Seminal Theories of Governance and Stewardship

Seminal theories of
governance and
stewardship

INTRODUCTION
Governance is a system in an organisation which helps it in controlling and monitoring
the mechanisms so that all the people who are associated with the project can be held
accountable for their actions and decision-making. Ethical actions, management of risk,
compliance of all the rules and regulations and administration are the elements of governance.
Corporate governance involves a relationship between managers, board of directors,
shareholders and other stakeholders so that the actions of the company does not have a negative
impact on the society and the environment as a whole (Zhang and et. al., 2018). By applying
stewardship theories the company executives try to protect the interest of all the stakeholders
who are affected by the business actions and decisions. This helps the company in being
accountable and responsible towards the society and also builds brand image of the company due
to following ethics in all its actions.
MAIN BODY
Key theories of governance contributing towards organizational effectiveness
Governance is an important feature in an organisation which helps it in being effective in
its performance as the actions and decisions that are taken are accountable, transparent,
responsible and fair in nature. This helps the company executives in thinking about the interests
of all the stakeholders by applying ethical behaviour mechanisms and control so that all the
resources can be optimally used and all the rules and regulations can be strictly followed (Hiebl,
2015). There are various theories of governance that can be used by the organisations in order to
deal with various challenges from time to time that can help the company in being efficient in its
performance and can also help the company in efficiently dealing with its goals and objectives.
Some of the theories that can be applied in the company to make it effective so that the
organisational goals are achieved are as follows:
 Agency theory: This theory defines the relation of principals and agents where in an
organisation the principals are the shareholders or the owners of the company whereas
the agents are the executives that are hired to manage the company. According to this
theory, agents are hired by principals so that they can make decisions and take actions
which are in the best interests of principals. However, the principals suffer an agency
loss, which is lesser return on investment as the company is not directly managed and

controlled by the principals. A part of this return goes to the agents and the principals
have to suffer loss. Thus agency theory suggests that financial rewards must be given to
the agents so that they can take such actions which can help in increasing the profits of
the principals. Further the theory also suggests that a board must be developed so that
strict control, supervision and monitoring of the agents performance can be done which
can help in maximizing profits of the owners. This thus means that the board is actively
involved in decision-making which ensures accountability towards the shareholders and
also maximize profits for them.
Source : Agency theory .2019
 Stakeholder theory : This theory states that the management of a company are
responsible to a broad range of stakeholders such as customers, suppliers, government,
environment and the society as a whole. It is the duty of managers to take decisions
which considers the interests of all the stakeholders so that they can receive a fair return
on their stake. This also means that the practices of the organisation take into account the
principles of sustainability which can help in the growth and development of both the
company and the society. It is thus the relationship between company and its stakeholders
which ensures that ethical actions are taken in the company so that economical and
sustainable growth of the surrounding can be achieved. This helps the company in
building a strong brand image of the company as the trust of people in ethically sound
company is more (Chen and et. al., 2016).
Illustration 1: Agency theory .2019