Theoretical Perspectives on CG

Question 1

What is Agency Theory?

Answer 1

• Dominant model
• Focuses on relationship between shareholders and managers
• Underscores the need for mechanisms to align the interests of managers with those of shareholders due to inherent conflicts of interest

Question 2

What is Stakeholder Theory?

Answer 2

• Expansion of Agency theory to include all stakeholders
• Argues for balancing interests of various stakeholder groups as part of strategic management decisions

Question 3

What is Stewardship Theory?

Answer 3

• Contrast with Agency Theory
• Suggests managers, when empowered, will act as stewards of the company, protecting shareholder interests naturally
• No need for oversight mechanisms that agency theory advocates

Question 4

Critique of Agency Theory?

Answer 4

• Fosters narrow focus on financial outcomes and shareholder interests
• This comes potentially at the expense of other stakeholders and long-term strategic goals

Question 5

Critique of Stakeholder Theory?

Answer 5

Whilst promotes more inclusive approach, may dilute firm’s focus and complicate managerial decision-making due to need to balance diverse/ conflicting stakeholder demands.

Question 6

Critique of Stewardship Theory?

Answer 6

• Overly optimistic of human behaviour
• Assumes managers will naturally act in best interests of the company without personal gain (may not hold true)

Question 7

What is the reason for different theoretical perspectives on CG?

Answer 7

• Theories emerge from different socio-economic backgrounds, historical contexts, and organisational needs.
• E.G. Agency theory prevalent in regions with widespread market-based economies and dispersed ownership structures. Stakeholder theory more relevant in contexts with strong social welfare systems or cooperative business models.

Question 8

What are the 3 major theoretical approaches to CG?

Answer 8

• Agency Theory
• Stakeholder Theory
• Stewardship Theory

Question 9

What are the 3 main external factors that have been integrated into CG theories?

Answer 9

• Regulatory environment
• Market conditions
• Cultural norms

Question 10

How can Regulatory Environment impact CG theory?

Answer 10

Legal/ regulatory frameworks can enforce certain governance practices, influencing the adoption of different governance theories

Question 11

How can Market Conditions impact CG theory?

Answer 11

Economic volatility, market competition, and shareholder activism can sway the balance between between different governance approaches.

Question 12

How can Cultural Norms impact CG theory?

Answer 12

Cultural expectations about business conduct and ethical behaviour can shape which governance theories are more acceptable or effective in particular regions.