Theories Of Corporate Governance

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2.0 Agency Theory and Corporate Governance Corporate Governance is a term used to refer to the processes, policies, regulations and customs by which a corporation is directed, administered and controlled. Corporate governance has been an integral part of the business practice since the creation of corporate structure and separation of ownership from control (Aguilera & Jackson, 2010). Corporate governance specifies the responsibilities and rights of various stakeholders in the organization, e.g. employees, shareholders, creditors and suppliers. Most companies set out to make profits, which shareholders reap in form of dividends. To help ensure that shareholder interests are protected, firms put in place various mechanisms to ensure that the…show more content…
Auditors act as agents to shareholders (principal) when performing the audit. The conflict arises when the auditor is unable to provide an independent review due to fear of losing out on the firm’s business in form of audit fees were they to give an honest opinion. 2.3 Board Structures A vital part of corporate governance is board structures. Board structures influence the growth of the firms and are regulated and governed by a framework so as to protect the rights of shareholders and check malpractices (Henry, 2004). There are two types of board structures: • Unitary/ Single-tier board system, where the governing body comprises a single board, e.g in the US, UK, India. This board combines both managerial and supervisory functions, though there are steps to ensure segregation of these functions. • Two-tier board system, where the governing body comprises two separate boards, being the supervisory board and the management board. This is common in Germany, Finland and Netherlands. In some instances a unitary board is preferred as it provides greater interaction among all board members( Cadbury Report UK, 2002). On the other hand, the two-tier system provides more stability due to the supervision and control…show more content…
It thus involves balancing the varied interests of the various stakeholders in a firm like its shareholders, employees, customers, suppliers, financiers, government, and the community (Kim & Nofsinger, 2004). Agency theory is concerned with the contractual relationship between two or more persons (Jensen & Meckling, 1976).It is thus concerned with resolving problems that can exist in agency relationships due to unaligned goals or different aversion levels to risk. Corporate governance is therefore considered an effective mechanism of reducing agency costs and ensuring efficient utilization of corporate resources. 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 (OECD, 2015). Corporate governance is informed by the following principles as prescribed by the Organization for Economic Co-operation and Development (OECD) which published the same in its ‘Principles of Corporate Governance’ in 2015. These

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