Governance Theories

This article explores the different theories of governance including agency theory, stewardship theory, resource dependence theory, and stakeholder theories. It also discusses the contributions of stewardship to governance and the leader's values and beliefs on effective governance.

Running head: Governance Theories 1
Governance Theories
Name
Affiliate Institution

Running head: Governance Theories 2
Introduction.
Organisations have changed drastically in the last century. To improve their success, these
organisations have evolved their decision-making process. Governance is an essential part of this
process. Governance is the section of an organisation that tackles group issues by making vital
decisions- this is the definition as simple as possible. But this definition becomes limited for the case of
international organisations. In this case, governance is the procedures that control all the actions
undertaken by the entire organisation and its stakeholders (Coupet, & McWilliams, 2017). Furthermore,
governance deals more with the steps leading to the decision instead of the actual decision (Wei,
Connery & Hoskisson, 2017). What this means is when it comes to international organisations,
governance is not concentrated on growing the organisation instead it simply dictates the guidelines
used by the organisation to achieve its objectives.
Governance is broad, it varies from one organisation to the next. Therefore, the correct
definition of governance is based entirely on the context. The theories of governance are similar. They
do not apply to all organisations but depend on the activities of the organisation and its decision-
making process. But even with their distinguished ideologies, all the theories of governance agree on
one thing; that rivalry can be settled by both the autonomous government and international
organisations that have governmental and non-governmental participants (Sacristán López de los
Mozos, Rodríguez Duarte & Rodríguez Ruiz, 2016). These theories can be used to evaluate the
governance of an organisation both for-profit and non-profit organisations.
The theories mostly used are agency theories, stewardship theories, resource dependence theories and
stakeholders theories.

Running head: Governance Theories 3
Theories of governance.
Agency theory.
In any organisation, there exist two groups of people, the first group are the people who own the
organisation, for example, shareholders and investors. The second group are the people that are paid to
make the organisation run, the managers. From the need to separate these two groups, agency theory
emerged. Agency theory argues that the owners (also known as principals) and the managers (called
agents) have separate objectives. And these objectives rival each other (Bosse & Phillips, 2016). The
theory considers the organisation as an agency. It assumes that the principal experiences agency loss,
which means that they do not receive the maximum returns simply because they are not managing the
agency themselves (Parker, Dressel, Chevers & Zeppetella, 2018). Instead, they hire agents to manage
the business for them, therefore, part of their returns on investment goes towards rewarding these
managers. And in order to motivate the agents, agency theory suggests the use of financial incentives.
These incentives would help maximize the returns of the principals.
Any organisation that adopts this theory and develops a board of directors from its perspectives
tend to be very rigid and show authority and control, in monitoring the behaviour of the agents in order
to maximize the return of the principals (Schnittfeld & Busch, 2016). This means that this board will
micromanage the agent. It would be involved in every decision made because they are responsible to
the principals. In the case of non-profit organisations, a board that follows the governance techniques
of agency theory tend to exhibit a more hands-on managerial way on behalf of the other stakeholders
(Schnittfeld & Busch, 2016).
Stewardship theory.
This theory argues that the managers of an organisation are the administrator of the owners and

Running head: Governance Theories 4
the two share a similar goal. The growth of the organisation. For this reason, the board that follows this
theory is not expected to be controlling as is the case with agency theory (Jan, 2018). They are only
expected to support the managers and consequently, they have a chance to motivate the managers and
increase the profits by appealing to the potential of the managers and inspiring higher performance
(Keay, 2017). The assumption of this theory is that the interaction between the board and the managers
is one that promotes guidance, training and an all-involving decision-making process (Jan, 2018).
Resource-dependence theory.
The theory of resource-dependence as the channel that gives the resources to the managers.
These resources are then used to realize the objectives of the organisation (Miles, 2017). The theory
suggests that the board should only be there to make available any assistance, for example, labour,
finance and mental support. It also recommends that the board intervene for them on behalf of the
managers to the owners. For instance, if there exists a member of the board that has some experience
on a field that also exists in the company, the theory suggests that this board member assist to guide the
managers in a way that helps the company achieve its goals. Other assistance from the members are
directed to the organisation directly and not through the managers, for example, looking towards some
of their friends to provide funding for the organisation (Voss & Brettel, 2014). In terms of decision
making, the resource dependence theory suggests that the decision is made by the managers but with
some sort of approval of the board. This is to utilise their expertise and ideas.
Stakeholder Theories
This theory suggests that shareholders (owners) are not the only group that claim some stake in
the organisation (Zieita, 2017). The entire internal and external environment have a stake in the
organisation. Meaning the surrounding community, the employees, customers, suppliers and even the

