An Examination of Corporate Governance Theories and Their Role in Preventing Business Scandals

An Examination of Corporate Governance Theories and Their Role in Preventing Business Scandals

Table of Contents 1.Introduction ....................................................................................................................... 4 2.Corporate Governance, CSR, and Sustainability ............................................................ 4 2.1 Concept of CSR .......................................................................................................... 5 2.2Relationship between Corporate Governance and Sustainability ................................. 5 3. Theoretical Framework .................................................................................................... 6 3.1 Agency Theory ............................................................................................................ 6 3.1.1 Key Principles of Agency Theory ....................................................................... 7 3.1.2 Assumptions of Agency Theory .......................................................................... 7 3.1.3 Strengths and Weaknesses of Agency Theory .................................................. 7 3.2 Stewardship Theory .................................................................................................... 8 3.2.1 Key Principles of Stewardship Theory ................................................................ 8 3.2.2 Assumptions of Stewardship Theory .................................................................. 8 3.2.3 Strengths and Weaknesses of Stewardship Theory ........................................... 9 4. The Real-Life Business Scandal ...................................................................................... 9 4.1 Introduction to the Enron Scandal ............................................................................... 9 4.2 Reasons for the Enron Scandal ................................................................................ 10 4.2.1 Information Asymmetry and Lack of Transparency .......................................... 10 4.2.2 Self-Interest and Incentives .............................................................................. 10 4.2.3 Weak Corporate Governance and Oversight ................................................... 10 4.3 Consequences of the Enron Scandal ........................................................................ 11 4.3.1 Financial Losses .............................................................................................. 11 4.3.2 Regulatory Reforms ......................................................................................... 11 4.3.3 Erosion of Trust ................................................................................................ 11 4.3.4 Legal Consequences ....................................................................................... 11 4.3.5 Lessons Learned ............................................................................................. 11 5. Agency Theory Application ........................................................................................... 12 5.1 Application of Agency Theory ................................................................................... 12 5.1.1 Clear Incentive Alignment ................................................................................ 12 5.1.2 Monitoring and Transparency .......................................................................... 12 5.2 Failures in Applying Agency Theory .......................................................................... 12 5.2.1 Weak Board of Directors .................................................................................. 12 5.2.2 Lack of Accountability and Ethics ..................................................................... 13 5.2.3 Inadequate risk The executives ........................................................................ 13 5.3 Lessons from the Enron Scandal .............................................................................. 13 6. Stewardship Theory Application ................................................................................... 14 6.1 Application of Stewardship Theory ............................................................................ 14 6.1.1 Intrinsic Motivation and Moral Initiative ............................................................ 14 6.1.2 Trust and Collaboration .................................................................................... 14 6.1.3 Long haul Viewpoint ......................................................................................... 14 6.2 Failures in Applying Stewardship Theory .................................................................. 15 6.2.1 Lack of Moral Administration ............................................................................ 15 6.2.2 Erosion of Trust ................................................................................................ 15 6.2.3 Transient Concentration ................................................................................... 15 1

1.Introduction The corporate governance persistently encourages the ideas of the board of directors for a new policy. They are preferably open to re-discuss, modifying, and creating layers of regulations to the old policy. Their major agenda is to involve the stakeholders, marketers, and the business partners in every major operation by the government. Corporate governance is known as the operations that help a system, work, or any form of operation run under the right set of rules. The core operations of the corporate governance are up for modifications as per the technological ground(Madhani, 2017). The CSR rules and co- partnership of both dimensions follow this. The stakeholders and the shareholders play an important role in the corporate bills and are welcome to suggest changes. There are many proxy advisory firms that advise the shareholders on how to vote in the corporate governance matters. These votes are then contributed to the ongoing process of decision- making.Every work operation, impact, output, and the design of every mechanism used depends upon corporate governance (Bae, Masud and Kim, 2018). This can create changes, mould the system, and bring about modifications for the betterment. The rule of corporate governance does not work on any moral concepts or immoral concepts. This solely creates a framework on the ground of the system that is required at a particular set of times. It can be fully sustainable, eco-friendly, or work completely through the understanding of business perspectives (Steinfeld, 2023).A complete regulatory force captures the activities of CSR under the guided rules of corporate governance. It is all subject to proper regulation, and divided occupation for each area work of the CSR. Therefore, it sustains the project's most integral parts. A slight difference that the legal authorities see in the context of economic changes, architectural changes, and property dispute possibilities can affect the proceedings. In case if CSR conflicts with the governance stature, it makes the right efforts to discuss and manage the CSR framework with the alignment of legal formalities (Steinfeld, J.M., 2023). 2.Corporate Governance, CSR, and Sustainability Corporate governance does regulate the legislative rules in its criterion, hence it is named as a form of governance. Even corporations have the freedom to think from a free perspective about what measures they can imbibe and also the types of operations, products, systems, and engineering forces they will implement into their procedures. Remember, that this is a governing body and holds the core rights to run a system with its rules adhered to government guidelines(Shi, Connelly and Hoskisson, 2016). In modern times, most 3

