AMITY

LAW SCHOOL

CORPORATE GOVERNANCE

Topic: Theories Of Corporate Governance





Submitted To: Submitted By:

Ms Adya Pandey Tanya Arora
BA LLB (H)
9th(A) Semester
A8111116033

 ACKNOWLEDGEMENT






I would like to give my special Thanks to my Corporate
Governance teacher Ms. Adya Pandey who gave me this
golden opportunity to do this wonderful project on the topic
Theories of Corporate Governance . This project helped me in
doing a lot of research and I learnt many new things.































 INTRODUCTION

Corporate governance concerns the manner in which corporations

are regulated and managed. Corporate governance has increased in
prominence over the decades. It has been an area of speedy
development especially after big corporate collapses, sweeping
measures were required to ensure adherence to good practice in
corporate governance. Corporate or Corporation is derived from
Latin term ‘corpus’ which implies a ‘body’. Governance implies
directing the procedures and frameworks put for fulfilling partner
desire.
The purpose of corporate governance is to help build an environment
of trust, transparency and accountability necessary for fostering long-
term investment, financial stability and business integrity, thereby
supporting stronger growth and more inclusive societies. The
Principles are intended to help policymakers evaluate and improve
the legal, regulatory, and institutional framework for corporate
governance, with a view to support economic efficiency, sustainable
growth and financial stability.
A primary worry in the corporate governance deliberations is to
balance the profit-making objective of corporations against broader
social responsibilities owed to the wider community. The principles
increase and constantly reinforce the trust placed in the company
by present and future shareholders, creditors, customers & clients,
employees, the public at large, the society, the community, the
regulators and the suppliers. Through consistent implementation of
these principles at all levels the Company’s place in the capital
markets will also be strengthened. Corporate governance has
increased in prominence over the decades. It has been an area of
speedy development especially after big corporate collapses,
sweeping measures were required to ensure adherence to good
practice in corporate governance.

Corporate Governance Theories

The following theories elucidate the basis of corporate governance:

(a) Agency Theory

(b) Stake Holder Theory
(c)Stewardship Theory

Agency Theory

According to this theory, managers act as 'Agents' of the

corporation. The owners or directors set the central objectives of
the corporation. Managers are responsible for carrying out these
objectives in day-to-day work of the company. Corporate
Governance is control of management through designing the
structures and processes. Agency theory defines the relationship
between the principals (such as shareholders of company) and
agents (such as directors of company).

According to this theory, the principals of the company hire the

agents to perform work. The principals delegate the work of running
the business to the directors or managers, who are agents of
shareholders. The shareholders expect the agents to act and make
decisions in the best interest of principal. On the contrary, it is not
necessary that agent make decisions in the best interests of the
principals. The agent may be succumbed to self-interest,
opportunistic behaviour and fall short of expectations of the
principal. The key feature of agency theory is separation of
ownership and control. The theory prescribes that people or
employees are held accountable in their tasks and responsibilities.
Rewards and Punishments can be used to correct the priorities of
agents.
 Stakeholder Theory

According to this theory, the company is seen as an input-output

model and all the interest groups which include creditors, employees,
customers, suppliers, local-community and the government are to be
considered. From their point of view, a corporation exists for them
and not the shareholders alone.The different stakeholders also have
a self interest.The interest of these different stakeholders is at
times conflicting. The managers and the corporation are responsible
to mediate between these different stakeholders interest. The stake
holders have solidarity with each other. This theory assumes that
stakeholders are capable and willing to negotiate and bargain with
one another. This results in long term self interest.
It is a theory of organisational management and business
ethics that accounts for multiple constituencies impacted by
business entities like employees, suppliers, local communities,
creditors, and others. It addresses morals and values in managing
an organization, such as those related to corporate social
responsibility, market economy, and social contract theory.

Stakeholder theory incorporated the accountability of management

to a broad range of stakeholders. It states that managers in
organisations have a network of relationships to serve – this
includes the suppliers, employees and business partners. The
theory focuses on managerial decision making and interests of all
stakeholders have intrinsic value, and no sets of interests is
assumed to dominate the others
 Stewardship Theory

The word 'steward' means a person who manages another's property

or estate. Here, the word is used in the sense of guardian in relation
to a corporation, this theory is value based. The managers and
employees are to safeguard the resources of corporation and its
property and interest when the owner is absent. They are like a
caretaker. They have to take utmost care of the corporation. They
should not use the property for their selfish ends. This theory thus
makes use of the social approach to human nature.

The managers should manage the corporation as if it is their own

corporation. They are not agents as such but occupy a position of
stewards. The managers are motivated by the principal's objective
and the behaviour pattern is collective, pro-organisational and
trustworthy. Thus, under this theory, first of all values as standards
are identified and formulated. Second step is to develop training
programmes that help to achieve excellence. Thirdly, moral support
is important to fill any gaps in values.

The steward theory states that a steward protects and maximises
shareholders wealth through firm Performance. Stewards are
company executives and managers working for the shareholders,
protects and make profits for the shareholders. The stewards are
satisfied and motivated when organisational success is attained. It
stresses on the position of employees or executives to act more
autonomously so that the shareholders’ returns are maximised. The
employees take ownership of their jobs and work at them diligently.









 Principles Of Corporate Governance

Corporate governance is carried out in accordance with the

Company’s Corporate Governance Code and is based on the
following principles:

• Accountability. The Code provides for accountability of the

Company's Board of Directors to all shareholders in
accordance with applicable law and provides guidance to the
Board of Directors in making decisions and monitoring the
activities of the executive bodies.

• Fairness. The Company undertakes to protect shareholders'

rights and ensure equal treatment of shareholders. The Board
of Directors shall give all shareholders the opportunity to
obtain effective redress for violations of their rights.

• Transparency. The Company shall provide timely, accurate

disclosure of information about all material facts relating to its
activities, including its financial situation, social and
environmental indicators, performance, ownership structure
and governance of the Company, as well as free access to
such information for all stakeholders.

• Responsibility.The Company recognises the rights of all

interested parties permitted by applicable law, and seeks to
cooperate with such persons or companies for their own
development and financial stability.
 CONCLUSION

Corporate governance is beyond the realm of law. It stems from the

culture and mindset of management, and cannot be regulated by
legislation alone. Structures and rules are important because they
provide a framework, which will encourage and enforce good
governance; but alone, these cannot raise the standards of corporate
governance. What counts is the way in which these are put to use.
It follows that the real onus of achieving the desired level of corporate
governance, lies in the proactive initiatives taken by the companies
themselves and not in the external measures like breadth and depth
of a code or stringency of enforcement of norms. The extent of
discipline, transparency and fairness, and the willingness shown by
the companies themselves in implementing the Code, will be the
crucial factor in achieving the desired confidence of shareholders and
other stakeholders and fulfilling the goals of the company.
A corporation is a congregation of various stakeholders, namely,
customers, employees, investors, vendor partners, government and
society. A corporation should be fair and transparent to its
stakeholders in all its transactions. This has become imperative in
today’s globalised business world where corporations need to access
global pools of capital, need to attract and retain the best human
capital from various parts of the world, need to partner with vendors
on mega collaborations and need to live in harmony with the
community. Unless a corporation embraces and demonstrates
ethical conduct, it will not be able to succeed. Corporate governance
is about ethical conduct in business. Ethics is concerned with the
code of values and principles that enables a person to choose
between right and wrong, and therefore, select from alternative
courses of action.
Much more needs to be done to ensure the entrenchment of good
governance standards, such as improving leadership. Indeed, there
is a need for advocacy and awareness.