Corporate Governance and Agency Theory - Article Example

Writers name] [Professors name] [Course title] [Date] Theories Introduction Corporate Governance has become a typical issue at the moment and is attracting a good deal of public interest because, of its apparent importance for the economic health of corporations and society in general. Corporate Governance is related to publicly traded, privately held, for profit and not for profit organizations. It should outline the duties, responsibilities and powers of Directors. Directors' interest should be to the stockholders, as well as, stakeholders such as employees, customers, suppliers, creditors and the community. Most times only stockholders interests are managed. Some theories relevant to corporate governance are: Simple Finance, the Stewardship and the Stakeholders theory. Stakeholder Theory The concept of a stakeholder relies on the fact that corporate activity is not solely a series of market transactions but also a cooperative (and competitive) endeavour involving large numbers of people organized in various ways. The corporation or firm is often a large organization providing a way for many individuals and groups to achieve their ends. A company shares a symbiotic relationship with its stakeholders. A company cannot function without its employees, and the employees in turn do not get to earn a livelihood without the company. The stakeholder view to develop this theory the organization has to be viewed as a stakeholder organization. Stakeholders are the people who have an interest, claim, or stake in an organization, in what it does, and in how well it performs.' (Jones p.31) In a word, a stakeholder is every individual or group who is capable of affect or is affected via an organization’s performance. In order to investigate and measure the effectiveness of organizational performance, studying the stakeholders is necessary. It is a rather understandable saying that a extensive variety of people as well as interest groups have an participation with any organization - include shareholders, clientele, suppliers, workers, the neighbourhood community, government ect. Evidently, they also have diverse and changing degrees of power on the behaviour and development of the organization. Jones (2004) believes that there are two main groups of organizational stakeholders, inside stakeholders and outside stakeholders. Inside stakeholders including shareholders, managers, and the workforce are those people who are closest to the organization and have the strongest or most direct claim on organizational resources. Shareholders are the owners of the organization who invest money and capital in organization in order to earn money from dividends and increases in the price of stock. They are the primary constituents of the corporation. Their claim on organizational resources is often considered superior to the claims of other inside stakeholders. The shareholders have ultimate authority over the use of a corporation's resources. They own and control the organization legally through their representatives - the board of directors. Through the board, they delegate to legal authority and responsibility to managers so that they can use the organization’s resource to create value and to meet goals Moreover, once shareholders no longer believe that the inducement is enough to warrant their contribution, they will sell their shares and withdraw their support from the organization. Managers are the employees who coordinate organisational resources to create value and ensure the goals of organisation are successfully met. They are the agents or employees of shareholders and are appointed indirectly by shareholders through the broad of directors of the organisation to manage the organisation's business. They contribute their skills to direct the organisations response to pressures from within and outside the organisation. Various types of managers have different responsibilities. The inducements for managers are the higher salaries, bonuses, status, and power. Corporate-level managers are ultimately responsible for setting company goals and objectives. Divisional or functional management have responsibilities for their division or function. It seems that managers are given almost unlimited power in the organizations, as it is managers who have the ultimate responsibility to decide what stakeholder interests receive attention. Managers are therefore to consider and poise stakeholder interests, trading off one beside another in situation on a route of action. Actually, management plays the critical role in deciding which stakeholder interests get attention and what priorities to assign stakeholder concerns. Outside stakeholders are those people other than inside stakeholders who have some interest in the organisation, such as customers, suppliers, government, trade unions, local communities, and the general public. As the largest outside stakeholder group of an organisation, customers are people who purchase the goods or services from the organisation. Their contribution is the revenue of the organisation. The customers are the vital stakeholders. Their satisfactory is the base and objective of the organisation's development. Customers are concerned about the quality and price of goods and services. In case the customers are not pleased with the products or services provided by organisation, they would withdraw their support through refusing to pay the price asked by the organization. Suppliers are another important outside stakeholder group who contribute to the organisation by providing reliable raw materials and component parts that allow the organisation to reduce uncertainty in its technical or production operations so as to reduce the production costs. The government wants companies to compete in a fair and free environment. The