corporate governance is delving into technology-driven means. Still, the idea that is making many corporations adapt to the sustainable system is taking a huge rift (Chen, C., Wang, D. and Wang, B., 2023). A core part of the entity or business is the employees and the executives.CSR always focuses on the commitment made to the environment, and society and goes beyond the legal needs to serve better. Corporate governance always ensures that the interest of stakeholders, customers, suppliers, and shareholders is adhered to. It involves the engagement of the stakeholders to understand the issues about social and environmental domains (Shukla, S., Kapoor, R., Gupta, N. and Arunachalam, D., (2023). 2.1 Concept of CSR Corporate Society Responsibility is the major aspect that impacts corporate governance as well as sustainable practices. The advanced innovations that have been coming into the technological fields have also been innovated enough to accept the idea of sustainability, and environment-friendly operations (Bjurstrøm, 2020). This is making corporate governance in adapting the ideologies of corporate society responsibility (CSR).Creating a trust factor among the stakeholders, auditors, company verifiers, and environmental officials creates a better view to check their authenticity. This not just creates their brand image better in the market but also invites better proposals (Harrison, V.S., 2023). The inside community between stakeholders, companies will get aware of the corporate governance style of an entity. It will have a greater impact on their relations. Maintaining a transparent work structure is also the main norm that Corporate governance should rule by. It not just provides the benefit of ruling the business or the corporation (Steinfeld, 2023). 2.2Relationship between Corporate Governance and Sustainability Sustainable development has a greater influence on the CSR structure. It is almost impossible for CSR to run effectively without the adaptability of sustainable development. The core practices and ideology has become the main tool that is making CSR more established in the coming technologies. There are more companies, governance policies, and legislative rules that support the law of sustainable development. This on the other hand makes the corporate governance in adhering to those policies and technologically adaptable framework. It creates a massive outreach for CSR to practice its way, funding, and initiatives on the groundwork through more authority (Jasir et al. 2023). This creates a better brand for the business and also opens doors for communication and lending projects to the environmental departments and entities.The core functioning of a CSR resides on the moral competencies, and values delivered to the society. CSR is meant to focus on the benefits they provide to society. Each act of the CSR must be performed under the stringent regulation of transparency. The economic aspects that are running corporate governance are quite restricted by their set standard. A slight enhancement in the ongoing process of 4

3.1.1 Key Principles of Agency Theory Agency Theory, an essential idea in corporate governance, bases on the relationship among principals and agents inside an association. The center principles of Agency Theory include: ● Principal-Agent Relationship: Agency Theory spins around the principal-agent issue, where the principal (generally investors) delegates position to agents (commonly supervisors) to follow up for their sake. ● Information Asymmetry: It accepts that information among principals and agents isn't impeccably shared, prompting possible struggles due to contrasting information levels(Payne and Petrenko, 2019). ● Self-Interest: The theory places that agents often act to their greatest advantage, possibly prompting conduct that doesn't line up with the principal's goals. 3.1.2 Assumptions of Agency Theory To investigate and anticipate the way of behaving of agents and principals, Agency Theory makes a few assumptions, including: ● Rationality: Agents and principals are thought to be judicious entertainers pursuing choices to amplify their utility(Schlesinger and Doherty, 2020). ● Goal Divergence: There is an intrinsic divergence of goals between agents (profit augmentation) and principals (abundance boost). ● Costs and Monitoring: Costs related with monitoring agents are thought of, as are instruments to relieve agency costs. 3.1.3 Strengths and Weaknesses of Agency Theory Strengths of Agency Theory ● Lucidity and Straightforwardness: Agency Theory gives an unmistakable framework to understanding the principal-agent relationship, making it a significant device for investigation(Panda and Leepsa, 2017). ● Prescient Power: It has prescient power in making sense of conduct in numerous hierarchical settings. ● Motivating force Arrangement: By perceiving expected clashes, it advances the arrangement of motivators among principals and agents. 6

