Organizational Life & Self-Interest

This assignment delves into the relationship between unproductive staff recruitment and the agency problem, arguing that such hiring can amplify agency costs. It concludes by suggesting that much of organizational life stems from the self-interests of executives.

Running head: ACCOUNTING THEORIES AND CURRENT ISSUES
Accounting Theories and Current Issues
Name of the Student:
Name of the University:
Author Note

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ACCOUNTING THEORIES AND CURRENT ISSUES
Table of Contents
Introduction......................................................................................................................................2
Agency theory – the selected journal review...................................................................................2
Implications of the Agency theory..................................................................................................6
Conclusion.......................................................................................................................................7
References........................................................................................................................................8

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ACCOUNTING THEORIES AND CURRENT ISSUES
Introduction
Accounting theories are continuously being modified and developed in order to improve
the accounting policies that have been used by the organizations all over the world. This means
that the importance of accounting theories have grown in the recent times. The firms adopt and
implement the accounting theories depending on the nature of business and other related criteria
(Battiston, 2016).
This particular study aims to provide an overview into the implications of accounting
theories (agency theory, institutional theory, stakeholder theory, legitimacy theory, debt-
covenant theories) to organizations. The particular journal article that has been chosen for the
purpose of reviewing and analyzing the implications of the agency theory is the “Agency Theory
and Bounded Self-Interest” by Douglas A. Bosse and Robert A. Phillips.
The journal article allegedly suggests that the agency theory invariably draws attention to
the behavior of certain CEOs and boards that in totality lead to the creation of losses for the
society. This particular study aims to provide an overview into the implications of agency theory
in regards to how the adoption of the particular theory affects the other entities in the related
society.
Agency theory – the selected journal review
The agency theory as mentioned in the journal is one of the most dominant theories in the
context of an economic organization and management. The problem that this particular theory
aims to resolve is that the theory explains the agency problem that arises whenever a single
party, who is the principal, employs another party, who is the agent for the purpose of creating
value. The particular problem that arises when such a situation occurs is that the particular
interests of the principal and the agents become different which ultimately lead to imperfect
information to the principal about the contribution by the agent. This in turn leads to certain
costs, which are popularly known as agency costs which have to be ultimately borne by the
society (Bauhr & Grimes, 2014).

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ACCOUNTING THEORIES AND CURRENT ISSUES
The agency theory has been formulated on the basis of certain assumptions which are as
follows:
 All actors that are involved in this theory are in all probabilities narrowly sel-interested
 All actors are rational in a bounded way
 The agents are more exposed to risk than the principals
These assumptions suggest that the action of aligning the stock options with the payments
of the CEOs of the organizations will invariably result in these chief executives working more
efficiently which will ultimately elevate the performance of the firm. However, there have been
certain experts that suggest that this practice of aligning the stock options with the pay of the
CEOs leads to bigger losses incurred by the particular firms in comparison for the gains that have
been expected from such actions (Burgers & Covin, 2016).
The journal article that has been examines the implications of the agency theory by the
application of the bounded self-interest. Self-interested actors who are bounded aim to increase
their self-interest up to the point where the fairness standards are not violated. The reported
journal article that has been selected for the purpose of evaluation in this study list three
plausible problems that exist in the agency theory (Bauhr & Grimes, 2014).
Firstly, the CEOs with the perspective that the Board treats them better than their own
expectations will automatically work in an improved manner, which will lead to improvement in
the performance of the particular firm. Therefore, as it is evident, this will lead to the incurrence
of agency benefits. The authors of the article further suggests that the experts the observing the
implication of the agency theory across a wide range of organizations have suggested that the
employees or other entities work with redoubled zeal when they discover the fact that the
treatment that they receive is much more than their estimations (Bauhr & Grimes, 2014).
Secondly, the perception by the agents that are not being treated fairly may lead to the
generation of the agency costs that are much more than the amount estimated by this particular
theory. This is because except the narrowly self-interested executives, the particular executives
who are self interested in a bounded way will, in all probabilities, incur additional costs in order
to re-establish what is right in the organization. Thus, as it has been stated by many experts, the