government wants companies to compete in a fair and free environment. It also pays attention to the payment and treatment of employees, workers' health and workplace safety, and other social and economic issues about which Congress has enacted legislation. Another outside stakeholder - trade unions focus on equitable share of inducements. The nature of relationship between organization and union has a direct effect on the productivity and effectiveness. Cooperation can lead to positive long-term outcome. An organization is used simultaneously by different groups of stakeholders to accomplish their goals. Stakeholder theory aims to impose upon a company and its shareholders a new form of contract that grants stakeholders a say or voice in the use of the shareholders' property. Stakeholders are given this voice even though they assume no risk, and they are given the voice ex post facto and at their own discretion. Stakeholder theory requires shareholders to assume not only market risk, but also the risks arising from the whims of stakeholders who remain undefined in both identity and power. Stakeholder theory thus severely needs the countermanding of rights specified by law. In continuing to debate the request of stakeholder rights to corporate governance, stakeholder theorists decide to pay no attention to the law in their pursuit to attain social goals. Stakeholder theorists advocate nothing short of civil disobedience, a prospect which does not assist businesses in recruiting investors. Investors willingly assume market risks, but they are understandably reluctant to succumb to the whims of an unidentified group seeking to advance its self-defined causes and desires. Agency Theory Agency Theory deals with the relationship between a shareholder (principal) and the company’s managers (agent of the principal). “This theory involves the cost of resolving conflicts between the principals and the agents and aligning interests of the two groups (Agency Theory, 2006).” Agency Theory classifies mechanisms that decrease agency loss. These include profit sharing, efficiency wages or fear or being fired. There are also various incentive schemes introduced for the managers, for instance, they are rewarded financially if they are successful in maximizing their shareholders’ wealth. These schemes involve plans where the senior executive purchase shares at a low price combining the financial interest of executives with the shareholders. In the agency theory directors are seen as agents for the owners (shareholders) and they have the responsibility to protect their rights and interest. For example, at Future Shop, any employee who sells insurance on the Future Shop credit card makes a commission. Here the company is the principal and the employee is the agent. Initially the company’s problem was to design an incentive scheme that would align an employee’s interests with the company’s own interests as the company makes huge profits on the insurance sold. This scheme aligns the interests of both the company and employee and in case if there is any uncertainty, both the company and the employee will share it. Therefore, the financial manager will make decisions in such a way as to minimize the conflict between the principle and the agent. In other words, the financial manager will make the decisions which are in the best interests of both the principal and the agent. By law, an agent must follow instructions given by the principal and act in the best interest of the principal. An agent is expected to perform the skills that he or she claims to possess. In addition, there should be up-to-date records of all business transactions available and the principal should be made aware of such transactions. Lastly, the agent is responsible for communicating information back to the principal. What the agent knows, the principal knows. The principal also has specific obligations to the agent and must cooperate with the agent. If the contract between the two parties state there will be monetary compensation, the principal is responsible for paying the agent. In addition, the principal must reimburse the agent for expenses or personal losses he/she may incur relating to the principal's business. A principal, in most cases, is considered the employer of the agent. Like any employer, he/she must provide the employee with safe and adequate working conditions. Empirical evidence: Agency & Stake Holder Theory The agency stake holder theory operates on a deductive approach when it has its point of departure in already existing theories and from these theories comparisons are made with collected empirical data. That deduction implies that the researcher articulates a hypothesis and that the hypothesis guides what empirical evidence is collected. Induction of both theories, on the contrary, is primarily based empirical findings and should not be controlled by theories and preconceptions. In research process of booth the theories during the research process let the theories interact with our empirical data. Kind of interaction between theory and empirical work very useful since the empirical evidence leads us to do some reinterpretations and extensions of our chosen theoretical data. Due to this interaction between theory and empirical data it is difficult to claim to be either completely deductive or inductive. However, in line with the above reasoning we believe that we lean towards a more deductive approach when considering either one of the theories since we began with consulting theoretical data before collecting empirical evidence. Research Paradigm The current meaning of this word its contemporary the set of practices that define a research based discipline during a particular period of time. What is to be observed and scrutinized The kind of questions that are supposed to be asked and probed for answers