Corporate Governance as a Vital Tool for Business - Coursework Example

The recent economic crisis and debacles have highlighted the importance of corporate governance. Corporations in the twenty first century are looking for the well being of the “customers, employees, and community and share holders”. (Silva, 2004) The framework followed by corporations look into the issues of “accountability, effective communication and diversity of perspective”. (Silva, 2004) Many theories and rules have been framed to ensure that corporations adhere to the corporate governance. The theories and models will help to ensure that “there is effective monitoring, overseeing and evaluating the performance of the upper levels so that the management don’t use it to their advantage but rather look into the well being of everyone”. (Silva, 2004) One such theory is the Agency Theory. This theory puts a new perspective and deviates from the old philosophy of profit maximization. This theory says that “corporations need to have agents who will work on behalf of the principal owner i.e. the shareholders and will be given certain incentive for it.” (Nicholson, 1998) For this to happen and ensure that corporate governance follows it is essential to differentiate the role of board of directors and the executive management. This will define the path each has to follow and will strengthen the core values of the unit. This thus looks into the problems encountered between the management and the share holders. A study conducted highlights that “while an agent works for the actual holders encounter a couple of problem relating to identifying the way the agent has behaved in a particular situation and the attitude of the agent towards the risk”. (Eisenhardt, 1989) This makes it difficult to identify whether the agent has acted fair. The principal owner is in no position to identify the outcome which makes the agent take decision which favours him. The principal therefore needs that the agent and the board are different and they work individually. This will try to ensure that the agent works for the well being of the principal owner and his behaviour won’t be influenced by others. Despite the efforts to have a manager who monitors all the functions still the manager might act “in his own self interest “. (Fama, Eugene & Jensen, 1983) The objective of both the manager and the shareholder might clash which might result in the manager to act in his own advantage as “there is asymmetry of information and uncertainty which will make the shareholders unclear as to what needs to be done”. (Fama, Eugene & Jensen, 1983) There might be an instance when the manager might work leisurely as it won’t benefit his personal interest. This will render the stakeholder useless and will give futile results. To ensure that they get proper governance shareholders need to “incur agency cost where they hire someone from outside the organisation who audits the performances, communicates with the shareholders regarding the changes and brings forward issues which might harm the shareholders”. (Fama, Eugene & Jensen, 1983) This cost will help to bring a check and ensure that there is proper corporate governance and shareholders get their dues as well as the society is looked after. The shareholder to ensure effective management and the agent delivering the purpose for which his position is created need to see that “managers are either paid on the basis of stock prices which will make him pursue the objective of maximizing shareholders wealth or monitoring every performance of the manager which might be costly”. (Fama, Eugene & Jensen, 1983) This will bring in a mechanism to check the functioning and ensure that results delivered are sound. The agency theory has further been propagated and developed and helps to define the functioning of the organisation with regard to the human resource function. A study conducted highlights that “the conversation between the agent and the principal helps to determine the future strategy which helps to define the human resource requirements and plan accordingly”. (Akdere & Ross, 2005) Thus, agency theory is also creating a platform for future growth which will have a contribution to the corporate governance for the organisation. Still, after all the level of development it is impossible to determine the level of “optimal level of monitoring that will help to reduce the conflicts and have an effect on the interest of financer, economist and practitioners”. (Bonazzi & Islam, 2007) This thus highlights and carries forward the agency theory to another theory which i.e. stewardship theory is having a different theory to deal with the issue of corporate governance. The stewardship theory puts forth the point that to ensure corporate governance “the shared role of the management and the agent and the shareholders helps to maximize the return for the shareholders”. (Donaldson & Davis, 1991) This theory states that to bring the best result it is important to integrate all the functions. This will improve clarity and will help to define the path and goal for each. It will help the corporations to know the areas they need to work upon to increase the return for shareholders. This theory goes against the Agency theory and propagates a single person for both the role. It states that the person should act as “the CEO and the chairman of the board of directors so that the decision taken by him is more efficient and effective as the idea in both the decision will be directed at a specific path”. (McGrath, 2010) This will improve efficiency as the person concerned will be able to know all the information and decision based on them will be better. There still lies another part of the story that the CEO might use his power and influence the decision which acts for his own good instead of for all the stakeholders. This theory supports the fact that “having a single person will ensure that decision taken by him concerns every one associated with the company and not only the shareholders”. (McGrath, 2010) This will help to improve the image of the corporation and considering the well being of every one will make it a company favoured by all. Even it is seen there is a correlation between the two functions but the success rate and growth for this is still a concern. These are making corporations move towards Agency Theory and use it so that corporate governance is better. The role of Stewardship theory still cannot be ignored as supported from a research which shows that “this theory when used along with the Agency theory helps to define the role of both the agent and the principal in government contracted services”. (Dicke & Ott, 2002) This will ensure its wide usage and will also create an environment for corporate governance. Defining the role of each and integrating the function will ensure that there is continuous monitoring and this will result in increasing the value for all. This can also be