Corporate Governance Lecture Notes

Introduction

• Overview of corporate governance theories
• Importance of understanding agency theory before studying stewardship theory
• Focus on stewardship theory in this lecture

Stewardship Theory

• Explains the relationship between management (stewards) and shareholders
• Key Point: Managers are seen as stewards, not agents

Arguments of Stewardship Theory

• Challenges the monitoring role of the board of directors as proposed by agency theory
• Management should be responsible for corporate governance
• Board of directors should support and assist management, not control
• Directly challenges behavioral assumptions of agency theory

Assumptions of Stewardship Theory

• Psychological factors motivate management to act in shareholders' best interest
• Management identifies with the corporation
• Power used by management is seen as a positive reinforcement

Model of Man

• Describes management as self-actualizing individuals
• Intrinsic motivation (e.g., organizational growth, self-actualization)
• Managers take organizational success personally

Use of Power

• More autonomy for management leads to better organizational performance
• Management seen as integral to organizational success

Recommendations on Board Composition

• CEO Duality: One person as CEO and chairperson
• Higher proportion of inside or executive directors
• Risks: Lack of clear role definition and accountability

Conclusion

• Encouragement to explore both agency and stewardship theories further
• Questions to ponder:
  • Limitations of each theory?
  • Which theory best describes corporate governance relationships?
• Invitation to watch future videos on corporate governance theories