Weaknesses of Agency Theory ● Overemphasis on Self-Interest: Pundits contend that it distorts human conduct by accepting that people are fundamentally propelled by self-interest. ● Restricted Prescriptive Power: While it makes sense of issues, it doesn't recommend explicit answers for further developing governance(Schaefer, 2019). ● Disregard of Trust: It often dismisses the significance of trust and the more extensive social setting in corporate governance. 3.2 Stewardship Theory 3.2.1 Key Principles of Stewardship Theory Stewardship Theory presents a differentiating perspective to Agency Theory by zeroing in on the positive parts of the principal-agent relationship. Key principles of Stewardship Theory include: ● Intrinsic Motivation: Stewardship Theory expects that agents, at times, might be intrinsically persuaded to act to the greatest advantage of the principal(Schillemans and Bjurstrøm, 2019). ● Trust and Participation: It underscores trust, shared goals, and collaboration among principals and agents. ● Long haul Point of view: Stewardship Theory advances a drawn out point of view, where agents go about as stewards of the association, shielding its interests. 3.2.2 Assumptions of Stewardship Theory Stewardship Theory works under a few assumptions, for example, ● Shared Values: Agents and principals share normal qualities and goals, decreasing the requirement for intricate monitoring systems. ● Trust and Correspondence: There is an innate trust and correspondence in the principal-agent relationship, which encourages collaboration(Torfing and Bentzen, 2020). ● Long haul Concentration: Agents are roused by long haul authoritative achievement and not simply momentary monetary profits. 7

Figure : Eron scandal impact on market share (AppliedCG, 2016) 4.2 Reasons for the Enron Scandal The Enron scandal had a few underlying drivers, a significant number of which can be understood from the perspective of Agency Theory: 4.2.1 Information Asymmetry and Lack of Transparency Enron's financial dealings were incredibly complicated, involving off-asset report associations and innovative accounting practices. This haziness made a critical information asymmetry between the company's initiative and its investors. The chiefs approached itemized financial information, while investors, who depended on open financial reports, were kept in obscurity about the genuine financial strength of the company(Li Way Lee and Keathley, 2022). 4.2.2 Self-Interest and Incentives The initiative at Enron was intensely incentivized to support the company's stock value, which was to a great extent attached to their pay. This incentive design, which energized momentary gains to the detriment of long haul solidness, prompted dishonest way of behaving, including the conscious control of financial information to inflate the stock cost. 4.2.3 Weak Corporate Governance and Oversight Enron's top managerial staff, in many cases, flopped in their obligation to give sufficient oversight. Some board individuals had irreconcilable situations or lacked the independence 9

expected to challenge the executives choices. This lack of powerful governance instruments permitted the scandal to persevere(Awolowo et al., 2018). 4.3 Consequences of the Enron Scandal The consequences of the Enron scandal were sweeping and included: 4.3.1 Financial Losses Investors and representatives experienced critical financial losses as Enron's stock cost plunged. Retirement savings and investments were cleared out for some individuals. 4.3.2 Regulatory Reforms The scandal provoked significant regulatory reforms, including the section of the Sarbanes- Oxley Act in 2002. This regulation introduced stricter accounting and reporting prerequisites for public organizations, with an emphasis on enhancing corporate governance and transparency. 4.3.3 Erosion of Trust The scandal harmed public trust in organizations, financial markets, and auditors. It featured the requirement for moral way of behaving and responsibility within the business world(Benson, 2022). 4.3.4 Legal Consequences A few Enron chiefs, including President Jeffrey Skilling and Director Kenneth Lay, confronted legal consequences. Skilling and Lay were sentenced for various charges, including extortion and scheme. 4.3.5 Lessons Learned The Enron scandal fills in as a useful example, emphasizing the significance of vigorous corporate governance and moral initiative. It underlines the requirement for straightforward financial reporting, cautious oversight, and a corporate culture that focuses on long haul sustainability over momentary gains(Payne and Petrenko, 2019). In outline, the Enron scandal fills in as an obvious illustration of how corporate governance disappointments, as seen from the perspective of Agency Theory, can prompt devastating consequences. This case highlights the basic job of powerful governance components and moral administration in preventing corporate scandals and maintaining the trust of investors and the general population. 10

