Corporate Governance Theories and Their Contributions to Organizational Effectiveness

Student name
INSTITUTIONAL AFFILIATION(S)
CORPORATE
GOVERNANCE AND
ETHICS

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Introduction
In the era of changing business dynamics, companies working for-profit or non-profit
objectives faces alike corporate scandals. In this regard, this summative paper will analyse
corporate governance theories to understand their contributions in bringing organizational
effectiveness. The entire paper has been guided by literature present in scholarly articles
comprising a fusion of governance and stewardship theories: agency theory, stakeholder
theory, resource dependency theory and ethical theory. The objective behind preparing this
paper is to reflect upon the key governance framework followed by leaders of the
organization which influences overall business performance through acceptance shown
towards corporate governance practices.
The companies which neglect structured governance system, usually fails sustainable
competitiveness, reflects mismanagement in organizations, dishonesty and corporate frauds
resulting in major corporate scandals. Globalization has further made governance structure
more complex than ever but at the same time, more relevant as most of the organizations
have become powerful by showing effective governance structure alongside showing
accountability in their business operations (Zuva & Zuva, 2018). Therefore, this paper
proposes to make a review of governance theories from academic lenses which have
contributed to making organizations powerful than before. This paper also intends to discuss
stewardship theory and how it brings effectiveness in both profits as well as non-profit firms.
Since leadership is the key factor which shapes organizational vision and mission, this paper
will reveal how leaders’ value and beliefs can be related to effective governance practices in
firms.

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Theories of governance
Governance can be related to any process in which government, network or market
governs a corporation, tribe, industry or people to find whether they fulfil laws, norms, ethics
or social standards. Governance is a wider concept as compared to the government because it
not only focuses upon state and its institutions but also on the creators of rules and other
social practices (Bevir, 2013). Corporate governance, on the other hand, refers to those
activities which include economic and non-economic practices. In literature, corporate
governance reveals some meaning to governance in organizations, however, fails to provide
the precise meaning of governance. This is because of emerging concepts like manage,
control, govern and regulation which makes governance concept interpreted variously. These
theories range from agency theory and extend into stewardship, stakeholders, transaction
cost, ethical and resource dependency theory among several others (Abdullah & Valentine,
2009).
Agency theory
Given that most of the contemporary leaders have to commit both organizational
management and business operations, while they show responsibility towards shareholders of
the company, it is necessary to ensure that the respondents have been taken care of. From the
agency theory application, it is usually accepted that the organization will lay a platform
through which such responsibilities can be ascertained. This theory recommends management
of the firm to undertake responsibility from the owner's perspectives i.e. the shareholders of
the firm. The agency theory makes shareholders expect leaders or the appointed agents to
react and take management decisions principally. However, the agent may or may not
necessarily always take decisions on behalf of principles (Yusof, 2016).

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The flaws behind agency theory were first explained by Professor Victor Brudney in
1985 when he claimed that governance based on agency theory can result in private contracts
or bargaining which may develop management misbehaviour. Indeed, the issues arising
because of ownership separation from the control in agency theory can succumb agents into
opportunistic and self-motivated behaviour, thereby falling short of required governance
systems and stakeholders' aspirations. Most of the researchers claim that providing incentive
payments to the agents can make them focus more on specific projects which can lead to high
returns. Although this may be acknowledged by shareholders greatly as it may bring in
additional issues related to corporate misconduct. Looking from the positivist realm, it can be
said that agents are ethically controlled by principle-based rules which are set by governance
structures to enhance shareholders value. Therefore, the individualistic approach like
stakeholder's theory is explored by contemporary workplaces to lead ownership and
management more ethically ( Panda & Leepsa, 2017).
Stakeholder theory
Stakeholders theory demonstrates a well-defined relationship between corporate and
stakeholder’s relationship defined by Freeman in 1984. This theory offers the fundamental
concept behind stakeholders’ approach and reflects upon a group of people or environment
that is affected by organizational achievements. In general, the notion behind stakeholder’s
theory is a redefinition of a firm as noted by Friedman. The author stated that the
organization itself must be treated as a group of many stakeholders who work for a purpose
by manging individual interest, viewpoints and demands. In this sense, managers need to
maintain corporate profitability to benefit stakeholders and safeguard long-term stakes
provided to every group. The increased emphasis given on governance structure and
stakeholders further require companies to provide some areas of representation to be held by
stakeholders group (Ali & Abdelfettah, 2016).