Theoretical Perspectives of Corporate Governance

Understanding the impact of theories on Corporate Governance As corporate governance evolved, various theories helped the development of corporate governance. These theories are based on a combination of financial, economics and behavioural sciences. Each theory identifies a different relationship among the participants, and their behaviour defines the function of governance and role of directors. The theories can be categorized under property rights theories, conflict theories, principal cost theory, theories of harmonic contract and institutional theories. The property rights theory indicates that shareholders as owners have all rights on the company and its assets. In reality, the extent of control that shareholders are able to exercise on the company would primarily depend on the ownership pattern and voting rights. The different forms of control prevalent are Managerial Control, Working Control and Majority Control. This can create conflict between the shareholder who acts as principal and their agent the directors, principal and principal, and between agent and agent. The conflict theory argues that the self-serving behaviour warrants a governance function of monitoring by mechanism such as having more independent directors and effective audit to reduce conflict costs. How CG is institutionalized? Traditionally, companies have been shareholder centric. External pressure and need for legitimacy challenge the traditional profit maximization objective and call upon considering the rights of all stakeholders and not merely the investors. Isomorphic pressure creates a universal applicability of governance mechanisms within a country. The differences in legal origin, government capabilities and social structures result in heterogeneous governance systems in different countries.