Advanced business economics - Essay Example

?Advanced Business Economics Organizations are physical and even ‘virtual’ setups, where ‘collage’ of humans will work taking different roles and responsibilities. Starting from lower level workers to shareholders, top level management, etc, etc, an organization comprises of people with skill and experience, who accomplish their given task. Although, all these people will work in-group for the effective functioning of the organization, there will be an hierarchy. This hierarchy defines the position of the various people inside the organization, with one section of people calling the shots and asking the other sections to function according to their ‘diktats’. This segregation of individuals, according to their role in the establishment and functioning of organization, only leads to the principal-agent relationship, which is particularly visible in the shareholder-manager relationship. In organizational context, the term principal is given to an individual or individuals who have the authority to hire other individuals to accomplish the set tasks because of their investments and other inputs. The hired individuals, whose duty is to comprehend and carry out the instructions of the principal is known as the agents. This exact principal-agent relationship will be visible in the shareholders and managers relationship, with the shareholders acting as the principal and making the managers work according to their instructions. However, this equation between them may not be uni-dimensional all the time, as according to the organizational situations and also the abilities of the shareholders and managers, the equation can change. Although, the shareholders may call the shots, the managers can have the upper hand in the principal-agent relationship, when they have more expertise and other needed information than the shareholders. In addition, even if the shareholders oversee the functioning of the managers, they may not be able to grasp all the actions and strategies of the manager. That is, the shareholders may not have the expertise to evaluate it. “Everyone can see the firm's revenues, but it takes very detailed knowledge to estimate how large those revenues could have been if the managers had acted differently.” (Lipsey and Chrystal 2007). However, when viewed from another perspective, this change in equation in the principal-agent relationship, with manager dominating the affairs could lead to problems for the organization, or in particular shareholders. That is, if the shareholders are not equipped to oversee and control the managers, the managers could indulge in actions that may be self-centric, pushing back the organizational goals to the background. Every manager could have personal goals, when he/she is working for the organization. Some times or maximum times, those goals could be in conflict with the owner's or organization’s goals. “The principal-agent problem arises within the firm when ownership and control are separated and the self-interest of managers may lead them to act other than in the interest of the shareholders.” (Lipsey and Chrystal 2007). This is in line with the Agency theory, which suggests that managers could seek to maximize their goals and benefits, at the expense of shareholders. The agents or managers will be able to act in a self-centred manner, as they have stronger asymmetric information, thereby causing troubles to the organizations. “Agents have the ability to operate in their own self-interest rather than in the best interests of the firm because of asymmetric information (e.g., managers know better than shareholders whether they are capable of meeting the shareholders' objectives) and uncertainty.” (Kleiman). The managers could act in a self-interested manner, when it comes to utilizing or ‘consuming’ corporate resources like allocating higher pays, incentives, etc. Even while viewing the supposed detrimental actions of the managers, there are also other aspects, in which the managers can exhibit positive behaviour, thereby taking the principal-agent relationship in the positive direction. That is, there may be situations as part of organizational functioning, during which managers had to cater to the interests of the shareholders, even while holding on to a moral standpoint. Managers may have to take decisions, which could financially profit the shareholders, but could be non-beneficial to other stakeholders particularly the employees, and also detrimental to the common public and even the environment. Managers had “to keep the corporation profitable while at the same time remaining cognizant of the ethical dilemmas of maximizing shareholder wealth to the detriment of other stakeholders.” (Gargerm 2010). Thus, it is clear that to orient the principal-agent relationship between the shareholder and the manager in an optimal manner, both the manager as well as the shareholders has to exhibit efficient and moral behaviour. Corporate governance involves proper functioning of the organization in its various ‘spheres’ including in its internal as well as its external environment. Proper functioning includes efficient as well as ethical functioning, so that it would result in profitability to the shareholders and other stakeholders including employees, suppliers, as well as the socio economic growth for the common public. Thus, optimum corporate governance will surely result in all round benefit to those directly as well as indirectly