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

Kaveri Power Ltd's board states that it must balance the interests of employees, lenders, customers, the local community and shareholders, and holds that long-term value arises from fair treatment of all of them. This board's approach most closely reflects which governance theory?

The approach reflects stakeholder theory. It holds that a company owes responsibilities to employees, lenders, customers, the community and shareholders, and that long-term value comes from balancing their interests. Agency theory is narrower, focusing on aligning managers with shareholder interests.

  1. AAgency theory, focusing only on aligning managers with shareholders
  2. BStakeholder theory, recognising duties to all groups affected by the companyCorrect
  3. CStewardship theory, assuming managers act in their own interest
  4. DTransaction cost theory, limited to the cost of market contracts

Explanation

Stakeholder theory holds that the company should consider all groups affected by or affecting it, not merely shareholders. Agency theory centres on the principal-agent conflict between owners and managers, so option A is too narrow. Stewardship theory assumes managers are trustworthy stewards, not self-interested, so option C misstates it.

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