CORPORATE GOVERNANCE
ASSIGNMENT - I
Topic
Introduction to Corporate Governance
Submitted To – Mr. MOHD ANAS
Submitted By – HIMANSHU
Course – BBA.LL.B (Hons.)
Semester - X
Roll no. - 2005140004
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Critically analyse the major theories of corporate governance and compare
different corporate governance models. Provide relevant case studies and
assess which model and theory best suit Indian corporate governance.
1. Introduction
Corporate governance refers to the framework of rules, relationships, systems, and processes
within and by which authority is exercised and controlled in corporations. It ensures
accountability, fairness, and transparency in a company’s relationship with its stakeholders.
Different governance models and theories have evolved to address these concerns,
influencing how companies operate in different countries. This assignment critically analyses
major corporate governance theories and models, compares their effectiveness, and evaluates
the best approach for India.
2. Theories of Corporate Governance
Agency Theory
Agency theory, proposed by Jensen and Meckling (1976), explains corporate governance as a
relationship between principals (shareholders) and agents (managers). It assumes that
managers (agents) may act in their own self-interest rather than maximizing shareholder
value. This leads to agency costs, which include monitoring expenses, bonding costs, and
residual losses.
Example: The Enron scandal (2001) is a classic case where executives manipulated financial
statements for personal gain, exemplifying agency problems.
Stewardship Theory
Stewardship theory, developed by Donaldson and Davis (1991), opposes agency theory by
suggesting that managers are stewards of the company who work towards long-term value
creation. It emphasizes trust and collective goals rather than self-interest.
Example: Infosys, an Indian IT giant, follows stewardship principles, with professional
management and strong ethical leadership ensuring shareholder trust.
Stakeholder Theory
Freeman’s stakeholder theory (1984) expands corporate governance beyond shareholders to
all stakeholders, including employees, customers, suppliers, and the community. This theory
argues that companies should create value for all stakeholders rather than focusing solely on
profit maximization.
Example: The Tata Group in India follows a stakeholder model, balancing profitability with
social responsibility and ethical business practices.
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2.4 Resource Dependence Theory
Pfeffer and Salancik (1978) introduced resource dependence theory, which emphasizes how
external resources influence corporate decision-making. Boards play a key role in securing
essential resources, such as capital, technology, and expertise, from the environment.
Example: Startups rely on resource dependence theory by including investors and industry
experts on their boards to gain credibility and funding.
Comparison of Corporate Governance Models
Feature Anglo- German Model Japanese Indian Model
American Model
Model
Ownership Dispersed Concentrated Keiretsu Mixed
(public (banks, family (interlinked (promoters,
shareholders) ownership) companies) institutional
investors)
Board One-tier (Board Two-tier Hybrid (Bank One-tier (but
Structure of Directors) (Supervisory & influence) influenced by
Management promoters)
Board)
Regulatory SEC (USA), BaFin (Germany) METI (Japan) SEBI, Companies
Framework FRC (UK) Act (India)
Stakeholder Shareholders Employees & Employees & Shareholders &
Focus long-term suppliers stakeholders
investors
Risk-Taking High Moderate Low Moderate to high
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Case Studies of Corporate Governance
Infosys (India) – Stakeholder Model Success
Infosys has been a model for ethical corporate governance in India. Under the
leadership of Narayana Murthy, the company adopted a strong stakeholder
approach, emphasizing transparency, employee welfare, and ethical business
practices.
Volkswagen Emissions Scandal (Germany) – Weakness of the German Model
Volkswagen’s emissions scandal (2015) revealed how excessive managerial control
and lack of external oversight could lead to unethical practices. The two-tier board
system failed to detect and prevent the misconduct, damaging Germany’s corporate
reputation.
Toyota Governance (Japan) – Long-Term Stability
Toyota follows the Japanese model, where inter-company relationships (Keiretsu)
ensure stability and long-term investment. Despite facing the 2010 recall crisis,
Toyota’s governance structure allowed for swift corrective actions, restoring
stakeholder trust.
Best-Suited Model and Theory for India
India has a mixed corporate governance landscape, characterized by strong promoter
ownership, growing institutional investor influence, and increasing regulatory
scrutiny. The most suitable corporate governance approach for India would be a
blend of:
Stakeholder Theory – Given India’s socio-economic diversity, a stakeholder-
oriented approach (similar to Tata Group and Infosys) is essential for sustainable
business growth.
Anglo-American Model with Modifications – While India follows a one-tier
board structure, stronger independent director roles and regulatory oversight
(SEBI’s corporate governance norms) can improve governance.
Key Considerations for India’s Governance Model:
Stricter enforcement of governance regulations to prevent fraud (e.g.,
Satyam scandal).
Increased board independence to reduce promoter dominance.
A balanced approach that considers shareholder rights and broader
stakeholder interests.
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Conclusion
Corporate governance is a critical factor in ensuring ethical and efficient
business operations. Different governance theories and models offer unique
perspectives, with varying success across global markets. For India, a
combination of stakeholder theory and a modified Anglo-American model is
best suited to balance business growth with ethical responsibilities.
Strengthening regulatory enforcement and promoting board independence will
further enhance governance effectiveness in Indian corporations.