Running head: Governance Theories 5
competitors contribute to the existence of the firm. They all have something to lose or gain should the
organisation either succeed or fail (Zieita, 2017). Thus, the challenge to the managers is to ensure that
all the stakeholders get their share of the organisation- the stakeholders include everyone and not just
the shareholders.
The theory promotes the idea of an all-inclusive social duty that obliges everyone to act in an
ethical manner no matter the cost to the organisation, even if it decreases in the overall profit (Belle,
2017). Given that, the duties of both the managers and the board are well defined; the manager strives
to make everyone satisfied and happy while at the same time and in the same conditions increase the
profitability of the company (Belle, 2017). The role of the board, on the other hand, is to guide the
manager in taking the interests of the stakeholders by making sure that the organisation's activities
consider the rules of the surrounding communities. The company that adopts this tyle of management is
mainly focused on sustainability and a stable customer base. Their governance strategy is based on the
sustainability and not profits or the interest of the owners.
Contributions of Stewardship.
To properly examine the contributions of stewardship to governance, it is only fair that the
performance of a firm that engages in stewardship be evaluated. This can be done by looking the
manager's stewardship in relation to a firm's performance or going to the top office, the CEO. The
stewardship ability and goals are what drives a firm, which only means that they stewardship is directly
related to the firm's performance.
CEO stewardship and firm performance.
For-profit CEOs' actions that are connected to stewardship have an effect on the performance of
the organisation. Studies have shown that CEO stewardship can increase firm performance (Park, Kim,

Running head: Governance Theories 6
Chang, Lee & Sung, 2018). This is mainly supported by CEO duality- where the CEO is both the
chairman of the board and the leader of the firm. CEO duality gives one person the chance to create and
install strategy.
Board independence and firm performance.
Agency theory argues that boards are only created to monitor the performance of the manager in
reference to the fulfilment of the organisational goals. But stewardship theory argues otherwise, it
stresses the need for board independence which would reduce the firms spending and formulate a better
avenue for monitoring the performance of the managers and therefore, increasing the performance of
the organisation (Felício & Rodrigues, 2013). In fact, the theory recommends that some members of the
board be hired from outside the company and even unqualified personnel (Bhatt & Bhatt, 2017). This is
because these members will implement new approaches to monitoring which, as mentioned above,
increases an organisation's performance.
Board size and organisational performance.
Many scholars argue that agency theory predicts a negative relationship between board size and
the performance of the organisation. Their argument is based on two reasons; first, that the increase in
the number of board members would also increase communication-related problems in the
organisation. And second, that increasing the size a board will result in a reduction of managerial
control which will pose problems for the organisation in that control and management will be separated
(Dodd & Dyck, 2015). Their argument claims that the process of making decisions and communication
will be greatly slowed in bigger boards than in smaller boards.
There is a strong relation between board size and board independence. Since the invention of
corporate culture, CEOs have tried to dominate the board. Reseach shows that smaller boards are

