Stakeholder and Agency Theories for a Better Development of Corporate Governance - Coursework Example

Does stakeholder theory provide a better basis for the development of Corporate Governance in the 21st century than agency theory? The way of Corporate Governance has been gaining importance throughout the world during the 21st century. It has allowed companies to grow and benefit both the share holders as well as the stake holders. Corporate governance as a concept has evolved over the past couple of decades, especially as a result of the recent economic crisis, at times even being called as the cause for the credit crunch (Solomon, 2010). Although influenced by multiple factors but the corporate governance culture of the 21st century finds it basis in the stake holder concept. Corporate governance of the 21st century seems to be focused on benefiting all the peoples and entities being either directly or indirectly influenced by the corporate. Many countries also give corporate the standing of a legal that has its rights as well as duties towards the public. What is corporate governance? So, what is corporate governance? Corporate governance being so broad in theory and implication presents a great challenge of being defined in exact terms. Lisa Mary Thomson presents a broad definition of corporate Governance and states, “Corporate governance refers to the set of systems, principles and processes by which a company is governed” (2010). Corporate governance includes decision making and implementation of those decisions by the Board of directors, so that it benefits both the share holders and the stake holders, in value and capital. Significance of Corporate Governance Sound corporate governance of a company signifies the board of director’s loyalty to the aims, objectives and values of the company. It helps in building the confidence of share holders as well as bringing in new investment. Keeping Lisa M. Thomson’s definition in view, the stronger the set of systems, principles and processes governing the company, the stronger will be the corporate. It will lead to better accountability of the people running the affairs at the top of the management and towards avoiding any major fraud. Strong corporate governance shields the company against any fraud or scandal. It is the image that is reflected upon the people and prospect investment. If a company were to be run without strong corporate governance, it will lead to mismanagement of affairs, recurring frauds, lack of product quality, unsatisfied stake holders and loss of capital and value. Ensuring the empowerment of employees and share holders in the decisions that affect them also has proven positive results (Matea, 2008) Ethics, principles, and values for good governance vary from culture to culture, something that might be unethical governance in one country might be considered a form of good governance in another, but still some ethics share common ground in all cultures like: protection of the share holder’s rights; timely disclosure of important information like profit, loss and sales data; and the board of directors having the power to implement changes that result in the best interest of the stake holder (Jai, M. W., 2012). The Organization for Economic Co-operation and Development has published the Corporate Governance principles to provide countries with a frame work to assist in establishing their own governance codes (Tricker & Mallin, 2010). Toyota can be regarded as an example of exceptional execution of the principles of good governance, while maintaining the required involvement of the stake holders of the company it has not improvised on the quality of its products and brand name (Matea, 2008). Theoretical Perspectives in Corporate Governance The concepts that the model of corporate governance displays today get their basis from the research conducted on the theoretical perspectives. Theories of Corporate Governance vary from each other in their implication yet in many respects share similarities. Theories of stake holder and agency, when studied in detail reveal their impact on the corporate governance structure of today. Agency Theory The Agency theory focuses on the Share holders and the managers. Share holders are the “principal” or the owners of the company who delegate mangers, “agents” to execute their decision making to monitor the daily activities of the company (Solomon, 2010). The agency theory purports that since the share holders are the owners and the principal in any corporation or company thus they define the objectives of that company (Fernando, 2009). The share holders and the managers or executives share the same interests. The share holders, according to the agency theory trust the agents to work on their behalf and take decisions that are in their best interest. But the problem supposedly arises when the agents’ interests conflict with those of the share holders’. The decisions taken by the agent should result in the increase of wealth of the share holder, but if the agent is seeking his own goals or objectives, then his decisions might be motivated by his self interest rather than the interest of the principal (Solomon, 2010). This could actually lead to decisions that are not in the best interest of the corporation. For example the manager/executive in order to further his interest of earning extra takes decision in favor of a high profile short term project that does not contribute to the firm and thus the share holders’ long term interests. The agency theory suggests such practices that align the goals of the agent with those of the principal e.g. allowing the executives or managers to purchase the shares of