Resource dependency theory posits that control over resources is a crucial aspect of corporate governance. Proper business direction is possible with resource dependency. As a result, directors are appointed based on their ability to control resources.
What is resource dependency theory?
This theory examines how corporate governance can be affected by resource dependency. The focus is on external resources and those who have the power to influence them. For example, a new regulation can make a company's activities illegal.
Therefore, companies will want to appoint directors who can influence government decisions. The resource dependency theory has been applied practically in Nigeria. Start-up companies that invented new products in Nigeria have employed directors who can influence government regulators. So that, when the government decides to regulate the new products, they can use these directors to influence government decisions.
Another way to understand resource dependency theory is the relationship between management and customers. Customers are indeed the greatest resource of a business. They influence business revenue. When a company earns more revenue than its peers, it is believed that the management has found a way to influence more customers to buy from them.
Application of the resource dependency theory on corporate governance
Corporate governance ensures that directors can secure resources that are in the best interest of the company. These resources include talents, technology, funding, and market share.
Direction involves resource control
The theory reminds directors that effective direction of a company involves resource control. To achieve this, appointed directors must have influence over the important resources the company depends on.
Power to control resources
The resource dependency theory implies that directors must have control over the resources they manage. They should have good strategies that ensure sustainable control over internal and external resources. Diversifying or forming alliances can help a company manage and mitigate problems from the lack of power to control resources.
Strategy should be based on resource control
Corporate strategy should factor in the resources a business can control. A SWOT analysis of the company's resources can aid in better decisions when creating business strategies.
The company's management performance
Management performance explains managers’ power and dominance over available resources. A company may have more market share than its competitors. This implies that the company management has unique control of resources. The company that can attract the best talent dominates talent resources.
Influence over external resources
The board should ensure that they have influence over external resources. These resources are not within the control of directors. But they can influence them. Non-executive directors with influence on various resources, such as government agencies and supply chains, may be appointed to the company's board.