Agency theory vs stakeholder theory. Agency Theory vs Stakeholder opportunities.alumdev.columbia.edu 2022-10-21
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Agency theory and stakeholder theory are two distinct approaches to understanding the relationships and responsibilities within a business or organization. While both theories have their own strengths and weaknesses, they offer different perspectives on the role of corporate governance and the management of a company's resources.
Agency theory is based on the idea that the primary goal of a business is to maximize shareholder value. Under this theory, the management of a company is seen as an agent acting on behalf of the shareholder, who is the principal. The shareholder is typically the owner of the company and holds a financial stake in its success.
The purpose of agency theory is to align the interests of the management and the shareholder, so that the management's actions are in the best interest of the shareholder. To achieve this alignment, the shareholder can use various forms of compensation and incentives, such as stock options and performance-based bonuses, to motivate the management to act in their best interests.
One of the key assumptions of agency theory is that the management and the shareholder have conflicting interests, and it is the role of the shareholder to ensure that the management's actions are aligned with their own interests. This can be achieved through the use of mechanisms such as board oversight and performance evaluation.
However, agency theory has been criticized for its narrow focus on shareholder value and its disregard for the interests of other stakeholders, such as employees, customers, and the community. This criticism has led to the development of alternative theories, such as stakeholder theory.
Stakeholder theory is based on the idea that a business has a responsibility to all of its stakeholders, not just its shareholders. Stakeholders include not only shareholders, but also employees, customers, suppliers, and the community.
Under stakeholder theory, the management of a company is responsible for balancing the interests of all stakeholders and ensuring that the company's actions are in the best interests of the overall stakeholder community. This can involve making decisions that may not maximize shareholder value in the short term, but that are in the long-term interests of the company and all of its stakeholders.
One of the key benefits of stakeholder theory is that it recognizes the interdependence of a company and its stakeholders and the need for a business to consider the impact of its actions on all stakeholders. This can lead to more sustainable and responsible business practices, as the company takes into account the needs and concerns of all stakeholders.
However, stakeholder theory has also been criticized for its lack of a clear and objective way to prioritize the interests of different stakeholders and for its potential to lead to conflicting interests and decision-making.
In conclusion, agency theory and stakeholder theory are two different approaches to understanding the role of corporate governance and the management of a company's resources. While agency theory focuses on maximizing shareholder value, stakeholder theory recognizes the interdependence of a company and its stakeholders and the need for a business to consider the impact of its actions on all stakeholders. Both theories have their own strengths and weaknesses, and the appropriate approach will depend on the specific context and goals of a business.
Agency Theory vs Stakeholder opportunities.alumdev.columbia.edu
Firms are considered to have a clear, visible and legitimate duty of care to the public, on environmental issues Bansal, 2005. These two theories can be compared and contrasted and used in the outlining of various interests of stakeholders, employees, the general public, customers of an organization and vendors Investopedia, 2018. There may be a misalignment with the fundamental shareholder interests of maximising overall financial return while assuming acceptable risk. Nike, a multi-national company selling sports ware was involved in employing children as young as 10 years as factory workers in Pakistan and Cambodia. Hence, control mechanisms recommended based on agency theory are not only expensive but also commercially unsuccessful. Thus, stewardship theory advocates management empowerment and the active role of shareholders in their own companies.
Reframing the Debate Between Agency and Stakeholder Theories of the Firm
It then becomes extremely vital that a greater number of corporations are aligned with this theory, and they also help propagate it to other groups. Firms should therefore recognize the explicit contract between them and shareholders as well as the implied contract between themselves and other stakeholders Kassinis and Vafeas, 2013. This theory states that in a healthy corporate culture built on honesty, integrity, and trust, there needs not to be an emphasis on monitoring. We created simple notes with exam tips, case summaries, sample essays, tutorial videos, quizzes and flashcards all specifically designed for you to get a First Class in the simplest way possible. The graphics in this PowerPoint slide showcase four stages that will help you succinctly convey the information.
