Over time, various corporate governance theories have evolved to address the challenges faced by modern businesses. Among various business principles, theories of corporate governance are vital to ensure a company’s smooth functioning and integrity. Businesses have several stakeholders. Many of them may have varying interests. It leads to differences in decisions and goals. The company can also suffer if a common goal is not realized. That's why there are rules to promote a healthy environment. Companies must set these rules under the theories of corporate governance. It will ensure smooth working and fewer frauds. The management shall set these rules as per their work. Corporate governance is what allows a smooth operation for companies. These become essential as a business grows and gets more owners or shareholders.

Different theories of corporate governance is a crucial business working concepts. One must learn the same for the UGC NET Commerce exam. It may be present in several theories and case questions. 

This article will discuss the theories of corporate governance. Learn ahead the theories of corporate governance notes pdf.

In this article the learners will be able to learn about the following topics:

• What is Corporate Governance?
• Theories of Corporate Governance 
• Corporate Governance Responsibilities 
• Importance of Theories of Corporate Governance 

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What is Corporate Governance?

Corporate governance is all about the rules or policies for the operations of a business. These rules are set as per the company's goals. It ensures the realization of the business stakeholder interests. Organization culture is also to some extent defined by corporate governance.

• A business can have multiple stakeholders. These include owners, management, directors, employees, government, etc. All of them can have different goals.
• For example, a manager would want to maximize their salary. Their goal will affect their actions while managing the company.
• However, an owner would want maximum profits. A higher wage would be contradictory to their interests. That's why there can be a conflict between an owner's goals and an employee's actions.
• The theories of corporate governance help avoid such disputes. They outline the rules and management policies. These rules apply to owners, employees, directors, etc.
• They must follow such policies to ensure the smooth working of the company. Also, it provides impartial decisions and holistic business development.
• The theories of corporate governance also set power standards. It helps understand who holds the power for specific decisions.
• These policies are also essential for accountability. Businesses can divide the responsibilities and decide who will be accountable for particular functions.
• The director's board is integral to these policies. The policies of corporate governance helps set the business values.

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Fig: theories of corporate governance

Let’s dive into the major theories of corporate governance that shape the structure and responsibilities within firms. The different theories of corporate governance help explain the various relationships among company stakeholders. These theories also mention different duties and their functioning. Read below the prominent ones.

Agency theory 

The theories of corporate governance provide the owner and agent relationship. The company principals, like the owners and shareholders, hire agents. These agents are usually the employees or managers. The agents handle the business functions. They represent the owners in different transactions and dealings. Also, these agents must make decisions and act per the principal's interests. Their decisions shall outline the owner's goals for all dealings.

There can be some instances where the agents have different interests. It can lead to disputes. Also, they can prioritize their interests over the owners. Such decisions lead to distrust. The business eventually suffers as both parties don't work together. For example, a manager will want to increase their salary. But, an owner would want money to stay in the business. Such disputes can affect decisions. The managers may act as per their goals instead of the company's development.

Real-Life Case Studies: Enron Scandal

The Enron scandal is a prime example of failure in agency theory, where there existed conflicts between management (agents) and shareholders (principals) that produced one of the largest corporate collapses in history. Heeding their interests instead of those of shareholders, the executives engaged in dirty and unethical accounting, which falsified the earnings and stock prices. The free running of managers, due to the absence of effective monitoring mechanisms, led them the financial information that finally led to immense losses for investors and the bankruptcy of the company itself. Cases such as these call much for the need for strong governance policies to align the agent's action with the principal's goals.

Stewardship Theory

These theories of corporate governance focus on stewards or company owners. It mentions that these executives focus on company goals. They work towards them with an organisational mindset instead of an individualistic one. It ensures that such executives meet the owner's goals. They work and make decisions on their own behalf. The employees of the company are considered to be the flag bearers of it and are expected to spread the goodwill of the company everywhere.

Such organisations offer to hire executives for top CEO or chairman positions. The company board is also present with the in-house members. It leads to better success and knowledge for the business. For example, a CEO who believes in the company values will work towards its goals. They will act on the owner's behalf. It helps ensure that such executives achieve the holistic organisational goal.

Real-Life Case Studies: CSR Initiatives of Tata Group

Tata Group is a globally reputed company in its stakeholder approach through active corporate social responsibility (CSR) activities. It not only concentrates on maximizing shareholders' profits but also the welfare of employees, communities, and the environment. Some of its imaginaries, like Tata Water Mission, health care, and education for poor children, are evidence of the broader stakeholder engagement. Investment in diverse interests enables Tata to build a good reputation and sustainable business model, which shows the worth of this stakeholder-centric governance in generating long-term value.

Stakeholder Theory

Stakeholder theory of corporate governance emphasizes balancing the interests of all stakeholder groups equally. These theories of corporate governance also focus on the company stakeholders. There are several stakeholders apart from the owners. All these stakeholder parties have an interest in the company. Their goals can be different. This theory states that the business must focus on all these parties. It also mentions that these various parties have equal stakes. None of them can be above the others.

For example, several companies follow corporate social responsibility. They advertise and mention their social functions. A business thus fulfills the interest of local bodies and the environment with this. It promotes goodwill and presents the company in a good light.

