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PART B: BUSINESS ORGANISATION STRUCTURE, FUNCTIONS AND GOVERNANCE 
 
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1.2.4 Good management 
Good management in business means setting best practice guidelines. 
1.3 Perspectives on governance 
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Put their money into the business
Owners
Business
Management
Make the decisions for the business
Manage the business operations
Own all of the business assets
Owners and management
are not usually the same
people in large organisations
In a small business the shareholders (ie owners) are likely to be the directors and so the owners and the 
managers are the same and there are no issues. 
In larger businesses the shareholders (ie owners) will not necessarily be involved in the day-to-day 
running and management of the business. The owners and the managers will not be the same and so 
there may be a conflict of interest.
1.3.1 The agency concept 
When applied to corporate governance, the agency concept refers to the organisation owners (the 
shareholders) as the 'principal' and those managing the company (the company directors) as their 
'agents'. 
The corporate governance framework should therefore aim to ensure that those running the company do 
so in a way that best serves the interests of shareholders (rather than pursuing their own interests). 
Ensuring that the way in which managers and directors are rewarded encourages them to act in a way 
that benefits shareholders is also important (see agency theory below). 
Debates about the place of governance are founded on three differing views associated with the 
ownership
and 
management 
of organisations.
The agency concept is particularly relevant for large organisations, where there is a greater degree of 
separation between ownership and management. This is particularly the case for public listed 
companies. 
1.3.2 Stewardship theory 
Some approaches to good governance view the management of an organisation as the 
stewards
of its 
assets, charged with their employment and deployment in ways consistent with the overall strategy of 
the organisation. With this approach, power is seen to be vested in the stewards; that is, the executive 
managers. 
Other interest groups take little or no part in the running of the company and receive relevant 
information via established reporting mechanisms (audited accounts, annual reports, etc). Technically, 
shareholders or members/owners have the right to dismiss their stewards if they are dissatisfied by their 
stewardship, via a vote at an annual general meeting.
1.3.3 Agency theory 
Under 
agency theory
, it is recognised that management are likely to pursue their own interests. It is 
important therefore that management interests (including their remuneration) are aligned with the 
organisation's goals. Only when these goals are aligned and consistent will managers act in a way that 
benefits shareholders and other stakeholders. 
1.3.4 Stakeholder theory 
The stakeholder approach takes a much more 
'organic' view
of the organisation, imbuing it with a 'life' of 
its own, in keeping with the notion of a separate legal personage. Stakeholder theory is effectively a 
development of the notion of stewardship, stating that management has a