The growing body of literature on corporate governance imperatives and their impact on modern-day corporate management has given rise to several philosophies and theories on the best possible methods of managing companies through representation on the board level.
From the days of yore when business merchants had to balance and manage every aspect of their business to contemporary times where there is a clear dichotomy between, corporate governance and leadership have both evolved from mundane autocratic leadership to a regime that is both progressive and accountable.
The evolution of corporate governance leadership began between 1343 and 1400 under the auspices of the English writer and philosopher Chaucer, who first used the word “governor.” This title did not gain widespread prominence, however, until the early 1980s when the need arose to create a separate ownership or membership from the management control of companies.
The introduction of this role has injected increased leadership efficiency in organizations, not least at the board management level where a lot of strategic decisions and policy formulation take place. There have been varied definitions ascribed to corporate governance based:
- A clear statement of the company’s purpose
- An action plan based on available resource
As discussed in earlier paragraphs human resource planning. Therefore, in drafting HR planning as well consideration:
- Ensure that the plan contributes something plan
- Ensure that human resource programs satisfaction
- Convert business objectives in to strategic
The simplest definition adopted in several management and leadership models is that corporate governance is the way power is exercised over corporate entities through representation at the board level. In our analysis of the governance, we stated that one of the historical imperatives that gave rise to corporate governance was the need to dichotomy the relationship between ownership of companies and its management. In essence, the governance and leadership at the board level represent the shareholders and act and make decisions on their behalf. This leadership arrangement has cut out the ugly phenomenon of always having shareholders unduly interfering in the daily running of the organization.
Corporate governance and leadership structures have made directors at the board level act as a buffer between management and shareholders. They are directly responsible for establishing the organization’s directions, strategy formulation, and policies. They are also responsible for supporting management while simultaneously being accountable to shareholders as well.
Several theories and philosophies have been utilized in corporate governance and leadership practice over the years, but the most noticeable ones that have stood the test of time are two major models known as the agency model and the stewardship model.
AGENCY THEORY:
This theory was propounded by Adam Smith in 1776. The underlying assumption for this theory is that:
1. Directors representing shareholders on boards naturally cannot be trusted to manage the company’s affairs at the board level as efficiently as they would have done for their own companies.
2. Human beings are inherently inclined to seek their own self-interests and preservation before any other consideration.
Thus, this theory recognizes the frailties in humans at the board leadership level in their ability to act on behalf of their principal. To remedy the situation, shareholders mainly appoint agents to keep their representatives on the boards in check. These appointed agents are mostly independent-minded people who checkmate the activities of the directors and then report back to shareholders. They mostly operate in capacities such as auditors or compliance officers of the board, and their primary duty is to evaluate the effectiveness of the controls put in place at the board leadership level and report their findings to shareholders.
Agency theory ensures greater transparency and accountability in the activities at the directors’ level. The knowledge that one is being monitored at the board level is enough to keep everyone on alert.
With agency theory, it has become much easier to separate the role of the CEO from the chairman of the board, a function that hitherto had been abused frequently due to the absence of any practical method of oversight.
STEWARDSHIP:
The philosophical underpinning for the stewardship concept includes:
1. Operation of a free-market system where leaders at the board level are to be given the needed latitude to make independent decisions with no recourse to external sources.
2. Directors are deemed to be a breed of people who have a fiduciary duty towards their shareholders and are therefore expected, at all times, to act in good faith and consider the best interest of shareholders while assuring them of appropriate returns on their shares.
The stewardship model, unlike the agency model, gives leadership at the board management the leeway to fashion out policies and strategies for companies on their own terms. The reporting lines in this instance is the natural order where the appointed directors are held accountable to the appointing authority, which is the shareholders.
Stewardship, as the word depicts, requires individuals entrusted with responsibilities at the board management level to live above reproach with little or no supervision. They are expected to allow good conscience to always guide them in making decisions on behalf of their shareholders.
Proponents of stewardship governance theory are of the opinion that once shareholders pick someone to represent them at the board level, they should be accorded the needed independence to execute the task at hand without resorting to unnecessary interference that may stifle creativity and informativeness from board directors. Even though its efficacy may not be absolute in running an organization’s board management, it has resulted in some degree of success in several organizations sampled from the United States. For instance, American billionaire and chairman of Microsoft, Bill Gates, had to resign his position as chairman of his own company to give the existing directors of the company the freedom to manage the firm according to their individual skills and competencies. Monitoring from afar after resigning as chairman, he could still keep tabs on their teamwork and saw that their cohesion was seamless when he parted ways with them.
Because this system is not absolutely foolproof, some minor types of checks may also be deployed, but they need not be as stringent as what is entailed in the agency model.
In summary, it is worth noting that whether a company uses the agency or stewardship model, corporate governance and leadership structure have come to stay as a forward-looking leadership model that ensures the effective participation of shareholders in oversight responsibilities of the organization through representation at the board level. It serves as a proxy role that, when exercised seamlessly, makes for effective organizational management.
Author:
Phidelia Johnson is a global Human Resources Practitioner with eighteen years of leadership success. With a focus on streamlining Human Resources administration, she’s well-equipped to find the right solution to a myriad of concerns. Her experience as a commercial business leader gives her a unique ability to advocate for both the employer and the employee.
In her down time, Phidelia is a master of her kitchen, creating wonderful dishes filled with passion and flavor. If she’s not cooking delicious food, she’s stretched out with a good book. She hopes to use her experience to help others, guide company leaders to best practices, and help build better professionals and stronger organizations.