Agency theory vs stakeholder theory. Agency theory and stakeholder theory exam question 2022-10-10

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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.

Reframing the Debate between Agency and Stakeholder Theories of the Firm on JSTOR

agency theory vs stakeholder theory

The people choose political representatives to govern the nation in a way that best serves their interests. He developed a stakeholder theory to generate a greater total concern for the third parties because they equally contribute to the returns of the organisation. Furthermore, we can apply a sustainability approach. So, without any delay, click on the download button now. Stakeholder theory helps to define the composition of an organisation as a collection of several individual groups with differing interests.

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Agency Theory

agency theory vs stakeholder theory

The resultant of such differences has seen the rise of. Social and environmental issues that affected well-being of many stakeholders need to be considered. However, the increasing number of corporate scams affects employer and employee relationships. Agency theory VS stakeholder theory The agency theory and the stake holder theory can both be used in the explanation of various types of relationships in business to create a better understanding of them. You can similarly convert our content to any other desired screen aspect ratio. However, voters feel deceived when their elected officials do not fulfill guaranteed promises.

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Agency theory and stakeholder theory exam question

agency theory vs stakeholder theory

Hence, control mechanisms recommended based on agency theory are not only expensive but also commercially unsuccessful. A Primer on Corporate Governance: China. Alternatively, Enron 2001 scandal can be linked to the existence of agency problem within its board of directors. As well as its shareholders because it is a philanthropic effort. In particular, the theories provide a means of understanding business challenges. These interests, when taken together, are a representation of the will of the firm.

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Reframing the Debate Between Agency and Stakeholder Theories of the Firm

agency theory vs stakeholder theory

Since its initiation in 1980, the editors have encouraged the broadest possible scope. Overview this article is to help you understand how to write a model answer. These Business essays have been submitted to us by students in order to help you with your studies. He may be perceived as questioning if the behaviour is aligned. Shareholders direct and indirect monitoring concentrated, diverse and via corporate boards who demand huge agency cots and control on agency behaviour have been exercised regardless of the free ride problems in diverse monitoring. In order to promote a dialogue between the various interested groups as much as possible, papers are presented in a style relatively free of specialist jargon. 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.

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Agency Theory Vs Stakeholder Theory Ppt Powerpoint Presentation Inspiration Elements Cpb

agency theory vs stakeholder theory

This coursework examines the views of the two theories by linking them to actual corporate governance issues and providing practical examples. The graphics in this PowerPoint slide showcase four stages that will help you succinctly convey the information. Some people regard stakeholder concern as a philanthropic option. There are problems in business that may be a result of genuine misinformation or may actually be caused by clashing business interests. For the same overtime, working hours, and paid holidays as full-time employees.

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Difference between Agency Theory and Stakeholder Theory

agency theory vs stakeholder theory

Here are some examples introductions to each approach. In that, multinational companies whether big or small incorporated in the UK must follow this common law of jurisdiction whereas, a default on the part of a companies operating in Germany must comply to the civil law of the state. Systems of production, consumption, marketing, advertising, social and economic accounting, labour relations, public relations and organisational behaviour are analysed from a moral viewpoint. During the financial crisis, it became apparent that firms needed to consider all their stakeholders. It is not in the best interests of all shareholders in the short run. Corporate agency theory necessitates both incentives from aligned remuneration packages focused on shareholder value objectives and controls from governance, risk management, and internal controls that prevent aberrant behaviour.

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Agency Theory and Stakeholder Theory compared

agency theory vs stakeholder theory

Moore: 1990, Business Ethics McGraw Hill, New York. This philosophy is still in existence even though various psychological studies have proven that human beings cannot be rational all the time. He also recognises that others may view the social issue favourably and that his reputation will increase as a result. It operates on the assumption that the interests of principals and executives remain in the state of permanent conflict, which cannot be solved. Article Link to be Hyperlinked For eg: Source: In a business scenario, shareholders are the principals, and company executives are the agents. The principals appoint the agents to perform specific duties.

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The relationship between agency theory, stakeholder theory and Shariah supervisory board in Islamic banking: An attempt towards discussion

agency theory vs stakeholder theory

According to this theory, the principals elect their representatives and give them the responsibilities to act and protect their best interest in return for compensation. This theory helps to define the composition of an organisation as a collection of a number of individual groups with differing interests. 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. Firms are considered to have a clear, visible and legitimate duty of care to the public, on environmental issues Bansal, 2005. Positive and principal agent kinds are significant. Difference between Agency Theory and Stakeholder Theory Agency Theory The agency theory helps to outline the main interests of both the principal as well as the agent, which includes an individual and their financial planner. Ouchi: 1986, Organizational Economics Jossey-Bass, San Francisco.

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Corporate Governance: Agency and Stewardship Theories

agency theory vs stakeholder theory

Stakeholder Theory The stakeholder theory mainly suggests that there are a number of differences between the individual groups like the investors, employees, and suppliers in any organisation. The agent may also choose to act in self-interest instead of the principal's interests. It is because I view myself as an honest person that can be entrusted to do my duty without anyone looking over my shoulder. Nevertheless, these policies are to ensure that managers perform their duties diligently in the best interest of their principals. To establish the perfect contract between the principal and the agent, principal-agent researchers concentrate on principal-agent interactions and relationships. The style and level of dialogue involve all who are interested in business ethics — the business community, universities, government agencies and consumer groups.


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