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Concept of stakeholder theory
An analysis of corporate governance
An analysis of corporate governance
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Agency theory, stakeholder theory, stewardship theory and transaction cost economics are the main theories that influence the development of corporate governance. The corporate governance can be drawn from a variety of disciplines and areas such as finance, economics, management, accounting rules, legal and regulatory, organization behaviours, etc. It express concerns in both internal aspects of the company (monitoring internal control & board structure) and the external aspects (eg. relationship of labour policies, role of multi shareholders and other stakeholders) besides protections of minority shareholder’s right (Claessens and Yurtoglu; 2012; Mallin, 2013). The Management will have the responsibility for the design, implementation and maintenance of the internal controls to prevent and detect any fraud that might happen.
In today’s business environment, a good corporate governance will be effective in stopping more financial scandals and collapses in future (Mallin, 2013) and protecting the reputation of both the company directors and the firms (Turnbull, 2000). Besides, it will also add value by improving firm’s performance and improvement on other efficiency. Contrarily, a poor corporate governance can affect the functioning of a country’s financial markets and the volume of cross-border financing (Claessens and Yurtoglu, 2012).
2. AGENCY THEORY vs. STAKEHOLDER THEORY
2.1. Agency Theory
Agency theory explains the relationship in between the principals and agents (P-A). Under the law of equity, the agents (e.g. directors) have a legal obligation to protect the interest of principals (e.g. shareholders). Jensen and Meckling (1976) identified the agency relationship as where a contract engaged shareholder (“Princ...
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...tter exercise their stewardship responsibilities, which applied on a “comply or explain” system. Stewardship theory stresses on the beneficial consequences on shareholder returns of facilitative authority structures which unify command by having roles of CEO and chair held by the same person. Stewardship theory focuses not on motivation of the CEO but rather facilitative, empowering structures, and holds that fusion of the incumbency of the roles of chair and CEO will enhance effectiveness and produce, as a result, superior returns to shareholders than separation of the roles of chair and CEO (Donaldson and Davis, 1991).
6. CONCLUSION
View of traditional agency theory more concern about the relationship between principal and agent, create value and maximizing principal’s wealth. Contrarily, the stakeholder theory consisting of more humanity and motivation implicit.
“Agency relationships are formed by the mutual consent of a principal and an agent.” (Cheeseman, p.487) Our book goes on to cite the Restatement (Second) of Agency,
One insight about human nature in Louise Endrich’s The Red Convertible is that family members always try to heal and support each other, but sometimes it does not work out. In the story, Henry is detained by the Vietnamese soldiers during the war and the readers are unaware of what happened to him during that time: Whereabouts I did not know. He wasn't such a hot letter writer, and only got off two before the enemy caught him. I could never keep it straight, which direction those good Vietnam soldiers were from. I wrote him back several times, even though I didn't know if those letters would get through.
Bibliography: Turnbull, S. (1997). Corporate governance: its scope, concerns and theories. Corporate Governance: An International Review, 5 (4), pp. 180--205.
Introductory, agency theory discusses the relationship in which one party, the principal, delegates work to another, the agent (Eisenhardt, 1989). The core idea behind agency theory is to through contracting align the interest of shareholders (principal) with that of the managers (agents) in order to maximize shareholders value. Thus, the decision-making is being separated from the party who bears the risk; therefore, problems can arise. Firstly, the principal cannot verify whether the agent has behaved appropriately (the agent and principal have partly di...
In Edward Freeman's A Stakeholder Theory of the Modern Corporation he suggests a transformation of the corporate system by replacing the notion that managers have a duty to stockholders with the concept that managers bear a fiduciary relationship to stakeholders (56). In its narrow definition stakeholders refer to customers, suppliers, management, owners, employees and the local community- those that are vital to the survival and success of the corporation. This direct approach of focusing on the interests of all those that are vital to its survival embraces all of the elements that have evolved in our society as a result of the absence of direct concern or lack of morality for the stakeholders in the Stockholders Theory.