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ACCOUNTING THEORIES AND CURRENT ISSUES
agency theory in the pursuit of resolving the agency problems have resulted in aggravating the
same (Ho & Bodoff, 2014).
Thirdly, the major contribution by the agency theory is that it readily takes into
consideration that the executives of a particular organization are, in all probabilities, narrowly
self-interested. A CEO who is self-interested in a bounded way will be a better example for the
society than the CEO who is narrowly self-interested. This means that the CEO of an
organization raising the issue of unfair treatment of its agents will enhance the social norms of
justice thus, contributing to the society in a positive way. The authors of the journal further state
the extent by which the expectations of justice and fairness are realized and accepted by the
CEOs will have a similar ripple effect through the society, which is a positive mechanism. Thus,
the welfare of the agents can be achieved by the application of the agency theory when it does
not readily assume that the executives of an organization are by default, narrowly self-interested
in nature (Pepper & Gore, 2015).
The authors of the journal have tested the theory against the backdrop of a corporate
governance phenomenon, which have involved the board of directors acting on the behalf of the
firms. This means that the boards of directors act as the principals while the CEOs act as the
agents who have been hired to increase the value of the firms by resulting in the efficient
management of the firms. Furthermore, it has been suggested by the different experts that the
theory needs further refinement for providing an improved explanation of the factor that how the
actions of the principals affect aggravate or mitigate the agency problems (Cicmil, 2017).
A particular solution to the agency problem that is recommended by the agency theory is
that the alignment of the interests of the organization with that of the CEO by facilitating the
providence to the CEOs to hold equity or buy equity in the firm. This is because the CEO of an
organization who is also the shareholder of the same organization will be doubly motivated to
improve the performance of the organization as his earnings are directly linked with the
organization incurring increased revenues (Zattoni, Gnan & Huse, 2015).
However, there have been certain studies that claim that the particular practice of making
the CEOs hold stock or compensation of the CEOs with the help of the stock options can at times

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ACCOUNTING THEORIES AND CURRENT ISSUES
aggravate the agency problem rather than mitigating it. Some experts suggest that these practices
invariably leads to the fraud related to securities within the organization.
Next, the other effective tool that is proposed by the theory for minimizing the agency
costs incurred by an organization is monitoring. It is natural and inn accordance to the hierarchy
of authority inside an organization that the action of a CEO will be evaluated and monitored by
the Board of directors. The degree of efficiency of this particular process of monitoring depends
on the independence of the board members. In terms of the composition of the board of directors
of a particular firm, the agency theory suggests that the efficiency of the actions carried out by
the board members will increase when the majority of the members of the board neither are
officers of the particular organization, nor have any previous link with the organization (Zattoni,
Gnan & Huse, 2015).
The most contrasting theory to the agency theory is the stewardship theory. This theory is
used for counteracting the agency problems by offering the alternatives to agency. The
stewardship theory can be explained by the situation in which the managers of an organizations
do not need the alignment of their individual goals with the organizational goals but the manager
himself can act as the steward for aligning his motive with the objectives of the organizations.
Thus, it can be deduced from the discussion that the agency theory in spite of being the most
dominant theory in terms of economic organizations comes with its own limitations and
drawbacks. The particular assumption by the theorists that the principals or the executives of a
particular organization will be narrowly self-interested has strengthened the theory. However,
there are certain areas that have affected the positive changes that the agency theory could bring
about in terms of minimization of the agency costs and other related issues (Kleven, Kreiner &
Saez, 2016).
The particular recommendations suggested by the theory for minimizing the agency
problem like monitoring the behavior of the agents by the board of directors, establishment of the
proper remuneration system for the purpose of rewarding the deserving agents and controlling
the market have been efficient in achieving the desired outcome. However, there have been
certain studies that suggest that the exact practices listed down by the agency theory lead to the
aggravation of the agency problem that it aims to mitigate (Kozlenkova, Samaha & Palmatier,
2014).

