Theories and Responsibilities of Corporate Governance

The two main theories:

·      Shareholder-oriented governance (the
Principal Agent or finance model): The principal-Agent model starts from an assumption that the
social purpose of corporations is to maximize shareholders wealth. The
principal-agent model regards the central problem of corporate governance as
self-interested managerial behavior in a universal principal-agent
relationship. Agency problem arise when the agent does not share the
principal’s objectives.

·      Stakeholder-oriented model: The most fundamental challenge to
the orthodoxy is the stakeholder model, with its central proposition that a
wider       objective function of the firm
is to be more equitable and more socially efficient than one confirmed to
shareholder wealth. The well-being of other groups such as employees,
suppliers, customers and managers which have long-term association with the
firm and therefore a stake in its long-term success, is recognized.

Proponents of the stakeholder model hold that its efficiency is
demonstrable in two principal ways. The first shows that firms developing a
reputation for the ethical treatment of suppliers, customers and employees are
able to build up trust relations, which support profitable investments and
mutually beneficial exchanges. The second argument for the efficiency of this
approach draws on Japan and Germany as examples of successful industrial
societies in which extensive stakeholder involvement with the firm is pervasive
and typically corporate goals are defined more widely than shareholder’s
profits.

Responsibilities of corporate
governance

·      Political Responsibilities: The basic political obligations are
abiding by legitimate law; respect for the system of rights and the principles
of constitutional state.

·      Social Responsibilities: The corporate ethical
responsibilities which the company understands and promotes either as a
community with shared values or as a part of a larger community with shared
values.

      Economic Responsibilities: Acting in accordance with the logic
of competitive markets to earn profits on the basis of innovation and respect
for the rights/democracy of the shareholders which can be expressed in terms of
managements obligations as maximizing shareholders value.