The paper reviews three important theories in corporate governance, different theories using different terminology, and views corporate governance from different perspective. Some articles are used to support these theories in this paper. From the Cadbury Report in 1992, we can get the information that corporate governance is the system by which companies are directed and controlled, which involves a set of relationship between a company’s management, its board, its shareholders and other stakeholders, and the objectives for which the corporation is governed. There are mainly three important theories included in corporate governance, which are agency theory, transaction cost theory and stakeholder theory, each theory views corporate governance from different perspectives. These three theories play significant roles in understanding the corporate governance and helpful for people to know how the corporate governance developed.
2. Agency theory
Agency theory is a concept that explains why behavior or decisions vary when exhibited by members of a group. It describes the relationship between two parties (principal and agent) and explains their differences in behavior or decisions by noting that two parties often have different goals and different attitudes toward risk. The concept of agency theory originated from the work of Adolf Augustus Berle and Gardiner Coit Means, they discussed the issues of the agent and principle as early as 1932. Berle and Means explored the concepts of agency and their applications toward the development of large corporations. They saw how the interests of the directors and managers of a given firm differ from those of the owner of the firm, and used the concepts of agency and principal to explain the origins of those conflicts. Michael C. Jensen and William Meckling shaped the work of Berle and Means in the context of the risk-sharing research popular in the 1960s and 1970s to develop agency theory as a formal concept. Jensen and Meckling formed a school of thought arguing that corporations are structured to minimize the costs of getting agents to follow the direction and interests of the principals. Agency theory is concerned with resolving problems that can exist in agency relationships; that is, between principals (such as shareholders) and agents of the principals (such as company executives). There are two problems that agency theory addresses, which are firstly, the problems that arise when the desires or goals of the principal and agent are in conflict, and the principal is unable to verify what the agent is actually doing; and secondly, the problems that arise when the principal and agent have different attitudes towards risk. Because of different risk tolerances, the principal and agent may each be inclined to take different actions. 2.2 Article 1
From the thesis Agency Theory and Its Consequences, written by Thomas Rüdiger Smith. Through the article “Although the findings cannot be conclusive, certain trends were spotted that gave support to the fact that the application of some agency theory tools may indeed increase risk taking. The negative influence of board size on risk-taking falls directly in line with the proposed agency logic that larger boards are more easily controlled by the manager and therefore less prone to take on risk. Additionally, it was found that the presence of stock based compensation plans, as proposed by agency theory, did indeed help increase the risk profile of the bank. However independent boards did make fewer loans, which could hint at the fact that independence does not equate shareholder primacy. The breakdown of knowledge into three measures provided both conflicting and confounding results, as collinearity could not completely be removed.” “Thereby the REMM is largely similar to the economic model of man, which assumes that humans are rational, selfishly motivated and will behave opportunistically, even ruthlessly,...
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