Assignment deals with studying several theories of governance and their impact on the organizations

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This assignment discusses the seminal theories of Governance that effect organizational leadership in a profitable and non-profitable organization. Governance is a process by which the firms and their organizational values are managed.  Under authority and policy making, governance believes in public upliftment. The growth of any organization depends on its corporate governance, the structure it follows, the ownership groups it possesses, and the political developments of a country. The word governance comes from Chaucer’s times and is as old as the human civilization. There are various theories proposed by the researchers which are being followed in different parts of the world. Its recent revolution in the business world is due to differences felt between the shareholders and business managers of the organization. In this assignment, several theories of governance and their impact on the organizations will be discussed(Page, 2013).

Theories of Governance

Corporate governance deals with the social and political background of any organization and assesses the rules which drive the organization. It is very essential for a firm, because a good corporate governance always brings success to the organization and achieving a desired goal also becomes easy and approachable. The following are the theories of governance(Robichau, 2011).

1. Agency theory

2. Stewardship theory

3. Social contract theory

4. Legitimate theory

5. Political theory

Agency theory

 The Agency theory was discovered by Stephen Russ and Barry Mitnick.This theory deals with issues that arise due to differences in the goals of the shareholders and managers. This leads to the additional cost to the company and its shareholders. Since they have conflicting issues with a view to control each other, the company has to bear huge costs arising due to it. Since the owners have appointed the managers, they expect them to work in a planned manner, focusing on the growth of the organization, which in some cases, the managers might not do.  As the complexities between them increases, the organization sees a downfall due to lack of monitoring and supervision. This results in clashes and there arises a need of governance. Owners feel a need to employ a person who works in the benefit of the organization, rather than focusing on his/her personal interests. It is important to believe that both the owners and managers have equal importance to drive any organization. If the owners don’t favor the views of their managers, they cannot take concrete decisions, they cannot use their skills for the upliftment, and they cannot use their knowledge and expertise for the betterment of the organization. All this thing would benefit the owners and not the managers, and a need to design a mechanism keeping in view the owner’s interest, will arise (Kingston & Weng, 2014).

Agency theory believes in resolving problems that occur internally between the shareholders/owners and managers due to diversification of views and goals. Managers generally think in their own personal interest whereas the owners always think about strategies which will enhance the efficiency of their firm. The agency theorists believe that there is a need to identify the problems which arise between the managers and shareholders and derive suggestions for improvement.

Financial incentives should be given to the managers. If they are financially satisfied, they will work for the upliftment of the organization.

Managers who don’t work should be asked to leave as they are of no use to the firm.

There should be separate roles for the CEO and the chairman, and suggestions fromboth the parties should be welcomed.

Stewardship Theory

The stewardship theory works in contrast to the agency theory. This theory believes that managers, if allowed to work independently on their own will, they will work in the interest of the organization. They will be quite responsible for the work allotted to them. They will act as a real steward, one who protects and takes care of the needs of the others. Stewardship theory is basically based on social psychology. It focuses on the behavior of the managers working for the firm. Instead of being self-centered, they work tirelessly for the firm. Their interest will always be in favor of the firm because they have a set of goals to achieve. Also, this leads to the growth of the shareholder benefits. The managers will try to balance and satisfy all other people associated with the firm. Their motive is non-monetary, and they believe to complete the assigned tasks to the best of their capabilities. The theory focuses on empowering the organization rather than monitoring and controlling. To avoid disputes and clashes, between the shareholders and the managers, they believe in appointing a single person and a team of executives. The objective is to create a healthy environment inside an organization so that the shareholders prosper.  

However, this theory also faces few challenges:-

1. The over trust of the shareholders develops an ego among the managers. They start thinking themselves to be the owners of the firm and feel whatever they think shall be incorporated.

2. Their profile becomes very much simplified, with no pressures and terrors from the shareholders.

It is noted that giving freedom to the managers to express and explore their ideas for an organization is always good, and it will always bring progress. But at the same time, the shareholders should have equal involvement in the working of the firm. If they feel something going wrong or inappropriate, they should sit with the managers and seek for a solution.

Stakeholder Theory

 Stakeholder theory was discovered in the 1980s by Richard Edward freeman who popularized this concept. Stakeholderis the term which was introduced by the Stanford Research Institute. This term refers to groups without which the organization would not exist. Stakeholders of any firm are the suppliers, buyers, decision makers etc. The success of any organization is dependent on the stakeholder. They are of two types- primary and secondary. The primary stakeholders are the employees, suppliers, investors whereas the secondary ones are government, political groups and trade associations. The theory states that the managers and executives must work in the interest of the political groups, trade associations etc., to bring progress to the organization. They should see that the company tasks run smoothly, and external obstacles should not affect the growth of the organization(Argandoña, 2011).

Stakeholder theory shows the interconnection between the shareholders and the stakeholders. It aims at creating value for all. However, analysis says that the spectrum of this theory is quite narrow. It means that it only identifies the shareholders as an entity(Greenwood & Mir, 2018).

But it still better explains their role in an organization. Shareholders are basically the owners of any company, so we need to keep their interest first in order to maximize profits. This theory is more in focus because it displays that the stakeholders bring accountability to the company.  Stewardship theorists have always felt a possibility that agency theory and stewardship theory are true in their own aspects, but not outside them. It means what determines in one context may not be in another. This theory makes opposite formulations to the Agency theory.Stakeholders have a very strong influence on the, but they are indirectly involved in the process. It is an understanding that all stakeholders associate with the firm that in future the company will deliver remarkable profits. Stakeholders are the ones which effect the business of the organization. Stakeholder theory is an important part of CSR. This concept explains about the roles and responsibilities of the firm, whether they are economic, political or legal. The investors associated with the firm are responsible for the competitiveness in the market. If they are highly skilled and work for the favor of the firm, they can give a better future to their organization(Crane &Ruebottom, 2010).