The relationship between agency theory, stakeholder theory and Shariah supervisory board in Islamic banking: An attempt towards discussion
Stakeholders have interest in the company and can affect or be affected by the company. Stakeholder Theory: An Overview There are certain theories that explain business relationships and are used to understand and explain these relationships. Alternatively, Enron 2001 scandal can be linked to the existence of agency problem within its board of directors. During the financial crisis, it became apparent that firms needed to consider all their stakeholders. Jensen and William Meckling popularized the concept. Because of their massive sizes, corporate businesses have the capacity to impact wide range of society and their actions have resulted in spill over effects that affect well-being of many people other than shareholders.
Agency Theory vs. Stakeholder Theory: What's the Difference?
Shareholders and Company Executives In this relationship, the company executives serve as the agents and the 2. An interesting reading that can be linked to this situation is the case of Robert Maxwell. This theory highlights the existence of healthy working relationships between managers and shareholders, which, in turn, helps minimize the costs of monitoring and controlling while increasing the speed of decision-making and the autonomy of managers and executives. Speculative philosophy as well as reports of empirical research are welcomed. The rationale behind maximizing their own utility has extended to the corporate world where one party principal concedes authority to another party agent to act on his behalf. Controlling mechanisms are required, as without them the quality of products will inevitably fall. All expenses associated with control are offset by the increase in quality and decrease in corporate theft.
Agency Theory Vs Stakeholder Theory Ppt Powerpoint Presentation Inspiration Elements Cpb
In addition, you can alternate the color, font size, font type, and shapes of this PPT layout according to your content. Focus The main focus of the agency theory is primarily towards taking care of the interests and well being of the shareholders. The two basic assumptions of the agency theory are as follows: 1. Findings The authors presented important arguments on the difference between ordinary theories to explaining corporate governance and Islamic perspective. However, it also has disadvantages like narrow focus and a limited set of presumptions.
Agency Theory vs. Stakeholder opportunities.alumdev.columbia.edu
These include shareholders, employees, suppliers, government, creditors, the entire public and local community and customers. Conclusion There are a number of points of difference between agency theory and stakeholder theory. In agency theory, there is an analysed relationship that conceptualizes between shareholder principal and manager agent when there is a delegation of activity Jensen and Meckling, 1976. In a political context, elected representatives are the agents, and their constituents are the principals. It is expected that in the future researches may bring better solutions that optimises all the diverse interests.
Corporate Governance: Agency and Stewardship Theories
The conflict between agency and stakeholder theories of the firm has long been entrenched in organizational and management literature. To summarise, these approaches encourage a better understanding of business behaviour and the probable need for clear regulations and good governance. Board of Directors and CEO The 3. For example, increasing dividends would favour the shareholders more in the short term but mean the directors have less money to allocate into investments. It is because I view myself as an honest person that can be entrusted to do my duty without anyone looking over my shoulder. In particular, the theories provide a means of understanding business challenges.
Their interests are different from the principal. Appreciation, status, and satisfaction from a job well done are what drives employees better than threats of punishment and intimidation. Personal Reflections and Conclusions Personally, I feel that the Stewardship theory is closer to my own set of values and beliefs than the agency system. Since its initiation in 1980, the editors have encouraged the broadest possible scope. In spite of the theory provides executives with mechanisms to ensure prolonged survival of the firms, he argued that the stakeholder theory does not provide clear corporate purpose of maximizing shareholders values that comply with the market economy.
Reframing the Debate between Agency and Stakeholder Theories of the Firm on JSTOR
This theory is very extensive and covers various areas, such as accounting, marketing, economics, sociology, politics, corporate and organizational behaviors. Both theories offer a platform that sheds light on business associated challenges that may potentially arise from factors such as misinformation or caused by differences in business interests. The operations director views stakeholder concern as altruisticrather than an obligation of directors or business advantage. Stakeholder theory as originally defined by Edward Freeman, 1984 suggested that as stakeholders are identified, management should give due regard to the interest of the group of stakeholders when decisions and recommendations are made in the corporation. This coursework examines the views of the two theories by linking them to actual corporate governance issues and providing practical examples.