supported by the fact that Stewardship theory helps in proper corporate governance as seen from the family relationship perspective. A study conducted on this shows that “productivity and corporate governance improves for the household business when a single person controls all the function and he looks after the well being of the entire person associated with the family”. (Eddleston & Franz, 2006) This sees that stewardship theory thus helps certain business and helps to improve the effectiveness of the stewardship theory and ensure that corporate governance is governed in a proper way. Another theory which also looks into the corporate governance aspect is the Stakeholder theory. This theory states that “business organisation needs to see that the organisation works for the well being of people associated with the organisation and ensure that their well being is looked after”. (Hill & Jones, 1992) The stakeholders who are influenced by the decision taken by the business units is demonstrated below It shows that corporation should take decision which will improve the performance for the customer, community, employee, trade association and everyone associated with the corporation. Thus stakeholder theory looks into various aspects and people associated with the company. This thereby ensures that decision taken affects all. The shareholders being the owner needs to ensure that the management i.e. the agent acting on behalf of the principal takes decision which helps to see the well being of all and ensure that the policy of corporate governance is adhered to. The shareholders can ensure that corporate governance remains in the organisation ensure that “decisions taken are such that affects all the stakeholders associated with the organisation”. (Corfield, 1998) This will help each stakeholder to perform the duties which will transform into a better picture for the corporation. Even economists support the stakeholders’ theory because “it looks into the well being of every individual associated with the company”. (Corfield, 1998) This theory as takes decision for every individual associated with the company so it takes care of the corporate governance aspect from the view of the shareholders and the managers also. A study demonstrates that since stakeholder theory “doesn’t specify the trade off between the decisions taken by the manager is correct or wrong and doesn’t hold him accountable for it so the manager might take decision which benefits him instead of all the stakeholders”. (Jensen, 2004) This makes it difficult to monitor the working and the decision can have a forbearing on all the stakeholders. This will thereby affect the proposition of value maximization. Corporations won’t be able to maximize it because the concern for the stakeholders is ignored. This will result in poor corporate governance and moulding the activities for personal gains. To increase the effectiveness of stakeholder theory and to ensure proper corporate governance the shareholders need to ensure that “managers are clearly made to understand the business and the kind of relationship they need to create with the stakeholders”. (Freeman, Edward, Wicks & Andrew, 2004) This will give the manager the sense of purpose and define the objective of working. It will also present a clear picture and the establishment of relationship will ensure that managers take decision which helps to increase value for the stakeholders. The stakeholder theory thus will help to look things from the shareholders perspective and maximizing returns for them will ensure that all the other stakeholders’ value also maximizes. This will help to “overcome the unethical practices of the management and help the board of directors to manage their stakeholders issue in relation to the shareholder”. (Tony & Kerry, 2009) This thus will help to ensure proper corporate governance and ensure that the corporation is able to deliver on the promises and thereby ensuring that management is effective. Thus, corporate governance has become a vital tool for business. All agencies and society is looking at the different aspect the business works upon to ensure that they look for the well being of most. The various theories and models developed thereby help to ensure that corporations are able to ensure that the management working on their behalf is able to consider corporate governance. With carious scandal and downturn it has become essential that business units focus on corporate governance and ensure effective mechanism in their organisation to ensure that the company doesn’t look for profit but instead maximizing value for all. References Akdere M & Ross A, 2005, “Agency theory from the perspective of human resource development”, International Journal of Human Resource Development & Management, Volume 5, Number 3, page 318-332 Bonazzi L & Islam S, 2007, “Agency Theory and Corporate Governance: A study of effectiveness of board in monitoring of CEO’s”, Journal of Modelling in Management, Volume 2, Issue 1, page 7-23 Corfield A, 1998, “The Stakeholder Theory and its Future in Australian Corporate Governance”, Bond Law Review, Volume 10, Issue 2, page 213 Donaldson L & Davis J, 1991, “Stewardship Theory or Agency Theory: CEO Governance & Shareholder Return”, Australian Journal of Management, Volume 16, Number 1, page 49-64 Dicke L & Ott S, 2002, “Can Stewardship theory serve a second conceptual for accountability in human resource functions”, International Journal of Public Administration, Volume 25, Issue 4, page 463-487 Eisenhardt M, 1989, “Agency Theory: An Assessment & Review”, Academy of Management Review, Volume 14, Issue 1, page 57 Eddleston K & Franz K, 2006, “Destructive & productive family relationship: A Stewardship Theory perspective”, Journal of Business Venturing, Volume 22, Issue 4, page 545-565 Freeman, Edward R, Wicks & Andrew C, 2004, “Stakeholder Theory & the Corporate Objective Revisited”, Organization science Fama, Eugene & Jensen M, 1983, “Agency Problems & Residual Claims”, Journal of Law & Economics, Volume 26, page 327-349 Hill C & Jones T, 1992, “Stakeholder Agency Theory”, Journal of Management Studies, Volume 24, Issue 2, page 191-205 Jensen M, 2004, “Value Maximization, Stakeholder Theory & Corporate Objective Function”, Harvard Business School, Research Paper No 01-01 McGrath J, 2010, “How CEO’s work”, retrieved on May 12, 2010 from http://money.howstuffworks.com/ceo8.htm Nicholson M, 1998, “Applying Agency Theory and the concept of corporate governance”, retrieved on May 11, 2010 from http://www.lotsofessays.com/viewpaper/1706098.html Silva M, 2004, “Corporate Governance in a turbulent world”, retrieved on May 11, 2010 from http://www.allbusiness.com/business-planning/business-structures-incorporation/866368-1.html Tony N & Kerry H, 2009, “The stakeholder theory in the modern global business environment”, International Journal of Applied Institution Governance, Volume 1, Issue 1, page 3 Read More