Impact of Corporate Governance Theories on Corporate Performance

This essay delves into the primary theories influencing corporate governance, including agency theory, stakeholder theory, stewardship theory, resource dependency theory, transaction cost theory, and political theory, illustrating their impact on organizational structure and decision-making. It further justifies how good corporate governance can enhance corporate performance by reducing production costs, assuring internal control, promoting effective planning, and encouraging positive behavior within the organization. The analysis provides examples to support the role of corporate governance in managing conflicts, improving productivity, and fostering a positive environment that attracts investors and customers.

CORPORATE
GOVERNANCE
QIESTIONS

TABLE OF CONTENTS
Qusetion1. .......................................................................................................................................3
The main theories that influence development of the corporate governance..............................3
Question2 ........................................................................................................................................6
“Good corporate governance can improve corporate performance” Justify................................6
REFERENCES..............................................................................................................................11

Qusetion1.
The main theories that influence development of the corporate governance.
The corporate governance theories explains the concept where they monitor the hazards and
develops the different activities to understand how the business runs. In general, there are various
theories of the corporate governance which also introduces the challenges of governance of firms
and organization. There are six kinds of theories which influence the development which are
agency, stakeholder, steward, transactional, political and resource dependency theory. In this
report, here performing the major theories which influences the development of the corporate
governance.
Agency Theory : The concept of agency theory introduces the relationship between the business
principle and their agents who also explain and solves the issues and obstacle. In this context, the
principal can be said to the “shareholder of a company” and agents as “directors of the
company”. From this mentioned concept it is easy to understand the relationship. Accordingly,
the principal hire and recruit the agent people to perform the work procedure(Nasr, and Ntim,
2018). In the work process, shareholder expects from the agents to create and put the appropriate
decision in the best interest of principal. In this theory, it is not necessary that an agent will only
make the decision to profit the company and principal. The agents may be composed the self-
interest opportunism behaviour and follow the ideologies which will benefit themselves.
Accordingly, from this inappropriate behaviour they fall the expectation of the principal or
shareholder. Performing the most common and revenant example from which this theory will be
understood in the effective manner. During the elections, the political parties and representative
promise to voters and public that they will maximize the profits and their interest in the effective
manner. However, the elections get over and a person who has elected as a government
representativeness they cheated the candidates who make them win and elected them for their
benefits (Nwafor, and Sibanda, 2019). Instead of providing them best interests they follow the
duties and work process which effect themselves. In the example, the voters act as principal and
who elect the representative as their agents.
Stakeholder Theory :
The stakeholder term introduces the accountability of the management to a wide range of
stakeholders. The term stakeholder includes the employee, production, investors, political

parties, suppliers, trade associations, government and communities. All these are the effective
part of the organization. This theory mainly focus on the managerial decision-making process
and helps them to provide the equal benefit and interest. The main objective of this theory is to
provide the value for the stakeholders and not only to the shareholders. The stakeholder is the
viviparity of the organization and have a right to take interests from the shareholders. The
management or shareholders have a responsibility of decision-making process in which theory
are required to generate and create an equal value of sets to their stakeholders. For example : A
food industry company providing the food stuff to their consumer which requires the proper
management of manufacturing, supplier, and the who will make a purchase (Barante, and Arasa,
2018.). The food company who is focusing on their stakeholders and providing the equal interest
of the profit will aid an organization to provide the best quality and services to the people from
which they will be able to approach the consumer by their effective designs and structure.
Looking at one more example, the organization who is a retail company of a clothing and
dressing then the company requires the numerous department and worker to perform the work
activates. The work process will only be done by the machinery or the labour but for running the
machines equipments also requires the stakeholder to look out for the manufacturing and
services. The stakeholder is the essential part of the organization and it can be of any
departmental company and business requires stakeholder to drive and run their business in the
stable platform. From thee activities only the shareholder will obtain the maximum benefit and
develop in the particular areas. This example is illustrated the value and importance of
stakeholder theory.
Stewardship Theory : The steward theory states the concept where steward secure and protect
the shareholder wealth though the organization performance (Iswaissi, and Falahati, K2017). The
term “steward” means to be company executive or manager who are working for the
shareholders and protect and enhance the organization growth by providing them maximum
profits and benefits. It has been known that an individual who feels motivated they can generate
the maximum profit to the shareholder. Similarly, the executive and managers are satisfies when
they feel motivated and courageous at the workplace then they will be able to sustain the growth
of the organization. Providing the employee an accurate motivation from the shareholder then
they can be able to put more efforts and maximize the returns. The motivation can be intrinsic
and extrinsic which helps the executives to put the efforts and hard work which drives the growth