the same company at a lesser rate could act as a stimulant to work in the interest of the share holders and the firm (Fernando, 2009). The Corporate governance structure in UK is influenced by the agency theory. The corporate governance structure has multiple checks and balances in the forms of codes to check the opportunism of executives so that it is not harmful for the corporation. The investing of executives in companies for short-term gains, British corporations are known for such attitude and in some instances have been slashed with the blame for the current economic crisis (Solomon, 2010). The Financial Reporting Council issued the UK Corporate Governance Code, that binds the corporations to either comply with the owners (share holders) or explain their actions in case of non-compliance (Mallin, 2010). Stake Holder Theory The stake holder theory suggests that as opposed to the agency theory, a company should be responsible for safe guarding the interests of all of its stake holders and not only the share holders. The stake holders could either be directly influenced or indirectly influenced, but still remain a stake holder, along with all the share holders (Young, 2004). The stake holder theory not only defines the non-supremacy of the share holders but also sets standards for how the organization should be run, and lays out the ethical conducts for running business, the role that management plays and in whose interest the corporation should be run (Weiss, 1995). The stake holder theory is an advocate for all those who are somehow associated with the corporation and who might be harmed by it, these include customers, employees, suppliers, and public, they have something at stake by being related to the corporation. Stake holder theory also argues that since the large corporations of today gain most of their capital by selling their shares and these shares are bought by general public, sometimes in large and sometimes in small quantities, these share holders are greatly dispersed; thus are less able to impact the daily functioning of the corporation, still furthering the argument that those who work with or within the corporation also deserve to have their interests looked after (Weiss, 1995). The theory also purports that since the organization is a product and part of the society thus it has moral obligations towards the society, and that society can place certain moral constraints on it to monitor it and hold it accountable. In the century of awareness, this is increasingly becoming a major issue for corporations, where more and more people and social groups demand justifications for the actions of a corporation. One factor that specifically results in encouraging socially responsible behaviour of the corporation is that it should be done purely on moral and ethical grounds (Solomon, 2010). The corporate Governance structure in the US is significantly representative of the stake holder theory. The publically traded corporations in America account for 75% of the total GDP (Statistical Abstract of the United States, 1994). These corporations not only cater to the interests of the share holders but all of all those who might be directly or indirectly influenced. The corporate governance structures of Japan and Germany also follow in the same lines. Recently stake holder concepts have also gained importance in the UK. The stake holder theory as opposed to the agency theory presents a view of the corporation as it should be in a world where the world is now known to be the global village and social responsibility is a day to day necessity. With the corporations growing ever large and people from all over the world becoming share holders in large organizations, the ownership in terms of share holders represents very dilute sense of ownership and responsibility, thus someone has to take hold of the corporation and run it. The corporate Governance of 21st century finds its basis in the stake holder theory as opposed to the agency theory, which limits the relationship of the corporation with the people, in this world of ever growing economies and corporatins. References Jie, M. W. (2012). Examples of Good Corporate Governance. Available at: http://www.ehow.com/list_6858965_examples-good-corporate-governance.html. (Date accessed December 21, 2012). Mallin C. (2010). Development of Corporate Governance Codes. Corporate Governance 3rd ed. Oxford University Press, USA Matea. (2008). Toyota: an Example of “Good” Corporate Governance. Available at: http://www.studymode.com/essays/Toyota-Example-Good-Corporate-Governance-148535.html. (Date accessed December 21, 2012). Solomon, J, (2010), Corporate Governance: Framework and Mechanisms, Corporate Governance and Accountability (3rd edition), John Wiley & Sons, New Jersey. Thomson, L. M. (2009). What is Corporate Governance? Available at: http://articles.economictimes.indiatimes.com/2009-01-18/news/28462497_1_corporate-governance-satyam-books-fraud-by-satyam-founder. (Date accessed December 21, 2012). Tricker, B, (2110), Rethinking the Exercise of Power over Corporate Entities, Available at http://corporategovernanceoup.wordpress.com/tag/agency-theory/, (Date accessed December 21, 2012). Weiss, A. R. (1995). Cracks in the Foundation of Stakeholder Theory. E-Journal of Radical Organisation Theory, vol1/1. http://www.mngt.waikato.ac.nz/research/ejrot/Vol1_1/weiss.pdf. (Date accessed December 21, 2012). Yung, D, (2004), The Theories Behind Corporate Governance, Available at: http://www.havingtheircake.com/content/1_Ideas%20that%20shape%20the%20world/fact%20and%20opinion/The%20theories%20behind%20corporate%20governance.lnk, (Date accessed December 21, 2012). Read More