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ACCOUNTING THEORIES AND CURRENT ISSUES
Implications of the Agency theory
There are certain implications of the agency theory (Kozlenkova, Samaha & Palmatier,
2014). The implications of the adoption of the agency theory can be listed down as follows:
 The alignment of the managerial interests with the shareholders might appear at the initial
stages, to be effective and meaningful. However, the utilization of the outcome based
incentive packages and a board of directors that consist of majority of the shareholders of
the organization may lead to an inflated level of risk.
 The different studies suggest that the different solutions provided by the theory for
resolving the issue of agency problem like smaller board sizes and remuneration
associated with options or stocks have been found to result in an increased amount risk
that has been undertaken by the firms adopting the agency theory.
 Financial education along with the experience related to work does affect the risk taking
in a positive manner
 The board of directors who are financially literate end up adopting the agency theory
which ultimately lead to the shareholder primacy
 There have been studies that support this particular theory and believe that the agency
theory can lead to the development of a conceptual framework which can be utilized as
the foundation of management accounting
 However, there are certain reasons for the agency theory being the most dominant theory
in case of economic organization. This is because the adoption of the agency theory
facilitates the effective dealing of the risks that exist between the principal and the agent.
However, any kind of favoritism towards the agent leads to the entire burden of risk on
the principal
 The agency theory also results in the effective dealing of the numerous situations that
involves a principal and an agent. For instance, a portfolio manager is an agent to his
client who acts as the principal
 Thus, the implication of the agency theory has both positive and negative effects.
However, the firms deriving the efficiency levels by adopting this accounting theory
cannot be denied by any means

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ACCOUNTING THEORIES AND CURRENT ISSUES
Conclusion
Thus, as it can be concluded from the preceding paragraphs, the framework that can be
developed by following the agency theory has a high degree of relevance in terms of studying the
behavior by the different entities in the organization. The agency is particularly related to the
human resource that is utilized within the organization. Therefore, it is the primary duty of the
human resource department personnel to identify any kind of agency tension within the
organization at the initial level. One of the major consideration that should be realized by the
organizations is that the recruitment of unproductive staff may aggravate the agency problem
thus, resulting in increased agency costs. Hence, the conclusion that can be arrived at is that
much of the organizational life is based on self-interest of the executives of the organization.

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ACCOUNTING THEORIES AND CURRENT ISSUES
References and Bibliography
Battiston, S., Farmer, J. D., Flache, A., Garlaschelli, D., Haldane, A. G., Heesterbeek, H., ... &
Scheffer, M. (2016). Complexity theory and financial regulation. Science, 351(6275),
818-819.
Bauhr, M., & Grimes, M. (2014). Indignation or resignation: the implications of transparency for
societal accountability. Governance, 27(2), 291-320.
Burgers, J. H., & Covin, J. G. (2016). The contingent effects of differentiation and integration on
corporate entrepreneurship. Strategic Management Journal, 37(3), 521-540.
Cicmil, S., Cooke-Davies, T., Crawford, L., & Richardson, K. (2017, April). Exploring the
complexity of projects: Implications of complexity theory for project management
practice. Project Management Institute.
De Massis, A., Kotlar, J., Chua, J. H., & Chrisman, J. J. (2014). Ability and willingness as
sufficiency conditions for family‐oriented particularistic behavior: implications for theory
and empirical studies. Journal of Small Business Management, 52(2), 344-364.
Ho, S. Y., & Bodoff, D. (2014). The effects of Web personalization on user attitude and
behavior: An integration of the elaboration likelihood model and consumer search theory.
MIS quarterly, 38(2).
Kleven, H. J., Kreiner, C. T., & Saez, E. (2016). Why can modern governments tax so much? An
agency model of firms as fiscal intermediaries. Economica, 83(330), 219-246.
Kozlenkova, I. V., Samaha, S. A., & Palmatier, R. W. (2014). Resource-based theory in
marketing. Journal of the Academy of Marketing Science, 42(1), 1-21.
Musacchio, A., Lazzarini, S. G., & Aguilera, R. V. (2015). New varieties of state capitalism:
Strategic and governance implications. The Academy of Management Perspectives, 29(1),
115-131.

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Olafsen, A. H., Halvari, H., Forest, J., & Deci, E. L. (2015). Show them the money? The role of
pay, managerial need support, and justice in a self‐determination theory model of
intrinsic work motivation. Scandinavian journal of psychology, 56(4), 447-457.
Pepper, A., & Gore, J. (2015). Behavioral agency theory: New foundations for theorizing about
executive compensation. Journal of management, 41(4), 1045-1068.
Zattoni, A., Gnan, L., & Huse, M. (2015). Does family involvement influence firm performance?
Exploring the mediating effects of board processes and tasks. Journal of Management,
41(4), 1214-1243.