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Approaches to corporate governance

This table summarizes materials from Introduction: Theories of Governance (Clarke, 1 through 30) and provides a taxonomy of several different approaches to corporate governance.
Summary table
(1,1) Description (1,2) Theory of Human Nature (1,3) Owner Role (1,4) Manager Role (1,5) Corporate Ethics Focus (1,6)
Agency Theory (2,1) Managers act as agents of the corporation fulfilling the goals established by the owners / directors(2,2) Managers are rational, but self-interested beings who must be controlled from the outside(2,3) Owners are principals, that is, they originate the action and bear primary moral responsibility.(2,4) Managers are agents, that is, responsible for acting in the interest of the principals who hire them. Faithful agency implies avoiding conflicts of interests and maintaining confidences.(2,5) Compliance focus uses (1) rule-based codes, (2) systems of monitoring, and (3) punishments and rewards to motivate compliance from outside.(2,6)
Stockholder Approach (3,1) Corporation is property of stockholders who dispose of it as they see fit.(3,2) Stockholders pursue self interest. They are rational (instrumental), economic self-interest maximizers.(3,3) Owners invest in corporation and seek a return (profit) on their investment.(3,4) Managers are responsible for ensuring that owners get maximum return on investment.(3,5) Stockholders direct compliance toward manager control and external conformity to laws.(3,6)
Stakeholder Approach (4,1) Owners drop out of center focus. Corporation is run for the sake of its stakeholders.(4,2) Groups have special interests but recognize the need to integrate these. Humans possess capacity for procedural reasoning.(4,3) Owners drop to one of a group of equal stakeholders. Still advocate their financial interests but not to exclusion of other stakeholders.(4,4) Managers are meta-stakeholders. They treat stakeholders and stakes equally and integrate these to the fullest extent possible.(4,5) (4,6)
Stewardship Model (5,1) Managers act as stewards for absentee owners; oversee the operations of corporation and exercise care over them. Emotion (care) plays an equal role with instrumental rationality.(5,2) Desire and self interest are balanced out by social motives such as Rousseau's pity and Aristotle's virtues.(5,3) Owners still set cardinal objectives but they also are responsible for providing managers with a meaningful work environment.(5,4) Managers are stewards exercising care over the property of the owners in their absence. Stewardship is based on internally generated and self-imposed motives toward care.(5,5) Value-based: (1) identify and formulate common standards of excellence, (2) develop training programs to foster pursuit of these excellences, and (3) develop support structures to help reduce value "gaps."(5,6)

    Agency theory

  1. In agency theory, the owners/directors set the central objectives of the corporation. Managers, in turn, are responsible for executing these objectives in the corporation's day-to-day operations. Corporate governance consists of designing structures and procedures to control management, i.e., to keep their actions in line with director-established objectives.
  2. Managers cannot be trusted to remain faithful agents, i.e., to stay faithful to the interests and goals of the owners/directors. This presupposes a particular view of human nature. Humans are rational, egoists. They have desires and use reason to devise means to realize them. Since one desire can be checked only by another desire, this egoism is potentially without limit. Agency theory assumes that managers will divert corporate resources to pursue their own selfish ends unless checked by some system of external controls. Thus, another key element of corporate governance under agency theory is to find the most efficient systems of controls to keep manager egoism in check.
  3. The owners/directors play the role of principal in agency theory. The principal originates the action and bears primary moral and legal responsibility for it. Most of the time the principal of an action is also its executor. But there are times when the principal lacks the knowledge and skill necessary for executing the objectives he or she originates. In this case, the principal contracts with an agent. The principal authorizes the agent to act on his or her behalf. This requires that the agent remain faithful to the goals and interests of the principal. See Hobbes's Leviathan , Chapter 16 for an important historical account of the agent-principal relation.
  4. Managers are agents. Their primary responsibility is to serve as faithful executors of the goals and interests of the principals. This requires, first, that, managers are responsible for exercising their professional judgment in a competent way. Managers are also responsible for remaining faithful to the interests of their principals. To do this they must avoid conflicts of interests and maintain confidentialities (i.e., keep secrets). Agent can also range from being free (unguided by principals) to bound (tightly monitored and controlled by principals).
  5. How does ethics enter into corporate governance under agency theory? Primary emphasis is placed on compliance, i.e., enforced conformity to rules that constitute minimum thresholds of acceptable behavior. Compliance approaches develop (1) rule based codes, (2) systems of monitoring to detect violations, and (3) punishments and rewards to deter non-compliance and reward compliance. Trevino and Weaver provide an empirical analysis to the goals achieved through compliance ethics: "[4] the perception that better decisions are made because of the ethics program [5]ethical advice seeking, [6] decreased unethical behavior in the organization...[7]ethical awareness." (Weaver and Trevino, 1999: 333.)

Questions & Answers

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Source:  OpenStax, Introduction to business, management, and ethics. OpenStax CNX. Aug 14, 2016 Download for free at http://legacy.cnx.org/content/col11959/1.4
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