Running head: Governance Theories 7
vulnerable to manipulation from CEOs. But a board with many members would force the CEO to waste
much time looking for and gaining agreement (Farooq, Ullah & Kimani, 2015). Therefore, the
independence of the board is much higher when the board is larger and the powers and reach of the
CEO are reduced. As such the CEO would find it difficult to dominate the board. Lastly, there is a
fallacy that the costs of an organisation are reduced with bigger boards. Some scholars argue that
clients and creditor would presume that a company with a big board have more monitors for their
money (Pintea & Fulop, 2015). This can improve the value and the performance of the organisation.
For the case of employees, in a stewardship run organisation gain the better trust of their
employees. This is because employees are able to see the vision of their managers and share that vision.
This makes them work more efficiently to achieve the organisation's goals (Belle, 2017).
Another group affected by stewardship is the customers. Stewardship is an involving theory, everyone
has a part to play. And given that the customer feels close to the business when allowed to participate,
this theory can increase the performance of a firm because it allows customers to share in the vision of
the company with more relatable products (Ballesteros-Sola, 2015).
Leader’s values and beliefs on effective governance.
Just like the technological world, the world of business is fast changing. Most companies are
going global, expanding into new markets. This change requires that an organisation have very
dependable and high-quality products which come alongside influential and ethical leadership (Crews,
2016). Effective governance and effective leadership are just one and the same thing, they go hand-in-
hand. Without effective leadership, governance is dead in the water.
Effective leadership has many characteristics, in the forefront is competence. A leader that is not
competent in any way cannot effectively guide an organisation. In terms of good governance,

Running head: Governance Theories 8
competency of a leader constitutes good governance in that when offering services of the company to
the customers, the leader will show effectiveness and efficiency (Akhtar, Humphreys & Furnham,
2015). This is extended to the usage of the organisational resources. With a lack of efficiency, leaders
are biased in their service delivery which may lead to misappropriation of company funds.
The next quality is openness. It is simply what it sounds like, but its importance for leadership is
that it promotes free movement of information, which may be vital for the achievement of
organisational goals. The general public is also included in the flow of information (Crews, 2016).
They deserve to know about the organisation and express their own opinions. But the trick for leaders
is to know what information that the public need and which ones are too sensitive to put in the hands of
the general public. An effective leader will be careful not to release classified information while at the
same time satisfying the public need for information. This promotes good governance.
Openness is also evident in transparent working system and protocols. Meaning, the decision-
making process is known to everyone and is followed to the latter and that anyone who is to be
influenced in any way by that decision has access to the information pertaining to the decision (Crews,
2016). This information is provided in less cryptic or reduced forms to make it comprehensible. This is
one of the bases of good governance.
Good governance dictates an inclusive and equitable (Akhtar, Humphreys & Furnham, 2015).
When leaders create an environment of openness and transparency and invite participation of the public
especially to criticise, they provide the best conditions for effective governance. The most vulnerable in
the society should be allowed a chance to be heard, through this process their interest and ideas can be
represented. The same can apply to the context of an organisation. For effective leadership to ensure,
leaders have to offer a chance to the vulnerable of the company (Akhtar, Humphreys & Furnham,

Running head: Governance Theories 9
2015). These are the factors of effective governance.
Conclusion
In conclusion, governance is not just a factor that affects the organisation alone. An organisation
has ties and relationship with the outside world, as previously discussed, some organisations are big
enough to participate in the problem-solving occurrences in the society. When they participate, they
bring with them their governance culture from within the organisation. The corporate culture within an
organisation is bred from the theory used by its managers to govern it. These are essential factors that
have to be considered by the organisation's leaders to promote the most friendly culture that can be
emulated by the society.

Running head: Governance Theories 10
References.
Akhtar, R., Humphreys, C., & Furnham, A. (2015). Exploring the relationships among personality,
values, and business intelligence. Consulting Psychology Journal: Practice And
Research, 67(3), 258-276. doi:10.1037/cpb0000040\
Ballesteros-Sola, M. (2015). Stewardship revisited at the fuzzy ends of the Yunus social business
framework. Social Business, 5(1), 33-46. doi:10.1362/204440815X14267607784802
Belle, S. s. (2017). Knowledge Stewardship as an Ethos-Driven Approach to Business
Ethics. Journal Of Business Ethics, 142(1), 83-91.
Bhatt, P. R., & Bhatt, R. R. (2017). Corporate governance and firm performance in
Malaysia. Corporate Governance: The International Journal Of Effective Board
Performance, 17(5), 896-912. doi:10.1108/CG-03-2016-0054
BOSSE, D. A., & PHILLIPS, R. A. (2016). AGENCY THEORY AND BOUNDED SELF-
INTEREST. Academy Of Management Review, 41(2), 276-297. doi:10.5465/amr.2013.0420
Coupet, J., & McWilliams, A. (2017). Integrating Organizational Economics and Resource
Dependence Theory to Explain the Persistence of Quasi Markets. Administrative Sciences (
2076-3387), 7(3), 1-13. doi:10.3390/admsci7030029
Crews, J. (2016). Leadership Values: Perspectives of Senior Executives in Sri Lanka. South Asian
Journal Of Management, 23(3), 193-209.
Dodd, S. D., & Dyck, B. (2015). Agency, Stewardship, and the Universal-Family Firm. Family
Business Review, 28(4), 312-331. doi:10.1177/0894486515600860
Farooq, S. U., Ullah, S., & Kimani, D. (2015). The Relationship between Corporate Governance and