initiative, undermining their independence. This weakened the board's capacity to actually monitor and challenge the executives choices.A legitimate application of Agency Theory would have required a board of directors with a different creation, including independent directors who were not financially trapped with the chiefs. This would have worked with more thorough oversight and tested possibly destructive choices. 5.2.2 Lack of Accountability and Ethics Agency Theory expects that agents might act in their self-interest, necessitating systems to consider them responsible. At Enron, there was a lack of accountability and an erosion of moral lead among chiefs. The company's way of life focused on financial gain over genuineness and integrity.A successful application of Agency Theory would have instilled a culture of accountability and moral way of behaving. This might have been accomplished through hearty sets of rules, informant security, and a corporate climate that compensated long haul esteem creation and integrity(Awolowo et al., 2018). 5.2.3 Inadequate risk The executives Another part of Agency Theory is risk the board. In the Enron case, the company took part in high-risk financial practices, often without legitimate exposure. The lack of hazard appraisal and moderation instruments added to the company's destruction.A more compelling application of Agency Theory would have mandated complete gamble evaluation and relief techniques. This would have included straightforward revelation of financial dangers and the reception of practices that minimized those dangers. 5.3 Lessons from the Enron Scandal The Enron scandal offers a sobering example in the consequences of inadequately applying Agency Theory. The misalignment of incentives, lack of monitoring, weak corporate governance, and moral passes generally assumed vital parts in the scandal. It exhibits the requirement for a strong application of Agency Theory to forestall such corporate disasters. All in all, the Enron scandal features the basic significance of appropriately applying Agency Theory in the realm of corporate governance. Successful alignment of incentives, thorough monitoring, major areas of strength for an independent board, accountability, ethics, and chance administration are imperative parts that, whenever carried out, might have deflected the scandal. By learning from the failures of Enron, associations can all the more likely apply Agency Theory to advance mindful corporate way of behaving, transparency, and long haul sustainability. 12

6. Stewardship Theory Application Stewardship Theory, with its attention on trust, collaboration, and intrinsic motivation within the principal-agent relationship, offers an elective point of view for analyzing the Enron scandal. In this part, we will examine how Stewardship Theory might have been applied to forestall the scandal and talk about the areas where it was disregarded or inappropriately applied, contributing to the Enron scandal. 6.1 Application of Stewardship Theory 6.1.1 Intrinsic Motivation and Moral Initiative Stewardship Theory proposes that individuals, as stewards, might be intrinsically roused to act in the wellbeing of the association. The application of this theory at Enron would have required moral initiative that accentuated long haul authoritative wellbeing over transient financial gains. Leaders ought to have been urged to think about the moral ramifications of their choices and their impact on the company's standing and partners(Clark and Demirag, 2002).Stewardship Theory's emphasis on intrinsic motivation likewise proposes that fostering a feeling of pride and obligation among representatives can forestall untrustworthy way of behaving. By empowering workers to get a sense of ownership with the association's prosperity, a culture of accountability and moral lead might have been developed at Enron. 6.1.2 Trust and Collaboration Stewardship Theory highlights the meaning of trust and participation among principals and agents. In the Enron case, trust was woefully lacking. The complex financial designs and off- monetary record elements were intended to delude investors and regulators. A legitimate application of Stewardship Theory would have focused on trust-building components like transparency, open correspondence, and moral direct.Collaboration among representatives and initiative, as upheld by Stewardship Theory, might have advanced a more moral corporate culture. Encouraging representatives to voice concerns, team up on navigation, and feel a feeling of responsibility in the association could have forestalled the scandal. 6.1.3 Long haul Viewpoint Stewardship Theory advances a drawn out viewpoint where agents act as stewards of the association, safeguarding its interests for people in the future. In the Enron case, leaders zeroed in on transient financial gains, often to the detriment of the company's drawn out sustainability.The appropriate application of Stewardship Theory would have involved creating an authoritative culture that esteemed the drawn out prosperity of the company. Chiefs might have been urged to consider the moral, ecological, and social impacts of their choices and focus on the association's standing and sustainability. 13