concerned. Although, now corporate governance is being discussed and practiced all over the world, it got mainly developed in the developed countries like USA, UK, Japan and Germany, however with different perspectives. Thus, the corporate governance system can be mainly distinguished based on the nature of treating shareholders and other stakeholders, (i.e. principal and agents) into Anglo-American Model and German-Japanese Model. That is, under the Anglo-American Model, which is followed in UK, corporate governance is mainly focused on the narrow goal of maximizing the interests and profits of the shareholders, more than the other stakeholders. However, in Japan and Germany, firms have a broader perspective and thereby focus on catering and fulfilling a broader group of stakeholders, which consist of all levels of employees, suppliers, importantly customers, along with the shareholders. The above mentioned idea of focusing and catering to the shareholders in the UK’s corporate governance system has been embodied in the legal framework in U.K, with the managers having a fiduciary duty to act in the interests of the shareholders. (Allen and Zhao 2007). However, quite contrast to this approach, in Japan and Germany, shareholders are viewed on equal terms with other stakeholders. Instead of working towards the accumulation of wealth for the owners or shareholders, under corporate governance, firms and managers carry out activities to cater to all sections of stakeholders, with Germany even incorporating this feature in its legal system. One way of articulating this view of Japan and Germany is that corporate governance has to ensure that firms use the society’s resources by taking into account and benefiting a range of stakeholders such as employees, suppliers, and customers, in addition to shareholder. (Allen and Zhao 2007). Apart from focusing on all the stakeholders, as part of the corporate governance, firms also have to give sizable representation to the employees in their supervisory board, thereby making them part of the organizational strategies formulation. That is, instead of giving only the shareholders prominent position and decision making authority, the employees and other stakeholders also has to be given roles, so they can come up with optimum contribution regarding the various processes of organizational functioning. This approach of corporate governance is visible in Japan and Germany, but not in UK. “The best known expression of this reform movement was the extension in Germany of employee representation rights at supervisory board level from one third of the seats to one half in the case of companies employing more than 2000 workers,” (Davies 2000). Likewise, in Japan, maximum rights are given to employees during the decision making process. However, in UK, this feature is not practiced extensively, with only the shareholders playing the main role. “The matter was even debated seriously in the UK, where the traditions of both company and labour law might have been thought to be hostile to such a development.” (Davies 2000).This could have a demotivating effect on the employees from all levels, as non-participation can lead to isolation without any teamwork. So, this feature of giving sizable representation to the employees in the supervisory body can be optimally adopted in UK. Normally, if the employees are given importance and made to contribute their inputs, suggestions, etc to the decision making process, it will surely elevate their motivation levels. This being the case, this strategy can be maximally implemented, leading to effective corporate governance. The other aspect, which can be incorporated in UK, is providing incentives, special allowances and even paid holidays to the employees. That is, in UK, wages are based only on the nature of the job done, with the employees' personal circumstances having no effect on their compensation. (Allen and Zhao 2007). On the other hand, in Japan and Germany, employees are commonly given paid holidays, special allowances for children of the employees and other incentives. This again shows how the skewed corporate governance of favouring mainly the shareholders is visible in UK. That is, these differences underline the fact that in the UK, the firms are designed mainly to create wealth for shareholders whereas in Japan and Germany, “the firm is a group of people working together for their common benefit” (Allen and Zhao 2007). Thus, from the above analysis of corporate governance, it is clear that UK has a different system, when compared to Japan and Germany. The UK’s system has certain inherent faults and it has to follow the German-Japanese model of corporate governance to optimize the shareholder and manager relationship, thereby benefiting various stakeholders. References Davies, PL 2000, The Board of Directors: Composition, Structure, Duties and Powers, viewed on April 5, 2011 http://www.oecd.org/dataoecd/21/30/1857291.pdf. Gargerm, J 2010, Principal-Agent Relationships and the Conflicts That Can Arise Within Them, viewed on April 5, 2011 http://www.brighthub.com/office/finance/articles/19031.aspx Kleiman, RT, AGENCY THEORY, Reference for Business, viewed on April 5, 2011 http://www.referenceforbusiness.com/encyclopedia/A-Ar/Agency-Theory.html Lipsey, RG and Chrystal, KA 2007, Principal-agent theory, Oxford University Press, viewed on April 5, 2011 http://www.oup.com/uk/orc/bin/9780199286416/01student/interactive/lipsey_extra_ch09/page_18.htm Read More