Agency Theory : A Important Function Of Board

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2.5 Agency theory: Another important function of board is to monitor the managers’ behaviour. Agency theory states that the interest of manager conflicts with that of shareholders and managers may behave opportunistically to pursue self-interest and harm the corporate performance (Jiraporn et al, 2008). The board of directors act as internal control mechanism to monitor managers which include CEO and executive directors. Prior researches offer the three main reasons of the conflicts between shareholders and managers. Firstly, managers tend to put emphasise on investing cash flows regarding paying dividends, though this investment do not have much profitable return in the future. This tendency may be caused by the more wages, reputation…show more content…
It requires that boards of all companies listed in the U.S. should consist of a majority of members of independent directors in order to enhance internal control. Although independent directors are directly hired by the votes of shareholders, they does not belong to the employees of the company. It is expected that they are able to take the fiduciary responsibility to monitor management at the best interests of shareholders. Similarly, the U.K also enacts relevant regulation, corporate governance code (Council, 2010), which requires the U.K. listed companies at least contain one third non-executive directors on the board in order to effectively monitor the management behaviours. Although governments enhance the manager-monitoring function and corporate reliability within companies by increasing the number of outside directors on boards, it is unknown whether there is a positive relationship between the higher proportion of outside directors and corporate performance. 2.6 Stewardship theory: Stewardship theory supporters reject that top managers behave opportunistically in order to pursue their best interests. Because their behaviour is not solely associated with financial stuff, but non-financial stuff as well. For instance, they will meet their spiritual needs and satisfaction through completing some challenging works, or they will put emphasis on the long-term career prospects and their reputation factors. They would prefer maximise
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