of the organization and also enhance the profitability to the shareholder. Let's understand this
concept with an example. A business organization who is only focusing on the environmental
concerns and operate with the impact as possible on the land (Makina, 2018,). A management
also requires focusing on their employee as executives and manager and provide them a well
work environment which helps them to provide a better result in the organization. It can also
include the training and development sessions from which an executive will be able to
understand the work process. A principal can also follow the strategy in which they can apply the
reward and incentive system to motivate the stewards from which they will feel a valued part of
the organization and provide the best efforts and hard work to the company from which the
organization will be able to generate and obtain the maximum benefit and profit in the market.
Providing the motivation and courage to an individual will aid and support the company growth
and development so it is required to focus on the steward pr executive and manager. Along with
this, a management also should appreciate their steward as they will feel motivated from which
they will be able to putt their best efforts to drive the company at successful position.
Resource Dependency
Resource theory focus on the board of the directors and provides the access to the resource which
are required and needed in the firm or organization. This theory states that the directors plays a
vital and important role in the business organization by providing and securing the essential
resource thorough the external environment. This environment includes the suppliers, buyers,
social groups and public policy-makers. The organization is mostly depends on the resources
from which they can obtain the outcome. In other term, the study in which organization external
environment or sources affecting the behaviour of the organization (Muzata, 2021). Resource can
be come in many ways such and raw material, financing and employees. For example : An
organization who is technology security firm. The organization is total depends on the
multimedia factor or equipments as they are the only source to run their business and
organization. Similarity, organization is depends on the external resources which are the main
drivers of their company and generates the effective outcome.
Transaction Cost :
This theory is based on the principal that arise such as director to drive the business which an
individual own. The concept where a company has numerous contracts within the company itself
and can be able to create the value for the economy of the company. The transaction cost could

be effected by the external and internal parties. Transaction cost will occur at the external
environment when it has been search and information costs to the supplier, policy and
enforcement costs to the monitor the quality and negotiating and decision costs to but the
components. Along with this looking at internal cost theory then it includes the amount the
manager will personally gain, frequency will introduce the nature of such activity with the
corporate culture and behaviour (Ramedies, 2020). Looking at the example of the transaction
theory includes the commission which was paid to stockbroker for furnishing the share deal and
provided the free cost booking charge when buying or purchasing the concert tickets. The value
or cost which ahas been travel and time to complete the exchanges are the common example of
the transactional theory.
Political :
The political theories brings the approach by developing the voting system or supports from the
shareholder who are the principal, instead of buying the votes and its power. It mainly highlights
the allocation of the profits, privileges and corporeity power which demonstrate the government
favour. This refers the political influences in the governance structure of an organization. This
politician theory emphasizes the governance decision-making activates at the distribution of the
power and profits (Costa, and Ngcetane-Vika, 2021). The theory includes the areas where the
votes are not purchased a shareholder are selected and chosen by the people in the effective
manner to determine the values and interests.
Question2
“Good corporate governance can improve corporate performance” Justify
The corporate governance refers to that administration that focuses on the activities of the
companies and regulates their activities. The administration is accountable for managing the
clashes that takes place in the organization. The Agent and principles in the organization faces
the large number of disputes (Bhagat and Bolton, 2019). In such situation, the corporate
governance has been proven effective in terms of managing the clashes among them. It further
helps in increasing the productivity of the organization. In order to understand this with more
clearance, here are the examples that are efficient enough in proving that the corporate
governance improves the performance of the organizations:

Reduces the cost of production- The corporate governance helps in reducing the cost of
production of the firm, this leads to lower the prices of the products and services. As a result, the
customers gets highly attracted towards the products and services of the company. The
administration puts a keen focus over the activities of the companies. If any company is invests
unnecessary then the governance keeps a check on those companies and immediately takes the
actions in relation of lowering their expenses. As a result, effective cash flow has been managed
by the companies. This ensures the high productivity in the firm.
Assures the internal control- The corporate governance keeps a keen focus over the managerial
control. As managers can leads to the opportunism in the company. This results in developing
the clashes among the agent and the principles in the company. This hinders the growth process
of the company. The agency theory of the corporate governance helps in managing the disputes
among the parties and ensures the smooth flow of working the company (Adnan, Hay and van
Staden, 2018). The administration is responsible for taking certain measures that manages the
level of control in the company.
Effective planning- The corporate governance makes the effective communication with the top-
executives of the companies and guides them about the decision that can be proven effective for
the company. It has been found from various studies that, the administration guides the
organization and helps in clearing their vision in relation of taking the decision. As a result, the
firm experience the growth process.
Encouraging positive behaviour- The major function of the corporate governance is to create
the positive environment in the organization. As the administration is accountable for ensuring
the fair practices in the company. As a result, the positive environment has been created in the
company. This results in boosting up the confidence of the members in the organization. Along
with this, it further helps in gaining the faith of the investors and the customers in the favour of
the company (Paniagua, Rivelles and Sapena, 2018). The fair practices lead to the positive
environment in the company. And this further leads to adopting the positive behaviour in the
company. As a result, effective communication has been take place in the company. This leads to
increase in the productivity of the company.
Improving the top-level decision-making-
In improving the top-level decision-making which demonstrate and having the strong link
between an organization within their corporate governance and make sure for having rapid