in relation to this subject How these questions are to be structured How the results of scientific investigations should be interpreted Alternatively, the Oxford English Dictionary defines paradigm as "a pattern or model, an exemplar." Thus an additional component of Kuhn's definition of paradigm is: How are an experiment to be conducted, and what equipment is available to conduct the experiment. Thus, within research the paradigm is the set of exemplary experiments that are likely to be copied or emulated. The prevailing paradigm often represents a more specific way of viewing reality, or limitations on acceptable programs for future research, than the much more general scientific method. (www.wikipedia.com) Two Paradigms of Research balanced assessment of the two forms of research requires a knowledge of the history behind the two forms of research, an in depth look at what they are and what they both entail as business research and to discover the different methods that can be used within qualitative and quantitative research. We also need to find out the strengths and weaknesses of both qualitative and quantitative data so fair judgment can be made to discover if there is a correct. How Qualitative and Quantitative Techniques Work An explanation of how Qualitative research works can be described as " Attempts to verify or generate a theory gleaned from gathering broad descriptive information in a natural setting,"(Redmond, Keenan & Landorf p7) which is a reason as to why qualitative data is also known as 'naturalistic research'. A lot of the time qualitative research is used as a 'before' for quantitative research. Qualitative research can help define what to measure, then quantitative data can pool the like answers together to form statistics. Data collection for qualitative data is usually done through interviews, observation and documentation. Qualitative research is interactive not only between interviewer and interviewee, but also in some cases allows for interaction between group members. Qualitative researches “often implies interpretive procedures, relativistic assumptions, and are verbally rather than numerically based"(Sutton 1993:411). In qualitative methods of research there is a less formal structure in which the data collection tools are lax to a certain degree. Often qualitative research is used for getting right into the core of the research problem and thoroughly investigating in this way Qualitative data is more prone to tell the researcher directly what the subject is thinking, feeling, and who they are ( Redmond, Keenan &Landorf p 10). Qualitative data permits the researcher to build a repot with the subject. This is this is the reason why kind of research is orientated to clearly understanding the human nature. Qualitative research begins with a defined hypothesis, as well as diverse methods of qualitative research are used when attempting to generate new theories or a new hypothesis to be tested later. Instead of a defined hypothesis general ideas are defined, the researchers then often change these as the research becomes more involved and 'answers' start to appear. There the researcher uses variables to make up the effect or the outcome (Brannen p 6). Qualitative data can only be valid to the particular situation that is being researched, meaning that this form of data collection cannot be generalized. The initial research question can be broad, and then it is later defined, and then refined by results of incoming data. (Brannen 1992 p4) The criteria for qualitative research involves 'conceptual framework'. This involves establishing a relationship between the variables through the 'conceptual framework' and explaining the relationship between the variables. There are certain methods which address the appropriateness of the technical methods used for the chosen method of qualitative research and there are also checks as to whether the procedures and techniques of analysis are appropriate to the research question. The last part of the criteria involves the presentation of the research checking that; that there is clarity and logic in the rationale, techniques and method; that the limitations of the research are presented and that the implications are clear and logical. (Higgs and Adams p15) Quantitative research on the other hand features a high level of reliability, it can be used to gather large amounts of information, and its findings can be tested through the use of statistics. Quantitative research is very different in that the goal is to respond a detailed research question by means of presenting statistical evidence in an austere set of guiding principles (Redmond, Keenan& Landorf p7) Quantitative research can be used when gathering large and vast amounts of research. It can be presented by using statistics in the form of graphs, tables and percentages. Quantitative research is evaluative, and is based on facts and figures, and the usage of measurements and numbers. The statistical weight of quantitative data is frequently seen as been strong. Quantitative research theories are typically designed from an inductive/qualitative procedure. A hypothesis made which is the foundation for the entire research. The hypothesis created is the basis for the research, this is then tested below controlled conditions, and then as theory builds, verification through research builds. "In theory if not in practice, the quantitative researcher isolates and defined variables and variable categories. These variables are linked together to form a hypothesis often before the data are collected, and are then tested upon the data" (Brannen p4).The hypothesis in qualitative research is also used to: Test one variable against another, explore the relationship between two or more variables, examine a huge group of people to decide precise facts as well as to