Running head: Governance Theories 11
Corporate Social Responsibility (CSR) Disclosure: Evidence from the USA. Abasyn University
Journal Of Social Sciences, 8(2), 197-212.
Felício, J. A., & Rodrigues, R. (2013). The effect of corporate governance on the financial structure of
listed firms. International Journal Of Management Science & Technology Information, (8), 58-
81.
Jan, B. (2018). Moving the governance of shared service centres (SSCs) forward: juxtaposing agency
theory and stewardship theory. Public Money & Management, 38(2), 97-104.
doi:10.1080/09540962.2018.1407135
Keay, A. (2017). Stewardship theory: is board accountability necessary?. International Journal Of
Law & Management, 59(6), 1292-1314. doi:10.1108/IJLMA-11-2016-0118
Miles, S. s. (2017). Stakeholder Theory Classification: A Theoretical and Empirical Evaluation of
Definitions. Journal Of Business Ethics, 142(3), 437-459.
Park, J. j., Kim, C. c., Chang, Y. c., Lee, D. d., & Sung, Y. s. (2018). CEO Hubris and Firm
Performance: Exploring the Moderating Roles of CEO Power and Board Vigilance. Journal Of
Business Ethics, 147(4), 919-933.
Parker, D. W., Dressel, U., Chevers, D., & Zeppetella, L. (2018). Agency theory perspective on public-
private-partnerships: international development project. International Journal Of
Productivity & Performance Management, 67(2), 239-259. doi:10.1108/IJPPM-09-2016-0191
Pintea, M., & Fulop, M. (2015). LITERATURE REVIEW ON CORPORATE GOVERNANCE - FIRM
PERFORMANCE RELATIONSHIP. Annals Of The University Of Oradea, Economic Science
Series, 24(1), 846-854.

Running head: Governance Theories 12
Sacristán López de los Mozos, I., Rodríguez Duarte, A., & Rodríguez Ruiz, Ó. (2016). Resource
Dependence In Non-profit Organizations: Is It Harder To Fundraise If You Diversify Your
Revenue Structure?. Voluntas: International Journal Of Voluntary & Nonprofit
Organizations, 27(6), 2641-2665. doi:10.1007/s11266-016-9738-8
Schnittfeld, N. L., & Busch, T. (2016). Sustainability Management within Supply Chains - A Resource
Dependence View. Business Strategy & The Environment (John Wiley & Sons, Inc), 25(5),
337-354. doi:10.1002/bse.1876
Voss, U., & Brettel, M. (2014). The Effectiveness of Management Control in Small Firms:
Perspectives from Resource Dependence Theory. Journal Of Small Business
Management, 52(3), 569-587. doi:10.1111/jsbm.12050
WEI, S., CONNELLY, B. L., & HOSKISSON, R. E. (2017). EXTERNAL CORPORATE
GOVERNANCE AND FINANCIAL FRAUD: COGNITIVE EVALUATION THEORY
INSIGHTS ON AGENCY THEORY PRESCRIPTIONS. Strategic Management Journal, 38(6),
1268-1286. doi:10.1002/smj.2560
ZIEITA, Y. (2017). Understanding CSR Communication Contexts Based on the Stakeholder's
Theory. Argumentum: Journal The Seminar Of Discursive Logic, Argumentation Theory &
Rhetoric, 15(2), 37-51.