Real life Case Studies: Founder's Governance at Infosys

The stewardship nature of Infosys is exemplified by the leadership of its founders for instance; N. R. Narayana Murthy, who conducted himself with high integrity and organizational loyalty. As stewards, the founders tactically kept the company's mission, innovation, and personnel over personal benefits. Their way of governing emphasizes transparency, ethical decision making, and sustainable growth, earning global credibility and investor faith in Infosys. A steady rise with hardly about any major incidence of conflict of interest shows how internal leaders might effectively align their values with those of the company.

Resource Dependency Theory 

Resource Dependency theory of corporate governance underlines the strategic role directors play in accessing vital resources and external networks. Here the directors are treated as assets for the company. They are looked up as a means for providing the competitive advantage over the other companies in the industry. Here the skills of the directors are highly valued and they are also expected to provide good social and external connections for the fir,.

These different theories of corporate governance apply to almost all businesses. They ensure that companies achieve the goals of all parties. It's what promotes a healthy environment for owners and managers.management must only focus on shareholder goals. 

Real life Case Studies:Reliance Industries' Strategic Board Appointments

The various board appointments depend on Resource Dependency Theory where Reliance Industries articulates its appointments strategically for individuals with very special industry expertise and connections that comprise an influential web. For many years, directors coming from different backgrounds in fields such as international finance, energy policy, and government relations have been brought to bear on the company to skillfully maneuver through regulatory environments and world markets. These appointments are not mere window dressing; they are actually entry points into resources that include information, capital, and strategic alliances. This is a manifestation of how Reliance sees its board as a vital asset for achieving competitive advantage, reducing uncertainty, and aligning with the external business environment.

Comparative Table of Theories

To better understand how each theory approaches corporate governance, it helps to compare their key elements. The table below outlines the focus, stakeholder roles, and decision-making approach of major governance theories.

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Corporate Governance Responsibilities 

Understanding the function of each theory of corporate governance is crucial before diving into governance responsibilities. The theories of corporate governance have several responsibilities. It allows businesses to work without disputes. Read below the major responsibilities companies have with theories of corporate governance.

• It helps set and evaluate the strategic aims. The business can put forward its long-term growth goals. These are as per the different stakeholders. A united company goal helps avoid disputes. Many of these responsibilities are derived directly from established corporate governance theories.
• Theories of corporate governance also set the responsibilities. They provide leadership roles for realizing the set goals. It helps understand the functions of the different stakeholders. Businesses can understand who will be responsible for every function.
• Theories of corporate governance also help supervise business management. The managers can have varying goals with the owners. It often affects management decisions for their own interests. That's why these theories focus on the supervision of employees.
• Theories of corporate governance also focus on shareholders. They report to them about the company's operations. It helps set a good relationship with the shareholders and other parties.
• Theories of corporate governance also report the performances back to owners. It helps change policies and work on further progress.

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Importance of Theories of Corporate Governance 

These corporate governance theories not only define power structures but also influence accountability mechanisms. Theories of corporate governance have great importance in holistic functioning. They're not as per the regular functions. Companies can set their policies or business values. Read below its importance. 

• Accountability: Corporate governance focuses on making people accountable. The different stakeholders are responsible for overseeing operations. They keep checks on the company working. It helps ensure that employees understand their functions. They must complete the tasks as per the business goals.
• Business frauds: Frauds or business thefts have been seen in several businesses. They prevail with employee activities. For example, some employees may use covert accounting methods. It is often to steal money or cover losses. Theories of corporate governance help avoid such actions. It sets rules and accountability. Employees also communicate the business values and have to report to the management.
• Business infrastructure: Theories of corporate governance create a healthy work structure. The management and owners remain in contact. They share goals and company performance. It helps improve their relationship. The management thus can make more independent decisions with increased trust.
• Shareholder interests: Theories of corporate governance prioritize shareholders. The policies are made as per their benefits. It leads to happy ownership. Shareholders enjoy good profits and the realization of their goals.
• Company functioning: Theories of corporate governance lay the ground for functioning. It helps complete business functions smoothly. The employees understand their responsibilities. They are also accountable for different tasks. It leads to less confusion. 

The theories of corporate governance thus become important with these factors. Companies without set rules and corporate policies can face issues. It can affect the business. The management may also be unhappy about their goal fulfillment. Find notes for how to manage stress.

Conclusion 

Understanding theories of corporate governance notes is essential for companies. They can adopt the applicable rules. It leads to the realization of goals for all stakeholders. There are also fewer conflicts when businesses work on everyone's interests. Employees feel more motivated as company development leads to personal growth. There are also fewer chances of fraudulent practices in the company. Thus, businesses must use theories of corporate governance to set their rules, values, standards, and policies. Choosing the appropriate theory of corporate governance depends on the organization’s size, culture, and ownership structure. Ultimately, implementing relevant theories of corporate governance can empower companies to function ethically and efficiently.

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Previous Year UGC NET Question on Theories of Corporate Governance

1. Which of the following is the central idea of the Agency Theory of Corporate Governance?

A. Managers and shareholders always have aligned interests
B. Corporate governance eliminates the need for shareholders
C. Separation of ownership and control may lead to conflicts
D. All stakeholders are equally represented on the board
Correct Answer: C