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Kieren Anderson T - Fri 11-1 GG04 C3110809

ACFI 2001 S1/2012 ESSAY Topic 4

In Australia Corporate Governance does not fall on a definitive scale, it covers a wide variety of views and as such can be considered both an internal process to benefit Directors and/or Shareholders, as well as an external perspective that is influenced by the concerns and actions of Stakeholders. The most Authoritative body on Corporate Governance in Australia is the ASXCGC (Australian Securities Exchange Corporate Governance Council).it Corporate governance as the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. It encompasses the mechanisms by which companies and those in control are held to account. This definition goes on to cover how corporate governance influences how the objectives of a company are set/achieved. How risk is monitored and assessed and how performance is optimised. (Dagwell.et.al)

Due to the broad scale of Corporate Governance many theoretical contexts have emerged with different views. This Essay intends to outline four main theories of corporate governance and the fundamental differences between them as well as the effects that has on the implementation of a practical corporate governance policy showing how even though they share similarities and overlap they are still limited to their own aspects for the present. The theories to be discussed are the Agency Theory, Stewardship Theory, Stakeholder Theory and the Resource/Dependency Theory. (Dagwell.et.al)

Kieren Anderson T - Fri 11-1 GG04 C3110809

Agency theory is the considered to be the most common and prominent theory adapted to corporate governance and its reforms. Agency theory is a result of division between Ownership and Control due to the capital requirements of modern corporations (Berle & Means, 1932). As a result majority of large modern corporations have multiple owners referred to as shareholders each of which is intent upon maximising their investment. Because of this an agency relationship formed, that is to say a contract under which the Principles (shareholders) give power to the agents (directors) to perform a service on their behalf as a result of which agents receive some decision making Authority from the principle. An agent is morally responsible to maximise the principles investment, however the core assumption of the agency theory is that if both parties to the relationship are utility maximisers then there is reason to assume that agents will not always act in the best interest of the principles. It is for this reason that the principles monitor the agents and give incentives to act appropriately. When the interests of the agents and the principles diverge due to one party considering there selves above the other that problems emerge. The three main problems are, one- potential for agents to maximise their wealth at the expense of the agents, two - sacrificing long-term growth for short-term gain and three - the difference in attitude towards risk. Corporate governing structures, policies and relationships are considered to be an important tool to help overcome the agency theory related problems. There are also important government reforms in Australia and internally to protect principles in extreme cases. (Dagwell.et.al)

Stewardship theorys origin can be found in psychology and sociology, it was developed to examine situations in which Stewards (directors) are motivated to act in the best interest of the principles (Donaldson & Davis, 1991).Stewardship theory differs from agency theory in

Kieren Anderson T - Fri 11-1 GG04 C3110809

how it rejects the fundamental assumption of the agency theory, that individuals are all utility maximisers, and that all decisions are driven almost singularly by economic desires. A key presumption of stewardship theory is that individuals have higher-order relationship needs driving them, such as acceptance and personal growth. As a result the behaviour of the steward is collective, because the steward perceives greater utility in cooperative behaviour it therefore behaves accordingly it can be considered to be a rational decision maker. (Davis & Schoorman.et.al).Therefore the steward can be considered to be organisationally centred around the key corporate goals (increase profitability and growth). Due to the amount of trust that can be placed with the steward is determined to be significantly higher than that of other theories the amount of resources that are required to guarantee pro-organisational behaviour from the individualistic agent stand point mentioned in the agency theory are reduced significantly due to the stewards motivation being towards the organisations goals.(Davis & Schoorman.et.al). The supporters of stewardship theory consider that their economic returns are best served by empowering management i.e. the steward. The result of the greater empowerment is that there is preference for representation from an independent director to be minimal, and view the duality of the Chief Executive Officer and the Board chair role as providing a strong/unified leadership reducing the risk that would result if it were agency theory. (Dagwell.et.al) The stakeholder theory views the corporation from a much broader perspective where shareholders are only part of the larger whole. Stakeholder theory has known to be considered a much more valid and morally acceptable theoretic framework when taking into consideration corporate framework dilemmas. As was the case with stewardship theory, stakeholder theory does not follow the premise of the agency relationship mentioned earlier between agents and principles. Instead it incorporates a much broader approach to include

