Corporate governance - Coursework Example

It is consisted of rules, which govern the relationships between stakeholders, shareholders and management (Ching et al, 2006). In the 1980s and early 1990s, some huge corporate scandals shocked the entire commercial world. Majority of the investors had lost their confidence over management of their investments; the entire commercial world was filled with distrust. To control this damage, different approaches are used such as corporate governance. In UK, Combined Codes consisting of various reports has been developed-Cadbury, Higgs, Smith, Greenbury.

These reports discuss how a Board of Directors should operate; what role non-executive directors can play; how the external auditor should be strengthened and so on. Stakeholder approach and corporate governance Stakeholder theory is defined as any group or individual who can affect or is affected by the achievement of the organization’s objectives (Abdullah and valentine, 2009).Stakeholder approach defines an organisation being a member and citizen of society, enjoys a protection, benefits and so on.

On the basis of this concept, organisations being a member of the society are remain accountable to all the stakeholders such as environmental groups, customers, governments, regulatory authorities, indigenous population and so on. Additionally, Wheeler et al (2002) contend that the stakeholder theory is derived from a collection of the organisational and sociological disciplines; where all groups participate to obtain benefits in a business (Donaldson & Preston, 1995). The supporters of stakeholder theory strongly believe on the concept and application of corporate governance; they require organisations are needed to be accountable for their all commercial activities to the stakeholders.

Since the supporters of stakeholder theory strongly believe on corporate governance, a CEO chairing a board, may be working at the cost of other stakeholders. Advantages: stakeholders approach and corporate governance Transparency and accountability benefit both stakeholders and organisations. Stakeholders receiving information that an organisation is clearly publishing all its commercial activities and informing to all stakeholders, would be in a position to critically monitor the activities of the organisation.

They can easily highlight detrimental impacts and can warn the organisation about its consequences. The organisation would also enjoy the trust of all stakeholders. This may increase its sales volume. Disadvantages: stakeholders approach and corporate governance Additional cost may be borne by an organisation. Since collecting data of sustainability reporting and other non commercial information do not come without cost, the organisation may be required to pay some additional cost. Additionally, for the organisation to satisfy every stakeholder may not be possible, this might result in additional loss of time as well.

Agency approach and corporate governance Agency theory was exposited by Alchian and Demsetz (1972) and was further developed its economic roots by Jensen and Meckling (1976).Agency is a relationship between a principal (a Shareholder) and an agent (a Director) (Siegel, 2000). Principals delegate their business running to the directors, who are the shareholder’s agents (Clarke, 2004). Also, this theory is conceptually simple and it suggests that managers in organisations can be self- interested (Daily et al, 2003).Under this