Agency theory
Agency theory is a principle that is used to explain and resolve issues in the
relationship between business principals and their agents. Most commonly, that
relationship is the one between shareholders, as principals, and company
executives, as agents. The principal or principals have hired the agent to perform a
service on their behalf.
Principals delegate decision-making authority to agents. Because many decisions
that affect the principal financially are made by the agent, differences of opinion,
and even differences in priorities and interests, can arise. Agency theory assumes
that the interests of a principal and an agent are not always in alignment. This is
sometimes referred to as the principal-agent problem.
Transaction Cost Theory
Transaction cost theory is part of corporate governance and agency theory.
One of the prevailing economic-based theories of organizational corporate
governance is the transaction cost theory.
Transaction costs will occur when dealing with another external party:
• Search and information costs: to find the supplier.
• Bargaining and decision costs: to purchase the component.
• Policing and enforcement costs: to monitor quality.
The idea of transaction costs is recognized as a useful analytical tool in the 1970s
through works of several authors. The transaction cost theory states that a firm as
a sum of contracts put in practice in order to organize and regulate transactions
serves for accomplishing contractual relations. Its main concern is in carrying out
economic transactions based on the most efficient governance structure.
Transaction costs refer to explicit fees associated with a transaction as well as
implicit fees of monitoring and controlling a transaction. Transaction cost includes
the costs of information, search, negotiation in addition to contracting and
enforcement.
Stakeholder Theory
The stakeholder theory of corporate governance focuses on the effect of corporate
activity on all identifiable stakeholders of the corporation. This theory posits that
corporate managers (officers and directors) should take into consideration the
interests of each stakeholder in its governance process.
This includes taking efforts to reduce or mitigate the conflicts between stakeholder
interests. It looks further than the traditional members of the corporation (officers,
directors, and shareholders) and also focuses on the interests of any third party
that has some level of dependence upon the corporation. Stakeholders are
generally divided into internal and external stakeholders.
Who are the stakeholders in a company?
Common examples of stakeholders include employees, customers, shareholders,
suppliers, communities, and governments.
• Internal Stakeholders - Are the corporate directors and employees, who are
actually involved in corporate governance process.
• External Stakeholders - May include creditors, auditors, customers,
suppliers, government agencies, and the community at large.
Stewardship Theory
Resource dependency Theory
Resource Dependency Theory agrue the goal of an organization is to minimize its
dependance on other organization for the supply of scare resources in its
environment.
Resource Dependency Theory, proposed by Pfeffer and Salancik (1978), explains
how organizational behavior is affected by external resources. Firms change their
external environment to secure access to the resources they need to survive. This
means that a firm’s competitiveness is determined by the way they deal with
their external resources.
While the resource-based view of the firm is concerned with the management of
a firm’s internal resources and capabilities, resource dependence theory, there is
a focus on external parties, such as suppliers.
Class and Managerial Hegemony Theory
What is managerial and class hegemony theory?
Managerial hegemony theory is similar to class hegemony theory in that the
governance system and board is seen as the tool of management.It argues that the
real power in corporate governance lies with management and that they can take
advantage of shareholder weakness to pursue self-interest.
Class hegemony theory
In the context of corporate governance, class hegemony theory might involve
studying how certain economic classes influence decision-making processes, shape
corporate culture, and perpetuate their interests within the organization.
Managerial hegemony theory
In corporate governance, managerial hegemony theory could be applied to analyze
how top executives or managerial elites influence board decisions, control
information flow, and shape the strategic direction of the company to serve their
own interests.
