Governance Theories and Their Application

The assignment discusses various governance theories, including stewardship theory, agency theory, stakeholder theory, and others. It highlights the significance of effective leadership and values such as competency, accountability, openness/integrity, good communication skills, persistence, perspective, influence, humility, and community in achieving good governance. The document also emphasizes the importance of distinguishing between ownership and management and finding the most suitable governance theory for a business organization.

Running head: Governance and Stewardship in Business 1
Governance and Stewardship in Business
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Governance and Stewardship in Business 2
Governance and Stewardship in Business
Introduction
Over the years, there have been multiple theories and models regarding corporate
governance. Business organizations have since tried to incorporate a sense of leadership into
their corporate structure. These governance theories address issues such as the functioning
of the members in the organization beginning from the board members, audit committee,
independent directors, and the employees of the company. The theories examine the role of
the top management, how they inter-relate socially with other members of the company, and
the regulatory frameworks that have been put in place to control their social relationships
(Suleiman, 2014). Scholars have insisted that corporate governance cannot be described by a
single theory but by multiple theories of corporate governance. This paper aims at
examining the various corporate governance theories and how they have contributed to the
effective running of organizations. Further, the paper will focus on the stewardship theory
and how it contributes to effective governance in both profit and non-profit organizations.
Corporate governance theories.
Corporate governance is analysed across key theoretical frameworks. The theories
address various challenges that business firms go through in terms of governance from time
to time. Corporate organizations today look for the best approach to use in governance. The
company must choose the most appropriate method that aligns with the organization’s
mission and vision. The method should support the goals of the company and lead to the
realization of the company’s targets (Ibrahim, Mathew, & Archbold, 2018). However, it may
be difficult to choose the appropriate theory for business governance because of the

Governance and Stewardship in Business 3
changing times in the corporate world. The various key theories of corporate governance
include agency theory, stewardship theory, and stakeholder theories just to mention a few.
Agency Theory
The agency theory Focuses on principles and their agents. A good example of this is
the directors of the company who act as agents and shareholders who act as principals. The
theory states that the principals hire the agents to perform work on their behalf. They do this
by delegating their duties to directors and managers of the company who are the agents (Du
Plessis, Hargovan, & Harris, 2018). The shareholders expect the company to run smoothly at
the hands of the directors and expect them to make decisions that are in the best interests of
the company. However, some agents may fall into the temptation of making decisions that
best suit their interests and not those of the shareholders. Although agency theory relies on
the key feature of separation of ownership and control. This theoretical framework states
that employees are accountable for their actions regarding tasks and responsibilities and
rewards and punishment can be used to discipline and control the actions of agents.
The theory argues that the goals of the agents are different from the goals of the
shareholders, and they become conflicting at some point. The theory assumes that the
principals suffer an agency loss meaning they get a lower return on investment since they do
not manage the company directly. It assumes that some of the returns they would have
gathered go to the agent because they are directly in charge of the company. Nonetheless,
agency theory also suggests that reasonable financial rewards can motivate the directors to
maximize profits for shareholders. Also, the principals can decide to exercise very strict
control of the agents, 24-hour supervision, and monitoring their performance aiming to
protect the interests of the shareholders. It means that the board is directly involved in the
operations of the business through direct decision making, therefore, making them

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accountable to the shareholders of the company. When looking at non-profit making
organizations through the perspective of agency theories, they reflect hands-on management
methods by the agents on behalf of the stakeholders.
Stakeholder theory
The stakeholder theory likes to believe that shareholders are not the only people with
an interest in the operations of a company. The theory states that people outside the
company such as the suppliers, customers, surrounding communities, the government, and
employees also have a stake in the organization. The theory insists that all these people are
interested in the failure and success of the company. Therefore, it believes that all the
managers should make sure that the stakeholders get a fair reward from participating in the
running of the company (Jones, Wicks, & Freeman, 2017). Stakeholder theory advocates for
an organization’s participation in corporate social responsibility. The theory insists that
companies are obliged to operate under strict ethical principles even if it means that the
company will be operating at a loss. In this perspective, the board of directors is expected to
guard the interests of all the stakeholders by ensuring that all the organizational operations
are in line with the principles and practices of sustainability for the surrounding community.
The theory focuses on the decisions made by managers and the interests of all the
stakeholders are on the same level and no interests appear to be more important than the
others. When applied, the stakeholder theory is beneficial to the company because the value
is delivered to the shareholders in both financial and non-financial benefits. On the other
hand, employees and customers enjoy the benefits of greater productivity and value on
goods and services produced. When employees feel valued, they are going to be more
productive. When the shareholders feel valued, they will look for more potential financiers
increasing their investment in the company. Ethical benefits come in the form of the mental

