Contemporary Corporate Governance Issues - Coursework Example

The paper 'Contemporary Corporate Governance Issues" is a perfect example of business coursework. The corporate governance has been theorized between stakeholder and the shareholder perspectives. Most debates have argued on the practicability of the models in combating issues such as social irresponsibility, abuse of managerial power and fraud taking place in corporate organizations as noted by Jensen (2003, p.3). Corporate governance entails creating effective mechanisms to ensure that the expectation of the shareholders is satisfied (Kim and John, 2007). Moreover, the corporate governance covers many aspects related to theories, concepts, and practices of the board of directors, and their executive and non-executive directors. It concentrates on the relationship between boards, other stakeholders, top management, regulators, stockholders, and auditors. The relative effectiveness and efficiency of corporate governance system have a profound effect on how well a business performs.

Various supporters have taken the centre stage in justifying their rationality and superiority. While Bhagat and Bolton (2008, p.261) argue that the major aim of the corporation is to make a profit, the corporate social responsibility theorists have based their arguments on the normative perspective in the business ethics perspectives. This paper gives a critical analysis of the corporate governance models and the approaches they have presumed. Corporate governance is categorically divided into two paradigms namely, the stakeholders and the shareholders as noted by Letza, Sun, and Kirkbride (2004, pp.242-250). The shareholders presume that the corporation involves the participation of the shareholders to maximize their interest which are the investments on returns.

Principal-agent model

This model focusses on the maximization of the wealth of the given shareholders. This model conforms to the separation of the ownership to the control functions in the corporation. The model renders that, it may oppose any interventions emanating from external forces. The shareholders do not fully control of the organization (Lubrano, 2010). The market efficiency tends to take the centre stage in its governance. The problems are solved by eliminating the restrictions on the markets.

Under this model, the issue of corporate governance equals the problem agents’ self-interest behavior in a universal principal-agent relationship. This means that the principal who is the shareholder, delegates work to the agent (manager) who then performs the work on behalf of the principal as noted by Jensen (2003, p.34). The theory asserts that agents will not always have the shareholders’ best interests at heart, that they cannot be trusted. They may pursue personal interests at the expense of the shareholders unless closely monitored.

However, there are certain challenges encountered in the relationship. In addition, this model faces the agency problem in its mode of governance. Firstly, it is difficult and expensive for the principal to monitor the agents’ behavior and routine actions. This leads to the incurrence of management costs as owners attempt to ensure that, managers act in the owners best interests. Secondly, due to different attitudes towards risk, there is a difference in taste between the owner and manager. All social relations in this model are minimized to a set of contracts between principals and agents (Macey, 2008). Contractual relations between shareholders, suppliers, customers, creditors and other stakeholders are the essence of the firm. As a result, written contracts are encouraged. This provides safeguards and aligns the interest of both the principal and the agent.