expertise. A diverse and skilled board can make the company stronger and more competitive.
5. Transaction Cost Theory
This theory looks at the costs involved in doing business, like negotiating contracts or managing employees. It says that companies design their structures and processes in a way that reduces these costs, making operations more efficient and effective.
6. Ethical Theories
Ethical theories emphasize the importance of doing what is morally right. They focus on honesty, fairness, and accountability. These theories encourage companies to act ethically and maintain trust with stakeholders for long-term success.
Corporate governance is about creating a system where everyone involved works together responsibly. These theories help companies ensure that decisions are fair, resources are used wisely, and the interests of all stakeholders are considered. Good governance builds trust and helps businesses grow sustainably.