Theories Commonly in Corporate Governance Literature - 2750 Words

Theories Commonly in Corporate Governance Literature (Research Paper Sample) Content: Studentà ¢Ã¢â€š ¬s Name:Instructorà ¢Ã¢â€š ¬s Name:Class Name:Date when Due:Using the relevant theories commonly referred to in corporate governance literature; write an essay to critically discuss findings of academic research that relates to the effectiveness of boards as an example of corporate governance mechanisms.IntroductionMany companies, both national and multinational have a management structure. The structure composes board members. These members come up with rules and standards to govern the institutions. By definition, corporate governance refers to the framework of practices and rules through which the board ensures transparency, fairness and accountability in an institution with different stakeholders. The company stakeholders include employees, the management, clients, financiers, the local community and government. The framework of corporate governance involves implicit and explicit contracts. Stakeholders and companies sign contracts for the distri bution of rights, responsibilities and the rewards. It also involves the procedure used to reconcile conflicting interests of any stakeholder as guided by the privileges, roles, and duties. Another framework involves processes for the proper control, supervision and information flows that serve as system checks and balances (BusinessDictionarry.com). According to Byrd and Hickman (195), any public traded company appoints the Board of directors who take the responsibility of promoting the stakeholder's interests. These boards have legal authorities to monitor and ratify any managerial initiative and check on the performances of managers. They also penalize poor performances.Theoretical framework of corporate governanceCorporate governance helps to describe the influence that affects institutional processes. These processes include those used to a point regulators and controllers who organize the production and sale of company products and services. The corporate governance includes e very firm included or not included under the civil law (Turnbull).The agency theoryWhen it comes to corporate governance, agency theory plays a significant role. Scholars argue that agency theory has become the primary foundation to carry out research based on the relationship between the company performance and its executive compensation. Atchison (12) argues that the underlying theory is used based on observations that the top executives in a firm act on its behalf, in their interest and in the absence of investors. The theory states that the strategy of a company designed by the executives must reflect the agenda set by investors. However, the theory holds the managers to act on their self-interests. It is in conflict with the owners interests who strives maximize the value invested. Antony (17) says that in regard to corporate governance, the main responsibilities of executives are to exert the controls of company resources and operations. The controls shown by managers ensure t hat resources are obtained and used according to plans in order to accomplish the objectives set.Gomez (7) says that the foundation of agency theory has remained the dominant theories for the corporate governance as seen in the last quarter of 20th century. Fama (300-302) sees the institution as a nexus of contracts. The system used to analyze any company under agency theory becomes the contract. The theory states that the separation of control and ownership as stated has become a hallmark of the modern company. It leads the firm managers to use their specific skills and management expertise to have an advantage over the investors. These investors remain absent in running their businesses on a daily basis. Managers take control, and therefore they face several risks. The risk includes pursuing different actions to fulfill their interest and not that of owners (Meckling and Jensen, 305-307).Limitations of agency theoryAgency theory, when used in any organization brings many benefits to managers and investor. First it is to examine performance measures implemented in any control system so that the firm achieves its goals. The theory, when successful, establishes the standards of performances and guides on how they have to be implemented by managers to achieve the goals of organizations. The theory helps to demonstrate the importance of different information when establishing control systems. It also helps to encompass different constituting factors that affect the implementation of efficient control systems (Namazi 46).Though the theory can help a company to grow, it has several limitations. Today, there are many reported corporate bankruptcies and scandals reported. It has become a powerful reminder that there are many risks arising from the enterprise and ownership. It is because investors remain residual claimants on the earnings. Therefore, they need to sign contracts to have their interests protected. Though it is the case, they rely on formal controls to m ake the best decisions for the firm.Jager (7) says that agency theory bring about uncertainty in any organization. The uncertainty arises in terms of potential emergence for the different environmental conditions unaccounted. The model does not allow the possibilities of subjective different information available to different players on different scenarios in the future.One common limitation of agency theory as stated by Braithwaite and Fisse (77) is the failure of a firm to account for the corporation status seen as a miniature legal system that has rule enforcing regimes. The theory presupposes state individual polity. It neglects pluralistic views of a firms system of governing. Though the contract rule can help to explain control and command within a firm, it suffers realism failure.Stewardship theoryOne element that drives many businesses is the profit made. However, some companies consider themselves part of a bigger element. The theory of stewardship states that the ownership of the firm does not really own the firm. It merely holds it in trust. The theory shows how a company does their business. The operation chosen becomes a vehicle to achieve the high calling, or it is designed to honor the initial visions. Getting profits remain a backset to meet the firmsà ¢Ã¢â€š ¬ social standards (Bondigas).Stewardship theory offers major alternatives to assumptions that support agency theories. It states that the human are individualistic, self-serving and opportunistic. The theory depicts subordinates as trustworthy, pro-organization, and collectively serving. In relation to corporate governance, the steward theory shows that when financial incentives and systems used to monitor are avoided, they will not ensure this is the case. Governance plays a performance function and brings strategic focus that concentrates lead managers to attain the corporate objectives and missions (Renz 55).Limitation of stewardship theoryWhen used in an organization, the theory brin gs several limitations. To the business, if the owner brings the issue of stewardship or the social responsibility in their corporate governance, clientà ¢Ã¢â€š ¬s weighs this based on how the company operates. Discrepancies between actions and talks alienate buyers. The theory affects employees who can tell within a short time if the firm stewardship stances will translate to how well they get treated. Under this theory, employees get higher expectations than when the investor operated to get profits. The only benefit is that employees who agree on this motive sticks around and work harder to achieve goals (Bondigas).3. Compare and link the chosen theoriesThe agency theory deals with the top firm managers who act on behalf of employers and the company. The managers come up with designs that help to achieve goals set by investors. On the other hand, stewardship theory helps to show that investors do not own a business, but acts as trustee on behalf of stakeholders. It guides how to do business and get profit through a series of set objectives that drive managers to their targets. The two theories interrelate because a manager must lead on behalf of clients and the roles of stewards to help in achieving the targets.4. Effectiveness of boards of directors (Problems initiatives)The board of directors in a company ensures that self-interested managers do not make laws that benefit them. Directors allow good board structures to meet their needs. A two-tiered structure of directors with experiences is ideal. The board effectiveness means careful planning of all activities. The board must have their calendar and a work plan. The calendar assigns recurring governance matters such as approving the budgets. To show the effectiveness, the board of directors must ensure board meetings with clear agendas, delivery of materials on time, a good chairman or leader and a robust debate for the corporate company. The company board of directors cannot escape without assessing t heir performances. Within a certain period, they have to review and state how effective they have become in order to take steps and improve the governance. They can even make use of facilitators sourced from consultancy firms. For the board to perform well, it has to use subcommittees when need arises. The detailed function of the board succeeds when handled by board committees. These committees assist the board to fulfill their corporate governance Functions. It also provides a way of making each member to participate (Australian Institute of Company Directors).There are several elements that hinder an effective board to progress towards high performance and progression. These elements include poor team dynamics among members, the composition of the board when made wrongly leads to serious impediments. A board that lacks agreement on the firmà ¢Ã¢â€š ¬s strategy and alignment leads to lack of interest onboard activities. The board becom...