Kieren Anderson T - Fri 11-1 GG04 C3110809

stakeholders such as employees, creditors, government and even society as a whole. The reasoning for this view with stakeholder theory is due the fact that stake holders are influenced by the corporation and in return the corporation is influenced by stakeholders. Using this reasoning it is necessary that for a corporation to be able to achieve its goals it must be able to do so with a full and detailed understanding of the relevant relationships it has with its stakeholders and the effects the decisions it makes will have. For individual stakeholder groups often have different and sometimes conflicting views/objectives. Donald and Preston explain that the stakeholder theory views the corporation as an organisational entity that through which numerous and diverse elements accomplish a multitude of purposes that are not always coinciding with one another. They also identified that the central core of the theory presumes that agents act as if all the stakeholders interests have an intrinsic value even though there value is not always on par with each other. In order to understand, respond and even relate to different stakeholder relationships corporate governance is key especially in application of this theory. The resource dependency theory maintains that a corporations level of success is reliant upon its ability to control its external resources. As a result the board of directors provides essential links to external resources that need to be maximised if a corporation is to achieve its goals. (Dagwell.et.al). In application of this theory Pfeffer and Salancik (1978) made the suggestion that the directors of the corporation bring four main benefits to hold their position, first - information in the form of advice and counsel, second - access to channels of information between the firm and environmental contingencies, third - preferential access to resources and fourth legitimacy. The theories above all have their similarities and differences to one another. Stakeholder theory and agency theory both imply that a key corporate governance factor is the significant

Kieren Anderson T - Fri 11-1 GG04 C3110809

independence of the corporation board and subcommittees however stewardship theory suggests that it has more of a negative effect than a positive effect to good corporate governance. The resource dependency theory yet takes a third stance where it finds that the independence of the board is a non issue and is more concerned with individual member value. The resource dependency theory and stakeholder theory both recognise the corporations interdependence on external and internal stakeholders yet there way of addressing them differs significantly in their approach, stakeholder theory has been refined to explain which stakeholders would take precedence in a given situation where as the resource dependency theory does not specify which takes precedence over another. In relation to this even the stewardship theory with its rational behaviour will acknowledge respond to certain stakeholders in order to achieve the company goals in achieving long-term gains. The agency theory is more concise in its relationship between the agents and principles, however due to both parties being utility maximisers the agents may respond to a certain stake holder in order to increase their wealth although it may result in decreased principles possible return. Agency theory, Stakeholder theory, Stewardship theory and Resource dependency theory, many studies have shown that that there is no one best system for corporate governance. Fundamentally it comes down to a value judgement as to which theory is considered the most valid or valuable to the individual corporation. For even though each of the separate theories discussed casts light on some aspects of corporate governance, it is as yet still limited to that aspect alone and as thus hampering the implementation to capture the entire theoretical complexity that is corporate governance at this time.

Kieren Anderson T - Fri 11-1 GG04 C3110809

References Berle, A. & Means, G. (1932), The modern Corporation and Private Property, Commerce Clearing House, Harcourt Brace and World, New York. Clarke, Thomas. (1998). The stakeholder corporation: A business philosophy for the information age. Long Range Planning, 31(2), 182-194. Retrieved April 14, 2012, from ABI/INFORM Global. (Document ID: 38525760). Dagwell, R., Wines, G., and Lambert, C, 2012, Corporate Accounting in Australia, Pearson Australia, ch21 Davis, James H, Schoorman, F David, & Donaldson, Lex. (1997). Toward a stewardship theory of management. Academy of Management. The Academy of Management Review, 22(1), 20-47. Retrieved April 19, 2012, from ABI/INFORM Global. (Document ID: 11170929). Donaldson, L. & Davis, J. H. 1991. Stewardship theory or Agency theory: CEO governance & shareholder returns. Australian Journal of Management. 16: 49-64 Hillman, A., Withers, M., & Collins, B.. (2009). Resource Dependence Theory: A Review :[1]. Journal of Management, 35(6), 1404. Retrieved April 14, 2012, from ABI/INFORM Global. (Document ID: 1926389521). Thomas Clarke. (2005). Accounting for Enron: shareholder value and stakeholder interests. Corporate Governance : An International Review, 13(5), 598-612. Retrieved April 14, 2012, from ABI/INFORM Global. (Document ID: 893339381).