Corporate Governance: Concepts, Theories and Frameworks
This domain tests whether you can name the theories that justify governance rules and then map them onto the instruments that actually bind a Sri Lankan listed company: the Companies Act No. 7 of 2007, the CSE Listing Rules (Section 7.10 on corporate governance) and the CA Sri Lanka/SEC Code of Best Practice on Corporate Governance 2017.
Core theories
- Agency theory (Jensen and Meckling, 1976): separation of ownership and control creates monitoring costs; boards, audit and disclosure are monitoring and bonding devices.
- Stewardship theory: managers are trustworthy stewards, so governance should enable rather than police - this is why insider-dominated boards get justified and why codes still resist it.
- Stakeholder theory (Freeman, 1984): accountability extends beyond shareholders; underpins engagement and sustainability reporting.
- Resource dependence theory: the board supplies expertise, legitimacy and access to networks.
- Managerial hegemony theory: explains why structurally correct boards can still fail to monitor.
Hard law versus soft law
Sri Lanka layers its regime: statutory duties in the Companies Act; mandatory listing rules enforced by the CSE; and the Code of Best Practice, which is principles-based and applied on a comply-or-explain basis through the annual report. The G20/OECD Principles remain the international benchmark for shareholder rights, board responsibilities and disclosure.
Worked example
A family-controlled listed company appoints two independent directors. An agency answer focuses on monitoring the controlling family and protecting minorities - a principal-to-principal conflict. A stewardship answer focuses on board capability and succession. A stakeholder answer asks about employees, lenders and customers. Strong answers state which conflict dominates and which mechanism - independent audit committee, related party transaction approval - addresses it.
Traps that cost marks
Treating comply-or-explain as optional. Assuming agency theory is the only valid lens. Labelling a controlling-shareholder conflict as principal-to-agent. Forgetting that directors owe duties to the company itself, not to the controlling shareholder.