In contrast , the shareholder theory organisations or organisation's decision-makers only have the responsibility to their shareholders by increasing the organisation profits and should only make the decisions to increase as much as possib...
This separation between ownership and managerial control in this instance can be problematic as the principal and the agents have different interests and goals. In a large publicly traded corporation such as NOL/APL, shareholders (principals) lack direct control when the CEOs (agents) make decisions t...
This report gives the brief overview of the concept of corporate governance, its evolution and its significance in the corporate sector. The report highlights various key issues and concerns that are faced by the organizations while effectively implementing and promoting Corporate Governance.
Solomon, J (2013). Corporate Governance and Accountability. 4th ed. Sussex: John Wiley & Sons Ltd. p.7, p9, p10, p15, p58, p60, p253.
In today’s day and age, there is a lot of news that is related to corporate accounting fraud as companies intentionally manipulate their financial statements to show a better picture of their financial health. The objective of financial reporting is to provide financial information about a company to its various stakeholders such as investors and creditors so that these stakeholders can make decisions accordingly. Companies can show a better image of their financial well being by providing misleading information. This can be done by omitting material information from the books or deceitful appropriation of assets such as inventory theft, payroll fraud, check forgery or embezzlement. Fraudulent financial reporting will have an effect on the
Agency Theory or Principal Agent Theory is the relationship that involved the contractual link between the shareholders (the principals) that provide capital to the company and the management (agent) who runs the company. The principals will engage the agent to carry out some services on their behalf and would normally delegate some decision-making authority to the agents. However, as the number of shareholders and the complexity of operations grew, the agent, who had the expertise and essential knowledge to operate the business and company tend to increasingly gained effective control and put them in a position where they were prone to pursue their own interests instead of shareholder’s interest.
The end of 2001 and the start of 2002 saw the end of a period of magnified share prices and booming businesses. All speculations of misrepresentation came to light and those firms which once seem unconquerable were now filing for bankruptcy. Within this essay, I shall discuss the corporate governance mechanisms and failures which led to the Enron scandal resulting in global corporate governance reforms being encouraged.
An agency relationship is formed between two parties when one party (the agent) agrees to represent another party (the principal). Normally, all employees who deal with third parties are considered agents. Principal-Agent relationships are defined as the understanding that the agent will act for and on behalf of the principal. (Cheeseman) The agent assumes an obligation of loyalty to the principal that he will follow the principal’s instructions and will neither intentionally nor negligently act improperly in the performance of the act. An agent cannot take personal advantage of the business opportunities the agency position uncovers. A principal-agent relationship is fiduciary, meaning these obligations bring forth a fiduciary relationship of trust and confidence. As such, an agency relationship is governed by employment law.
The Asian Financial Crisis which exposed the corporate governance weaknesses was a wake-up call for all the policymakers, standard setters as well as the companies (OECD, 2014). The parties that involved and affected from the crisis started to realize the importance of having strong corporate governance practices in their countries. Consequently, the Asian economies along with the OECD established the Asian Roundtable on Corporate Governance in 1999, in order to support the enhancement of corporate governance rules and practices (OECD, 2014).
The office of the Director of Corporate Enforcement (ODCE, 2015), Ireland defines Corporate Governance as “the system, principles and process by which organisations are directed and controlled. The principles underlying corporate governance are based on conducting the business with integrity and fairness, being transparent with regard to all transactions, making all the necessary disclosures and decisions and complying with all the laws of the land”. It is the system for protecting and advancing the shareholder’s interest by setting strategic direction for the firm and achieving them by electing and monitoring the capable management (Solomon, 2010). It is the process of protecting the stakes of various parties that have their interest attached with a company (Fernando, 2009). Corporate governance is the procedure through which the management of the company is achieving the goals of various stake holders (Becht, Macro, Patrick and Alisa,