decision-making. Along with this might be also related for having the improving about
performance and explains them more for working within the corporate governance in some
recent reports (Zhou, Li and Chen, 2021). While there seems no more doubt about the corporate
governance which access about information and keep communication among their stakeholder
that can leads for better outcomes. In organization, the rapid decision-making which seems to be
important and this could be accurate for having prioritizing about their valid action. As this can
work for enabling the firms to tough economics storms and supports about their organization
substantiality.
Enabling better strategic planning-
While having better access for the information and with having good communication
with their management in organization, this could lead to formulate successful strategies. Along
with, corporate governance also including the better and efficient allocation of capital and
resources. The strong governance which can make sure for having the assists about the boards in
some following ways- the regulatory about environment governing in business, leveraging more
huge technology from the production, communication and distribution with point of view
(Nugroho, 2021). Furthermore, this identifying and managing the reasonable for working with all
stakeholder in the business and keeping them for working within their components as better
elements.
Attracting talented directors-
The good corporate governance that can lead for work with bringing out the talented non-
executive with complementary skills which helps to make them overall assessment of the firms.
While having such things this might be more helpful for including the better level of compliance
with their relevant legislation. Moreover, having such new talent the view for sustainability of
the organization which has to adopt those changes and make sure for involving them with the
better market condition. For example, the (Mishra, Jain and Manogna, 2021)organization, which
keep the non-executive post and providing the better kind environment which seems to be
equally important,
Corporate governance which helps for set up rules, policies, controls and resolution
which put towards the place to dictate about the proper corporate behaviour. Along with this,
could also play the effective role for the proxy advisor and shareholder which seems to be
important. Basically, who are being indirectly affect governance and the broad of director which

have some major ramification for the equity valuation (Pekovic and Vogt, 2021). Moreover, a
company that can keep the corporate governance which seems to be important to their investor
and since this can show them for working with some better direction and business integrity. This
has been said, good corporate governance which helps the companies for developing better trusts
with investor and the community. As the result, the corporate governance which help the
companies for promoting the financial viability and also make sure for creating the better long
term investment for opportunity in participants for market. While for having the better
communicating the companies that can work with corporate governance which play the
important key component for the investor relation and community. For example, Apple Inc.'s
which include firm outlines within the corporate leadership and its executive teams and broads of
director, governance documents, stock ownership guidelines and so on. This has been seems that,
most of the organization strive for having the high level of corporate governance and many of
shareholder for working is might be not so enough for company which merely having the better
profitable. While this have been also needed to demonstrate about the good corporate citizenship
through environmental awareness, sound some corporate governance practices and better ethical
behaviour.
Along with this, good corporate governance which can easily creates transparent set for
the rules and controls about the shareholder, officers and director that are being aligned
incentives. For example, Volkswagen AG, that could be related about the good corporate
governance can cast doubt in the organization, integrity, reliability and might be having the
obligation to their shareholder (Ngatno, Apriatni and Youlianto, 2021). As well as, implication
more about firm financial health and tolerance for keeping support towards the illegal activities
that can creates the scandals and started with something new in organization. However, this has
been also seems that supervisory which have been comprised about the large portion for their
shareholder and voting rights with having the controlled by members, as they are working within
the organization. For example, Enron and Worldcom, the public and government concern seems
to be more important and tends to wane and wax. The organization is being keeping the good
corporate performance within the business through which they have taken the private partnership
to do business within profits. Corporate governance which could give about the company that
relies on making the formal decision and to manage the company.

Basically, the good corporate governance ensure more about the board of director and
meet up with them on regularly basis, retain to control over business and are being clear about
division towards their responsibility. For example, Infosys, which follows the best practices in
corporate governance and across the high categories that have been followed by the organization.
Along with this disclosure, responsibilities for the management and the board of director and
shareholder with some equitable and right treatment . As the organization which basically, keep
about the corporate governance with the 74% and states about the best practices for working
within the confidence among the financial backers and investors (Mishra, Jain and Manogna,
2021).

REFERENCES
Books and Journals
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governance on corporate social responsibility disclosure: A cross country
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Barante, D.M. and Arasa, R., 2018. Corporate Governance Practices And Firm Performance: A
Review And Interrogation Of Theory.
Bhagat, S. and Bolton, B., 2019. Corporate governance and firm performance: The
sequel. Journal of Corporate Finance. 58. pp.142-168.
Costa, K. and Ngcetane-Vika, T., 2021. A comparative analysis of strengths and weaknesses of
corporate governance practices between two jurisdictions; UK and South Africa.
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Libyan commercial banks. Corporate Governance and Sustainability Review, 1(1),
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Muzata, T., 2021. Rethinking corporate governance approaches. African Journal of Business &
Economic Research, 16(2).
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conservatism: evidence from Egypt. Corporate Governance: The International Journal of
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Ngatno, Apriatni, E.P. and Youlianto, A., 2021. Moderating effects of corporate governance
mechanism on the relation between capital structure and firm performance. Cogent
Business & Management. 8(1). p.1866822.
Nugroho, M., 2021. Corporate governance and firm performance. Accounting. 7(1). pp.13-22.
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