Governance and Stewardship in Business 5
wellbeing of the entire workforce. The company also improves their socio-economic status
within the local community and they can work to benefit the stakeholders.
Stewardship theory
Stewardship theory is similar to agency theory in a way because it also states that
there are stewards and owners. A steward is a person who is responsible for taking care of
something on behalf of another person or a larger group of people. The stewards are the
managers responsible for the activities in a company while the owners are the shareholders.
Although, the theory suggests that managers and owners share common goals of the
organization. Further, the theory suggests that shareholders should not be too controlling
over the managers but instead they should empower them to be more productive, and boost
the performance of the organization (Contrafatto, 2014). The theory continues to suggest
that the relationship between the board of directors and the owners should entail thorough
training, mentoring, and shared decision-making process between the two parties.
Stewardship theory believes in shareholder satisfaction only. The method is clear
about who is in charge of making the major decisions in the company. The approach
requires the CEO to put all his gains aside and only consider the gains of the owners. The
theorists presume that a steward will always put the organizational interests first when faced
with tough decisions to make for the sake of the company. Although, the steward of the
company is expected to reward the employees in case of work well done and become an
integral part of their achievements. The theory is designed to create leaders who can be
termed as stewards of a company. The manager (steward), is in charge of all the aspects of
the organization including motivating employees as part of a bigger team. The concept of
stewardship theory has continued to become popular across business organizations as they
are all looking for a good steward.

Governance and Stewardship in Business 6
Application of Stewardship Theory in The Effectiveness of Governance in Profit and Non-
Profit Organizations
Stewardship Theory
The stewardship theory has been defined as a framework that states that people are
intrinsically motivated to work for other organizations or people in order to accomplish the
tasks, responsibilities, and duties that have been given to them. It further emphasizes that
people are collective minded and pro- organizational and not individualistic such that they
work towards the achievement of the groups, society and organizations goal because they
believe that in doing so, they will get a higher level of satisfaction. This theory has provided
a framework that has been used in the characterization of motivations of managerial
behaviour in different types of organizations (Chrisman, 2019).
The Effectiveness of Stewardship Theory in the Governance of Profit Organizations
The majority of organizations and businesses are driven by profit however some may
consider themselves to be part of something bigger, especially in their surrounding
environment or community. The stewardship theory suggests that ownership does not
necessarily own a company but merely holds it in trust this is shown in the way the
organization conducts its business (Subramanian, 2018). In such an instance an act for the
community can be considered a higher calling or a way of honouring the founder’s vision
thus making a profit becomes a non-issue with the aim of meeting organization social
standards.
In a profitable business, stewardships may include environmental concerns where the
organization believes that it has to play a role in the current global warming situation,

Governance and Stewardship in Business 7
championing human and animal rights, etc. These acts will help the organization attract
more clients who share the same perspectives in their cause, it gives the employees an idea
of how the organization will treat them. Managers strive for alternative means to an end that
are not financial in nature such as a sense of worth, altruism, a good reputation, a job well
done, a feeling of satisfaction, and a sense of purpose. For employees who share the same
ideas, will work even harder to achieve the organization's goals, and their morale is also
boosted. A solid sense of stewardship makes both clients and employees get a sense of
satisfaction and feel like they are part of something bigger. Stewardship also allows
organizations to put up a united front in times of hardships since both the management and
the employees do not consider themselves as isolated individuals but as part of the
organization: it merges their ego and sense of self-worth with the organization’s reputation.
The Effectiveness of Stewardship Theory in the Governance of Non-Profit Organizations
The stewardship theory has origins in both sociology and psychology and has been
divided into two branches with one stating that from a conflict between the goals of the
principle and the agent and assumes that the agent will draw motivation to act in accordance
with the principal. This means that even though the interest of the agenda the principles may
not be aligned the agent can attain a higher utility level by acting in the interest of the
principal because this might lead to opportunities for desired personal outcomes that are
related to achievement, affiliation, and self-actualization. The second division states at the
agent’s goals are in line with those of the principal. The stewardship theory assumes that
agent harbor high identification with the mission of the organization and the fact that they
attribute the organization's success to themselves contribute to their self-image and self-
concept (Van Puyvelde, Caers, Du Bois & Jegers, 2016). This theory also stresses the fact
that agents tend to be collectively oriented and intrinsically motivated. Researchers have

