Critically discuss the main theories of corporate governance, focusing Essay

Critically discuss the main theories of corporate governance, focusing in particular on how they apply to different types of co - Essay Example What this means is that corporate governance could be looked at from a perspective of the legal administration of different businesses. In effect, mechanisms and acts that would constitute corporate governance in one firm or business may not constitute corporate governance in another because of differences in the legal organization of the companies involved. Interesting, the demarcations that company law gives to the various forms of companies inform the basis of the existence of various corporate governance theories. With reference to company law, corporate governance could generally be seen as the legal mandate that binds players in various organizations and institutional set ups to ensure that companies meet the interest of all stakeholders, defined to include shareholders, customers, employees and the government3. Contract Theory and Corporate Theory Contract theory and corporate theory remain two of the major forms of theories of corporate governance. As indicated earlier, these two theories are directly related to the allocation and differentiations that exists in the types of business under company law. With reference to corporate theory, its principles could be dated to as far back as the era of â€Å"artificial† entity theory. The artificial entity theory dates back to the dates before the 1800s when governments made special legislations to ensure that the power to operate corporations was vested in the power and authority of public benefit units4. Some of these public benefit entities included schools, churches and the larger community. However, these public benefit units were not the outright owners of the corporations but the government. It is in light of this simulated ownership that the theory became known as the artificial entity theory. In relation to the present study, it would be noted that the corporate theory has a lot of influence on corporate governance in the sense that because the cooperation are supposedly owned by government, th ere are State defined legislations that affect and influence their operations. Though many who belong to the fiction theory school of thought hold that â€Å"corporations are simply legal fictions, created and sustained by an act of the state†5 and that there are weaker internal management principles that defeat the principles of corporate governance, the reality is that in a state where institutions are made to function properly, there is no way managers can expect to go away with lapses in corporate governance. Under contract theory, reference is made to contract-based corporate theory where actors in various companies and organizations are expected to play a collaborative role in ensuring that they use asymmetric information to regularize the construct of contractual arrangements6. In effect, the contract theory expects that managers and administrators would work and function as people who have been assigned to play specific roles within a specific timeframe for a specific reward. Essentially, contract theory greatly affects corporate governance because it is said to be an avenue by which managers and stakeholders in the running of businesses feel fundamentally obliged to work and operate within the premises of the contracts they agreed upon7. In certain quarters, this has been said to