Theoretical Aspects of Coporate Governance (CG)

Arif Hartono, SE. MHRM. PhD.

What is Corporation?
A corporation is a mechanism

established to allow different parties to contribute capital, expertise, & labor for the maximum benefit of all of them (Monks & Minow, 2004)

Characters of Corporation
Limited Liability for investors Free transferability of investor interests Legal Personality (entity-attributable

powers, life span, and purpose) Centralized Management

The purposes of corporation

Meet the needs of stakeholders Human Satisfaction Social Structure Efficiency & Efficacy Ubiquity & Flexibility Identity

What is Corporation
Corporation as a person Corporation as a complex adaptive

system Corporation as a moral person

Definitions of CG
Corporate Governance is the system by

which companies are directed and controlled

to do with Power and Accountability:

who exercises power, on behalf of whom, how the exercise of power is controlled.

Theories of CG
Agency theory Transaction cost economics theory Stakeholders theory Stewardship Class hegemony theory Managerial hegemony theory

Agency theory
Identifies the agency relationship where

one party, the principal delegates work to another party, the agent. In the contect of a corporation, the owners are the principal and the directors (managers) are the agent. Managers must be monitored and institutional arranngements must be provide some checks and balances to make sure they dont abuse thei power

Agency theory
Much of agency theory as related to

corporations is set in the context of the separation of ownership and control.

Transaction Cost Economics Theory (TCE)

TCE views the firms itself as a

governance structure. The choice of governance structure can help align interests of directors and shareholders

Stakeholders Theory (ShT)

ShT takes account of wider group

constituents rather than focusing on shareholders. Where there is an emphasis on stakeholders, then the governance structure of the company may provide for some direct representation of the stakeholder groups.

Stakeholders Theory (ShT)

Maintenance or enhancement of shareholder

value (e.g. Employees, provider of credit, cutomers, suplliers, govrnment, local community) Shareholders & stake holders may fovour different CG structure & also monitoring mecahnism.

Anglo-American model: executive & non executive directors are elected by shareholders German model: stakeholder group (e.g. Employees) have a right of representation to sit on the supervisory board alongside the directors.

Stewardship Theory
Directors are regarded as the steward of

the companys assets ad will predisposed to act in the best interest of the shareholders

Class Hegemony Theory

Directors view themselves as an elite at

the top of the company and will recruit/promote to new director appointment taking into account how well new appointment might fit into that elite

Managerial Hegemony
Management of a company, with its

knowledge of day-to-day operations, may effectively dominate the directors and hence weaken the influence of the directors

Summary
CG is a relatively new area and its

development has been affected by theories from a number of disciplines, including finance, economics, accounting, law, management, & organizational behavior Agenccy theory takes account has probably affected the development of the CG framework the most.

Summary
Stakeholders theory takes account of

wider constituents rather than focusing on shareholders. The development of CG is a global occurence and, as such, is a complex area including legal cultural, ownership, and other stuctural diferences. Therefore some theories may be more appropriate and relevant to some countries than others,