Theories of Corporate Governance

Comprehensive practice flashcards covering the four major theories of corporate governance: Agency, Stakeholder, Stewardship, and Shareholder theories.

What are the four theories of corporate governance discussed in the lecture?

The agency theory, the stakeholder theory, the stewardship theory, and the shareholder theory.

In Agency theory, who are the 'principals' and who are the 'agents'?

Principals are the shareholders, and agents are the managers or executives.

According to Agency theory, what is the relationship between managers and the owners' best interests when goals diverge?

It assumes that managers may not always act in the best interest of the owners.

What is the first assumption of Agency theory regarding manager motivation?

Managers are self-interested and may pursue personal gain over shareholder value.

According to the second assumption of Agency theory, what authority do shareholders delegate?

Shareholders delegate decision-making authority but seek to align agents' behavior with shareholder goals.

What monitoring mechanisms are suggested by Agency theory to reduce agency costs?

Performance-based pay, board oversight, and audits.

How does Stakeholder theory broaden the focus of corporate governance?

It looks beyond shareholders to include all stakeholders affected by a company's actions, such as employees, customers, suppliers, local communities, and governments.

According to Stakeholder theory, on what does a company’s success depend?

Its ability to create value for all its stakeholders.

What does Stakeholder theory assume about ethical obligations?

Ethical obligations exist beyond maximizing shareholder wealth.

According to Stakeholder theory, how should companies approach social responsibility and conflicting interests?

Companies have a social responsibility and should balance conflicting interests.

How does Stewardship theory view managers in contrast to Agency theory?

It assumes managers are trustworthy stewards of corporate assets who are naturally motivated to act in the best interest of the shareholders and the company.

What factors intrinsically motivate managers according to Stewardship theory?

Duty, loyalty, and performance, rather than just personal gain.

What does Stewardship theory assume about the conflict of interest between shareholders and managers?

It assumes there is no conflict of interest between shareholders and managers.

What is the outcome of empowering managers according to Stewardship theory?

Empowering managers leads to better results than strict controls and supervision.

Which economist is popularly associated with Shareholder theory?

Milton Friedman.

What is the primary responsibility of a company according to Shareholder theory?

The primary responsibility is to its shareholders, and its main goal is to maximize shareholder wealth.

What is the first assumption of Shareholder theory regarding the purpose of business?

The sole purpose of business is to generate profits for its owners.

According to Shareholder theory, who should address 'sole issues'?

Governments and NGOs, not companies.

To whom is accountability limited under Shareholder theory?

Accountability is to shareholders only.