Corporate Governance and Stakeholder Theory

Corporate Governance
Running Head: COMMERCIAL LAW 0
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Student’s Name

Corporate governance 1
Every organization works in a society/business environment and thus is comprised of many of
the stakeholders that affect the organization and are influenced by the same in return. To govern
the behavior of a corporation, some laws are formulated in every nation. However, apart from the
rules, regulations and the laws, another concept known as corporate governance also does exist.
In a general sense, corporate governance can be understood as a set of good practices, which
governs the way of working of corporations for a positive change. Similar to the law of the
nation, corporate governance rules are also different in every country, but the basic concept is
almost the same everywhere. In an attempt to understand the need of corporate governance, it is
significant to note that many of the times it has been noted that management of the corporations
uses its powers in an unfair manner. Hence, in order to control such conflict of interest issues, the
presence of corporate governance is essential. The necessity is significant when the entity
concerned is a company, where the boards of directors manage the affairs of the entity while
having a separate identity. As decided in the case of Salomon v A Salomon & Co Ltd [1896]
UKHL 11, a company is a separate legal personality and directors and officers of the same cannot
be held personally liable for the acts of the same. Therefore many of the times, management acts
for their personal benefits and forget the fiduciary relationship with the stakeholders of the
company, In addition to this, many of the times, management only works in the favour of
shareholders and ignore the interest of other stakeholders. This is also a matter of concern as
every stakeholder plays an important role in the success of the company and expects a good
behavior in return. The objective of this essay is to evaluate the value of stakeholders while
discussing various corporate governance theories. In the presented essay, the discussion will be
focused on different ways and methods by the help of which interest of stakeholders can be
included in the process of the corporate governance accountability process.
1 Salomon v A Salomon & Co Ltd [1896] UKHL 1

Corporate governance 2
There is no universal definition of corporate governance and many of the scholars and authors
have defined the same differently over the years. According to Marc Goergen, corporate
governance is a system that deals and manages the conflict of interest issues between the finance
providers and managers, stakeholders and shareholders, the minority and majority shareholders
and prevents or mitigates the said issues2. Further, as per the American Management Association,
corporate governance is a system by which the suppliers of the capital ensure that the
management of the company are not misusing the capital by investing the same in risky projects.
Thus, the corporate governance is a framework by which the creditors and shareholders monitor
the managers. In an overall view, corporate governance can be understood as a system of
practices, processes, and rules, which govern and control the behavior of a corporation. In the
UK, the history of corporate governance is older than 30 years. In the year 1991, London Stock
Exchange, the UK Government, an independent regulator supported by accountancy organization
and Key members of the accountancy profession and the Financial Reporting Council constituted
a committee, which was commonly known as Cadbury committee. This committee had released
its report on the financial aspects of corporate governance, which has proven to be very
significant3. This committee also provided a definition of its own for corporate governance.
According to the committee, corporate governance is a system by which companies are
controlled and directed4. The present model of corporate governance is the result of development
of different committees, codes, and regulations on the subject of corporate governance over the
years. In the country UK, Companies Act 20065 consists of the provisions of corporate
governance. In the said legislation, duties of directors have been codified in a comprehensive
2 Corpgov.net, ‘Corporate Governance Defined: Not So Easily’ < https://www.corpgov.net/library/corporate-
governance-defined/> accessed 24 December 2018
3 Gopalsamy, A Guide to Corporate Governance (New Age International 2008)
4 Marc Moore and Martin Petrin, Corporate Governance: Law, Regulation and Theory (Macmillan International
Higher Education 2017)
5 Companies Act 2006

Corporate governance 3
manner. A number of the cases comprise of the pronounced judgments, in which directors have
breached their duties and therefore have faced litigations and penalties. This proves the
importance of corporate governance and thus it can be said that the compliance with corporate
governance is no more a voluntary thing to do. However many of the scholars have argued while
attempting the interpretation of section 172 of Companies Act 2006, that the focus has been
made on the shareholders only. Now Companies (Miscellaneous Reporting) Regulations 20186 is
regarded as a significant step in the sector of corporate governance. This code considers the
interest of every stakeholder.
Similar to various definitions, various approaches are also there with respect to corporate
governance, which are known as corporate governance theories. Before discussing the different
corporate governance theories, first, it is required to understand that what these theories are. In
order to answer this question, it is significant to note that these theories make use of different
approaches and concepts in respect to corporate governance, and are focused on various different
groups7. In the following section, some lead theories of corporate governance such as agency
theory, shareholder theory, and stakeholder theory would be discussed.
Agency theory arises out of the distinction between ownership and management of the company.
The theory states that shareholders are the true owners of the company but do not take part in the
management process8. This is the reason that being the manager of the money invested by
shareholders, the board of directors acts as an agent of them. In such a situation, shareholders are
regarded as the principals. As in general, the agent is responsible to work in the best interest of
6 Companies (Miscellaneous Reporting) Regulations 2018
7 Carol Padgett, Corporate Governance: Theory and Practice (Macmillan International Higher 2011)
8 A. C. Fernando, Corporate Governance: Principles, Policies and Practices (Pearson Education India 2009)