Agency theory, stakeholder theory, stewardship theory and transaction cost economics are the main theories that influence the development of corporate governance. The corporate governance can be drawn from a variety of disciplines and areas such as finance, economics, management, accounting rules, legal and regulatory, organization behaviours, etc. It express concerns in both internal aspects of the company (monitoring internal control & board structure) and the external aspects (eg. relationship of labour policies, role of multi shareholders and other stakeholders) besides protections of minority shareholder’s right (Claessens and Yurtoglu; 2012; Mallin, 2013). The Management will have the responsibility for the design, implementation and maintenance of the internal controls to prevent and detect any fraud that might happen.
In today’s business environment, a good corporate governance will be effective in stopping more financial scandals and collapses in future (Mallin, 2013) and protecting the reputation of both the company directors and the firms (Turnbull, 2000). Besides, it will also add value by improving firm’s performance and improvement on other efficiency. Contrarily, a poor corporate governance can affect the functioning of a country’s financial markets and the volume of cross-border financing (Claessens and Yurtoglu, 2012).
2. AGENCY THEORY vs. STAKEHOLDER THEORY
2.1. Agency Theory
Agency theory explains the relationship in between the principals and agents (P-A). Under the law of equity, the agents (e.g. directors) have a legal obligation to protect the interest of principals (e.g. shareholders). Jensen and Meckling (1976) identified the agency relationship as where a contract engaged shareholder (“Princ...
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...tter exercise their stewardship responsibilities, which applied on a “comply or explain” system. Stewardship theory stresses on the beneficial consequences on shareholder returns of facilitative authority structures which unify command by having roles of CEO and chair held by the same person. Stewardship theory focuses not on motivation of the CEO but rather facilitative, empowering structures, and holds that fusion of the incumbency of the roles of chair and CEO will enhance effectiveness and produce, as a result, superior returns to shareholders than separation of the roles of chair and CEO (Donaldson and Davis, 1991).
View of traditional agency theory more concern about the relationship between principal and agent, create value and maximizing principal’s wealth. Contrarily, the stakeholder theory consisting of more humanity and motivation implicit.