Agency theory, stakeholder theory, stewardship theory and transaction cost economics are the main theories that influence the development of corporate governance. The corporate governance can be drawn from a variety of disciplines and areas such as finance, economics, management, accounting rules, legal and regulatory, organization behaviours, etc. It express concerns in both internal aspects of the company (monitoring internal control & board structure) and the external aspects (eg. relationship of labour policies, role of multi shareholders and other stakeholders) besides protections of minority shareholder’s right (Claessens and Yurtoglu; 2012; Mallin, 2013). The Management will have the responsibility for the design, implementation and maintenance of the internal controls to prevent and detect any fraud that might happen.
In today’s business environment, a good corporate governance will be effective in stopping more financial scandals and collapses in future (Mallin, 2013) and protecting the reputation of both the company directors and the firms (Turnbull, 2000). Besides, it will also add value by improving firm’s performance and improvement on other efficiency. Contrarily, a poor corporate governance can affect the functioning of a country’s financial markets and the volume of cross-border financing (Claessens and Yurtoglu, 2012).
2. AGENCY THEORY vs. STAKEHOLDER THEORY
2.1. Agency Theory
Agency theory explains the relationship in between the principals and agents (P-A). Under the law of equity, the agents (e.g. directors) have a legal obligation to protect the interest of principals (e.g. shareholders). Jensen and Meckling (1976) identified the agency relationship as where a contract engaged shareholder (“Principal”) to appoint director/manager (“Agent”) act on behalf of them to perform work by using their resources to increase the company or firm’s net present value. Quinn and Jones ( 1995) approach that as an agent, they should maintain minimum moral while applying four principles, i.e. avoid harm to others; represent autonomy of others; avoid lying and honour agreements; create trust, honesty and loyalty of principals-agents relationship.
2.1.1. Debates of Agency Theory
Relationship of principal and agent can be related to the separation of ownership and control. All agency relationships experiences agency cost, which is a cost arise from many source which include monitoring and bonding costs (Jensen and Meckling 1976), recruitments costs, oppose selection, moral hazard, self-dealing, corruption and self-regulation (Shapiro, 2005). Besides, the agency relationships also cause a number of disadvantages relating to the opportunism or self-interest of the agent. The agent may not act for the best interest of the principal; the agent may misuse his/her power for monetary or other advantages; moral hazard; principals-agents have differences interest and asymmetric information. The view and objective from principal and agent may...