Governance and Stewardship in Business 8
emphasized that an agent is intrinsically motivated if they perform an activity without
expecting any reward except performing the activity itself.
The sole purpose of a non-profit business entity or organization is to better the
Communities that they are situated in. Here the leader's role is likened to that of a steward
where the steward is often the leader of the group of volunteers that interact the public in a
given community. The steward is aware of the organization’s abilities and limitations as
well as the needs of the community. The steward also required to have expert knowledge in
stewardship. They guide, manage, and designate tasks to the volunteers that have been
provided play the topmost management of the organization (Van Puyvelde, Caers, Du Bois
& Jegers, 2016). The guidance and management of the volunteers revolve around providing
Direction on the best action to be taken in the tasks being done for the community. A
steward congratulates and credits the group of volunteers in the event that they are
successful in the tax they're given but also accepts the blame if the tasks are not done to
completion or they will only have failed in their tasks. This ensures at the steward is
respected by his team and maintains respect from the management.
Impact of Leaders and their Values on Governance
Effectiveness of achieving an organization's goals sustenance and delivery of quality
services/ products depends on good leadership and governance. Leadership as a concept is
as old as time itself it has been described as the process of which a person influences others
to accomplish a given task or objective. Governance has been defined as the manner in
which power is exercised in the management of an organization's social and economic
resources for the purpose of development (Du Plessis, Hargovan & Harris, 2018).

Governance and Stewardship in Business 9
Governance involves the process of decision-making which is often done by leaders thus a
leader’s values have a significant impact on the governance of any organization.
A leader is recognized by their skill and values. Some of the values associated with
good leaders are competency, accountability, openness/integrity, good communication
skills, persistence, perspective, influence, humility, and values/community which is a core
belief in what is right and fair. These values are influenced by both culture and society and
are also interpreted differently (Schillemans & Bjurstrøm, 2019). They help a leader be
aware of the different philosophical beliefs and values even if they don't necessarily agree
with them. All these values mentioned above play a significant role in relation to good
governance especially with the increasing complexities and requirements that have arisen
from the constant change in the world together with the constant demand and push for high
levels of productivity. Values such as competency help a leader to become more effective
and efficient when leading an organization which is one of the core principles of good
governance (Ledgerwood, 2017). Accountability serves as an instrument to achieve various
important elements of good governance. The other values play an equally important role in
the achievement of good governance and setting a positive work environment.
Conclusion
In conclusion, Governance theories apply to many business organizations today. What is
required is that the firm finds the most suitable theory for their company. Most of these
theories insist on the distinction between ownership and management and distinguishing
between who plays which role. Although, organizations will thrive with the application of
the most suitable governance theory. Both good governance and effective leadership are key
to an organization's success and are also linked with economic prosperity. Without proper

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and effective leadership there is no chance that good governance will be achieved in its
totality.

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References
Chrisman, J. J. (2019). Stewardship theory: Realism, relevance, and family firm governance.
Contrafatto, M. (2014), "Stewardship Theory: Approaches and Perspectives", Accountability
and Social Accounting for Social and Non-Profit Organizations (Advances in Public
Interest Accounting, Vol. 17), Emerald Group Publishing Limited, pp. 177-196.
https://doi.org/10.1108/S1041-706020140000017007
Du Plessis, J. J., Hargovan, A., & Harris, J. (2018). Principles of contemporary corporate
governance. Cambridge University Press.
Ibrahim, S., Mathew, S., & Archbold, S. (2018). Coporate governance and firm risk.
Corporate Governance, 18(1), 52-67.
Jones, T. M., Wicks, A. C., & Freeman, R. E. (2017). Stakeholder theory: The state of the
art. The Blackwell guide to business ethics, 17-37.
Ledgerwood, G. (Ed.). (2017). Greening the boardroom: Corporate governance and
business sustainability. Routledge.
Schillemans, T., & Bjurstrøm, K. H. (2019). Trust and Verification: Balancing Agency and
Stewardship Theory in the Governance of Agencies. International Public
Management Journal, 1-35.
Subramanian, S. (2018). Stewardship Theory of Corporate Governance and Value System:
The Case of a Family-owned Business Group in India. Indian Journal of Corporate
Governance, 11(1), 88-102.
Suleiman, S. (2014). Corporate governance mechanisms and accounting conservatism.
Journal of Management Policies and Practices, 2(2), 113-127.

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Van Puyvelde, S., Caers, R., Du Bois, C., & Jegers, M. (2016). Managerial objectives and
the governance of public and non-profit organizations. Public management
review, 18(2), 221-237.