Business Ethics and Corporate Governance, Second Edition

THEORETICAL BASIS OF CORPORATE GOVERNANCE

There are four broad theories to explain and elucidate corporate governance. These are: (i) Agency Theory; (ii) Stewardship Theory; (iii) Stakeholder Theory; and (iv) Sociological Theory.

Agency Theory

Recent thinking about strategic management and business policy has been influenced by agency cost theory, though the roots of the theory can be traced back to Adam Smith who identified an agency problem (managerial negligence and profusion) in the joint stock company. The fundamental theoretical basis of corporate governance is agency costs. Shareholders are the owners of any joint stock, limited liability company, and are the principals of the same. By virtue of their ownership, the principals define ...