Agency Theory: The fundamental theoretical basis of corporate governance is agency costs Adam Smith had identifiedthe agency

problem (managerial negligence andprofusion). Shareholders are the owners and theprincipals too. The management, the board, chosen bythe shareholders are the agents. Principals may want tocarry out the objectives of the company but the agents may not quite exactly match the requirements. The costof the dissonance caused by the agency problem is theagency cost. There are many a way through which themanagement go counter to the objectives of theshareholders such maximizing shareholder returns.Ostentatious life styles of directors, empire building etc.are examples. Mechanisms that help reduce agencycosts: 1.Fair and accurate financial disclosures 2 . E f f i c i e n t a n d i n d e p e n d e n t b o a r d o f directors

S t e w a r d s h i p T h e o r y The theory defines situations in which managers arenot motivated by individual goals, but rather they arestewards whose motives are aligned with theobjectives of their principals.It assumes that managers are trustworthy and havehigh reputations. There fore their behavior will not runcounter to the interests of the company. There is asignificant emphasis on the responsibility of the boardto the shareholders in a corporate governance modelthat is emboldened by stewardship and trusteeship. These concepts of stewardship and trusteeship aretraceable in the scriptures of India and Christendom. Basic Behavioral differences between Agency & Stewardship theories Agency Managers act as agents Governance approach is materialistic Behavior pattern is individualistic, opportunistic & self serving Managers are motivated by their own objectives Interest of the managers & principals differ The role of the management is to monitor & control Owners attitude is to avoid risks Principal-manager relationship is based on Stewardship Managers act as stewards Governance is sociological & psychological Behavior pattern is Collectivistic, proorganizational & trustworthy Managers are motivated by the principals objectives Interests of the managers & principals coverage The role of the management is to facilitate & empower Owners attitude is to take risk Principal-manager relationship is based on

control Issues in Shareholder VersusStakeholder

trust

Shareholder approaches fundamentally mean that corporations have limited responsibilities namely that of obeying laws and maximizing shareholder wealth. That is to say, shareholder interests will automatically maximize societal utility. But this argument presupposes that there will be perfect competition which is rather suspect in many situations. Stakeholder approaches dwell upon the theme that corporate managements have responsibilities toward other stakeholders. In other words responsibilities of the companies in terms of maximizing profits toward the shareholders should be subject to obligations toward others. Stakeholder theory Dating back to 1930s, this theory represents a synthesis of a fair bit of economics, behavioral science, business ethics, and stakeholder concept. It deals with the common interests of employees, customers, dealers, government, and the society at large and draws all of them into corporate-mix. It is often criticized as wooly minded liberalism because it is not applicable in practice by companies. But the defense is that managers can act efficiently only by drawing upon the resources of the stakeholders and as such there is a contract between the company and the stakeholders .But then who are all genuine stakeholders? Some might make bizarre choices like terrorists, dogs, trees and to the least questionable like employees and customers! Corporate Governance Mechanisms The joint-stock, limited liabilitycompany is becoming the most preferred organization for running any business. It has been successful in providing employment, generating wealth, and contributing to economic and social development. In the limited liability company, the business is incorporated as an independent legal entity separate from its owners. Shareholders liability for debts is limited to the amount of capital they have agreed to subscribe for. The company as a legal person has the rights to sell, buy, to own assets, to incur debts, to employ, to contract, and to sue and be sued upon. Company has a long life span different from those of its innumerable shareholders.