UNIT 4
TOPIC
THEORIES AND
MODELS OF
CORPORATE
GOVERNANCE
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.
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.
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
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
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.
• German Model
• This is also called European Model. It is believed that workers are one
of the key stakeholders in the company and they should have the right
to participate in the management of the company. The corporate
governance is carried out through two boards, therefore it is also
known as two-tier board model. These two boards are:
• Supervisory Board: The shareholders elect the members of Supervisory
Board. Employees also elect their representative for Supervisory Board
which are generally one-third or half of the Board.
• Board of Management or Management Board: The Supervisory Board
appoints and monitors the Management Board. The Supervisory Board
has the right to dismiss the Management Board and re-constitute the
same
Features of INDIAN MODEL
• 1.FAMILY DOMINANCE
• 2.NO SEPARATE OWNERSHIP
AND CONTROL
• 3.ROLE OF BANKS AND
FINANCIAL INSTITUTION