Contributions of Steward Theory in Effective Governance

Two theories were demonstrated to focus on the principal-agent relationship. One was the agency theory and the other was stewardship theory. Agency theory has highlighted the conflicts that arise between the owners and stakeholders because both work in the direction of their personal interest which enhances the agency costs of the organization. On the contrary, stewardship theory focuses on the point that the people work for the betterment of the organization keeping their personal interests aside. They maximize the utility of the organization they are working for. Here, the owners and managers share a common interest. Even if the owners and managers are not aligned, they can enhance the utility of the company by acting on owner’s interest. Stewardship is a concept which has been beneficial for any organizations and has helped them protect the assets of the firm. Non-profit organizations do not merely make profits, but they receive enough money to achieve their targets. This clearly explains that such organizations must be following the concepts of stewardship theory where everyone has a common goal and work in the interest of the organization. And the stewards working for such firms are likely to achieve their missions even if they have less money to invest.They are more involvement oriented rather than control-oriented. They believe in operating in a collectivist culture than an individualist culture. These conditions are only possible in non-profit organizations. Contribution of stewardship theory to for – profit organizations is not much clear because such firms operate in the private sectors. Such companies make profits through its operations and are only concerned with their own interests. Such firms need to pay taxes as well, even for the money received from the donations. For-profit organizations have a single focus, i.e. the optimize the resources to their respective shareholders(Kluvers&Tippett, 2011). 

For both the organizations, stewardship theory illustrates that the goal is aligned based on shared goals and mutual trust. Since everybody working for the firm is responsible, it minimizes the risk of threats. People work for common objectives. Stewardship theory focuses on collaboration and cooperation. This theory practices organizational behavior. In case of for profit organizations, the directors manage other’s people money not as with the same care as they manage their own.

Relationship of a leader’s value and beliefs to effective governance

A leader is one who leads the organization and makes sure that the desired goal is achieved. A team is eventually identified by the leader it possesses. It is said that if the leader is no performing good, then obviously its team members will also not function properly. The two main factors of a leader which lead to effective governance is its leadership and the skills it possesses. Team working under good leadership will always set an example for the other teams(Liang, Renneboog& Sun, 2013).

Governance is decision making for an organization and the process by which those decisions are implemented. And, good governance is the set of good decisions taken by a responsible leader in the benefit of the organization. A leader’s personality has a great impact on the team as well as the organization. The way he thinks, what he thinks, how he implements, and analyses, the difficulties ensures the future of the company. A good leader must establish a vision for his company and keep motivating his employees in the direction of the goal. He must reinforce the accountability in the organization. The relation between the leader’s beliefs and his organization is very important to understand. So far, the leader is good, his organizations will run effectively. A set of beliefs and values should be understood by the organization and not as a small team of executives. For the leader and organization relation to be strong, a leader must have a power of competence. A leader is always seen as a person who is an expert and self –skilled, and likely to be admired, or followed(Rahmawati, Moeljadi, Djumahir&Sumiati, 2018). 

His competing skills can take the company towards a better future, as he will keep analyzing the problems and will find suitable solutions to it. Good leaders have an ability to observe. They observe what goes around them inside the company as well as in the external environment and take decisions accordingly. For effective governance, they always aim to build strong goal-oriented teams who have a strong desire to win from the competitors, they believe in sharing good information which is beneficial for the organization. A leader makes his team understand their roles. No matter what the objective is, they will help all their employees. For an effective governance of an organization, communication plays a major role. A leader must be highly communicative and develop that culture among his employees. If people talk healthy, keep out their personal interests and work for the organization, they are sure to achieve their targets.in today’s world, the complexities in the market are increasing. For that reason, the firms need to increase their productivity, for which they require an effective leader. A good leader must have an expertise in leadership and must set an example for his team. Here, accountability plays an important role. A leader is highly responsible for the planning, his team has done and for the policies and actions that will take place in future. Planning and implementation of policies , if done positively will bring success to the organization.(Ferguson, Green, Vaswani & Wu, 2012).

Effective Governance.



This diagram illustrates that for an organization to run effectively, it should have effective governance, which comes from the leader with good leadership qualities. He should have the ability to bind its employees and work for a set goal. As discussed in stewardship theory, they are the actual stewards, who keep their personal interests aside and help in the progress of the organization. They help their team members build good skills and keep adding new tasks and challenges to make a stronger team. The purpose of effective governance is to ensure the long-term success of the company. The shareholders and stakeholders also play a major role in determining the success of the company.


The outcome of good governance is that the company’s benefits are given prime importance. The sustainability of any organization depends on the shareholders and investors it is associated with.it is also concluded that governance may vary from country to country according to their political and social aspects. It is also observed that if the employees work for a common goal keeping their personal interests aside, the organization gets a better future.


For effective governance, it is recommended that the leader who leads the team should be efficient enough to handle all tasks and new challenges coming on his way. He must be an example for his team members. He should work in the interest of the organization. There should be healthy relation between the principal and the managers working for the firm. Whatever policies are made for the betterment of the firm must be enforced to get the real output. At both the financial and political grounds, there must be transparency among the employees of the organization. The entire team should have a good understanding, and everyone should be given the liberty to speak and explore their ideas. It is also recommended to have a deep commitment for a firm and always work for its betterment.If people at all levels work tirelessly and enthusiastically, without their personal interests, the organization will succeed.

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