All in all, the Enron scandal gives a distinct illustration of the consequences of neglecting Stewardship Theory's principles. The application of Stewardship Theory, focusing on intrinsic motivation, trust, collaboration, and a drawn out point of view, might have forestalled such a corporate calamity. By embracing this theory, associations can encourage a culture of liability, moral direct, and sustainability, eventually mitigating the dangers of corporate scandals(Clark and Demirag, 2002). 7. Comparative Analysis of Theories Agency Theory and Stewardship Theory are two distinct ways to deal with understanding and addressing corporate governance issues. Every theory offers special insights and points of view, making them reasonable for various settings. In this part, we will analyze the effectiveness of these theories and examine scenarios where one may be more appropriate than the other. Effectiveness in Addressing Corporate Governance Issues Agency Theory: Agency Theory is profoundly successful in addressing corporate governance issues where there is a critical gamble of irreconcilable circumstances among principals and agents. This theory gives an organized framework to understanding and mitigating these struggles, fundamentally through the alignment of incentives and the execution of monitoring and control instruments. Agency Theory succeeds in settings where trust is restricted, and where there is a need to safeguard the interests of investors. It is especially significant in public corporations where investors depend on leaders to pursue choices for their benefit. Stewardship Theory: Stewardship Theory, then again, is viable in addressing corporate governance issues when trust and collaboration are key parts of hierarchical achievement. This theory perceives that not all agents act exclusively in their self-interest and stresses the significance of intrinsic motivation. Stewardship Theory is especially significant in settings where there is areas of strength for an of shared values and long haul goals. It advances a culture of liability, moral way of behaving, and an emphasis on the association's prosperity. It is often appropriate to secretly held firms, privately-owned companies, and nonprofit associations. Scenarios for Applicability Agency Theory: Agency Theory is more reasonable in circumstances where there is a high gamble of pioneering conduct by agents. This includes scenarios where there is a lack of trust among principals and agents or when financial interests are skewed. It is exceptionally 15

applicable in public corporations with scattered proprietorship, where investors might have restricted command over administrative choices. For instance, in a huge multinational partnership, where investors are different and might not have direct involvement in everyday tasks, Agency Theory helps in setting up control systems and aligning incentives(Payne and Petrenko, 2019). Stewardship Theory: Stewardship Theory is more reasonable in settings where trust, collaboration, and intrinsic motivation are pervasive. It is exceptionally applicable in family- possessed businesses, associations, or circumstances where proprietors are actively involved in administration. For instance, in an intently held privately-owned company, where proprietors and chiefs have shared values and long haul obligation to the association's prosperity, Stewardship Theory can be applied successfully. It urges pioneers and workers to act as stewards of the business, emphasizing liability and moral direct. 8. Conclusion The comparative analysis of Agency Theory and Stewardship Theory gives significant insights into the multi-layered world of corporate governance. These two theories offer distinct points of view on the most proficient method to address the principal-agent relationship and its related difficulties. The Enron scandal, as a real-world model, highlights the basic significance of applying these theories successfully.Agency Theory, with its emphasis on aligning incentives and implementing monitoring components, is instrumental in addressing corporate governance issues where there is a critical gamble of irreconcilable circumstances and where trust is restricted. It succeeds in public corporations with scattered possession.Conversely, Stewardship Theory accentuates intrinsic motivation, trust, and participation, making it appropriate for settings where shared values and long haul targets are fundamental. It flourishes in circumstances where proprietors and chiefs are firmly associated, fostering a culture of liability and moral way of behaving.The decision between these theories ought to be directed by the particular authoritative setting, aligning the governance approach with the idea of relationships and the goals of the company. The two theories, when appropriately applied, add to more grounded corporate governance, improved transparency, and moral direct, at last leading to additional sustainable and dependable associations. By understanding the subtleties and applicability of these theories, businesses can explore the intricate landscape of corporate governance with better progress and integrity. 16

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