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CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Conceptual Framework of Corporate Governance

Ananya Foods Ltd appoints a former regulator and an industry expert to its board mainly so that they bring external contacts, legitimacy and access to critical information and funding. Which theory explains the purpose of these appointments?

Resource dependency theory explains it. Under this theory, directors serve as links to the external environment, bringing expertise, contacts, legitimacy and access to funding or information that the company depends on. The appointments here are for resources, not for monitoring managers as agency theory would emphasise.

  1. AResource dependency theoryCorrect
  2. BAgency theory
  3. CTrusteeship theory
  4. DShareholder primacy theory

Explanation

Resource dependency theory sees directors as boundary spanners who connect the firm to external resources such as expertise, contacts, legitimacy and capital. The facts stress access to resources, not monitoring of managers, so agency theory is a weaker fit.

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