investigate a large group of people who meet specific criterion. Results from quantitative research are often generalized to fit the whole population or at least a target section of the population. .Quantitative research is also seen as deductive and breaks the problems into groups or parts then analyses them individually and tries to calculate the outcome as a whole. (Redmond, Keenan, Landorf p 14) Strengths and weakness of qualitative and quantitative research Qualitative and Quantitative research have both many strengths and weaknesses it is in these that researchers often choose their methods or at least it is believed that they should. Strength of quantitative research is that outcome is statistically reliable, for the reason that it has a "strong scientific temperament". (Basset and Basset p1) For example: quantitative marketing research can discover that an idea, concept, product or package is better than any other product on the market. Another advantage of quantitative research is that it is much cheaper to carry out the research. It is a less costly to allow for mass opinion as well as can also be less time taking. Quantitative research also has the added bonus of using a language that is formatted and easy to understand. (Redmond, Keenan and Landorf) 2001) A main disadvantage of quantitative research is that issues are only measured if they are stated in the hypotheses at the commencement of the research, so all possible questions must thoroughly be thought through. If new findings or ideas for questions come up during the questioning, then new and separate research can be undertaken but cannot form part of the current research. Quantitative research is very 'rigid' and tries to put information into numerical form. This kind of research is not capable to measuring human emotion. Another disadvantage of quantitative research is 'context stripping'. (Guba and Lincoln p 7) This is when there is a focus on certain variables that are seen within the research and they are 'stripped' from the context of research in the effort to eliminate variables. Even though there are controls in qualitative research, random sampling and so on, there is always the possibility that the subject(s) of the research can bring a new set of unexpected variables that can greatly alter the research and cause the outcome to be altered or false. This also makes the research inappropriate to the other population. A disadvantage is that quantitative data can often be misinterpreted or give unsatisfactory results due to poor research designs. This can occur throughout being not capable to find an important difference when one exists. Sample sizes might also be inadequate to really find their preferred hypothesis. (Redman, Keenan and Landorf p13) Qualitative research is best when used in small groups and explores the feelings of only a few. Qualitative research is often said to be "rich" in data. It is excellent for studying "emic" (Guba and Lincoln p10) which are most commonly known as 'insider' views as well as theories. Strength is the close communicative process between the interviewer and interviewee which subsequently allows for observation of actions as well. A disadvantage of qualitative research the methods that are utilized for the research turn out to be "unreliable predictors of the sample/population meaning that it cannot be applied to a large section of the population, only a select few. Qualitative research is perceived (mostly by those who use a quantitative approach) as a non-scientific approach. This is a downfall because it leads most to believe that the findings presented are not valid and that a rigorous research method has not been carried out. Qualitative research is also very costly to carry out for the reason that of frequently there is an individualistic approach which consumes a lot of time of the individuals and researchers so the study cannot be done over a large scale i.e. masses of people. In qualitative research the researcher becomes element of the data. Conclusion The code of practise should be part of the organisation's guiding principles and corporate ethics, which will in turn set the organisation's culture. Substance is extremely vital to high-quality corporate governance. An organization can have an excellent corporate governance structures and policies on paper but if the CEO and directors are not focused on stockholders and shareholders interests, it can spell disaster. Good Corporate Governance should set principles and values that look out for the interest of shareholders, stakeholders, as well as, the society as a whole. Work cited Basset, C and Basset J Quantitative and Qualitative research, British journal of periperative nursing, Harrogate. Vol 13 (2003) p 1 Brannen, Julia; Combining Qualitative and Quantitative approaches: An overview. In Julia Brannen (Ed.), Mixing Methods: Qualitative and Quantitative research, Aldershot: Avebury (1992) pp 3-37 Jones, GR; Organizational theory, design, and change: text and case, 4th edn, Pearson Education, New Jersey 2004, pp30-36 Guba, E.G, and Lincoln, Y.S Compeating paradigms in Qualitative research in Denzin, N.K. Lincoln, Y.S (eds) The Landscape of Qualitative Research Theories and Issues, SAGE, Thousand oaks, pp 7-10 Higgs, J and Adams, R; Seeking Quality in Quantitative research, in J Higgs 9Ed) qualitative research: Discourse on methodologies (1) Hampton press Sydney (1997) p 15 Redmond A, Keenan A-M and Landorf K 'Horses for courses': the differences between quantitative and qualitative approaches to research. Australasian Journal of Podiatric Medicine. Vol 34 no 1 (2000) pp5-14 Sutton, Brett; The rationales for Qualitative and Quantitative research : A Review of Principals and theoretical foundations. The Library Quarterly, 63 (4) October, pg(s) 411- (1993) 430 Appendix Fig 1. Stakeholder Theory Read More