The current crisis:is it really a matter of governance - Essay Example

An old empirical theory by Denis & Denis (1999. pp1071-1074) described the agency theory acting as controller of risk taking attitudes in corporations which states that strategic decisions are taken by people keeping in view their personal interests above the organizational interests, shareholder interests & investor interests. Every corporation comprises of two different stakeholders – the share holders and the managers – that normally are face off with each other. The shareholders are interested to maximize their wealth and hence tend to take higher risks in anticipation of higher gains whereas the managers tend to take lower risks to ensure lower managerial overheads and easy going life in the corporation.

Denis & Denis (1999. pp1071-1074) argue that this is a perfect balance resulting in effective corporate governance of corporations such that legal & statutory compliance and general public interest are taken care of. However, the changing corporate landscape have converted even the managers as shareholders by virtue of variable pay, incentive schemes, bonuses and in many cases by offering stocks. But if the managers are also made shareholders then such a balance breaks whereby taking higher risks becomes the part of life in the corporations with no-one to curb the illegal activities, malpractices, corporate frauds, manipulations in accounting statements, etc.. Many global Banks possess internal policies of providing corporate stocks to all employees’ right up to the level of CEO.

In this entire process, the only agents that can strike the balance are the external auditors. But it seems that in some way, they also are becoming shareholders of organizations. The spurt of corporate scams and the failure of risk management & auditing that resulted in the current financial crisis has raised questions about effectiveness of corporate governance in the organizations. There needs to be a balance between attempts to maximize shareholder’s