Critical Analysis of Agency Theory and Corporate Governance Practices

This essay provides a comprehensive analysis of business ethics and corporate governance, focusing on agency theory and its alternatives. It defines business ethics and corporate governance, emphasizing the importance of ethical practices and structures within organizations. The essay explores agency theory, explaining the relationship between agents (managers) and principals (shareholders), and discusses its role in management control systems. It then examines alternative theories of corporate governance, including stewardship theory, stakeholder theory, and resource dependency theory. Each theory's principles and implications are discussed, highlighting their strengths and weaknesses. Finally, the essay addresses the practical problems of implementing these theories, such as the challenges of aligning interests and ensuring ethical behavior in complex organizational settings. The analysis underscores the importance of corporate governance in achieving organizational objectives and maintaining stakeholder relationships.

Ethics and Corporate
Governance
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INTRODUCTION
Business ethics can be defined as moral functionary within the business organization so that
management can take effective decision by analysing the choices if they are correct or wrong
(Namazi, 2013). Therefore, to ensure the ethical practices within the organization, it is required
to follow proper systems mainly known as corporate governance. It is defined as set of ethical
system through which business organizations is being governed and controlled. It mainly focuses
on providing guidelines and road-map that defines how organization would be directed so that it
may result in accomplishing the objectives and it will also be beneficial for stakeholders in
maintaining long term relationship. The study will also focus on discussing agency theory
within the organization and further it will stress on the problem while putting these theories into
the practice. The stakeholders theory is defined as any individual or group of people which are
directly or indirectly affected by the activities and operations of an organization. One of the
major problem which is associated with stakeholder theory is that it is not specific. This theory
demonstrate no criteria related to decision making which will help in corporate governance.
“CRITICALLY ANALYSE THIS STATEMENT BY DISCUSSING THE
PLACE OF AGENCY THEORY, ITS ALTERNATIVES, THE PROBLEMS
OF PUTTING THESE THEORIES INTO PRACTICES”
The main aim of the company to operate in the competitive environment is to meet the
requirement of all different stakeholders (Bonazzi and Sardar, 2007). However, the statement is
true that company mainly functions to provide benefit to all of their stakeholders. However, the
corporate governance may also provide an effective structure through which objectives of the
organization are set as well as it also determine and monitor the way in which objectives are
achieved. According to Ibrahim Fazila and Samad (2011) good corporate government mainly
focuses that internal environment of the business is fair and transparent for all the stakeholders
so that it result in minimizing mismanagement within the organization (Ibrahim, Fazila and
Samad, 2011). As per the view of Thomsen (2004) corporate governance is also concerned with
balancing the different interest of company's stakeholders that is management, customers,
suppliers, government etc. abidance with the different principles of corporate governance is
beneficial for the shareholders as well as companies (Thomsen, 2004). According to Roberts
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(2005) different benefit of corporate governance to the companies are that it assist them to hold
up within the competitive environment as ethical corporate governance practice results in
ensuring effective internal control system that often lead to the greater responsibility and
enhance net profit edge (Roberts, 2005). However, Abu-Tapanjeh (2008) has also asserted that
corporate governance is also beneficial to different stakeholders as it provide safety to their
investment as they will get proper return on their investment (Abu-Tapanjeh, 2008). In addition
to this, good corporate governance also results in improving or increasing corporate worth of the
organization within the economy in which they are operating their activities. According to
Bhimani (2008) fairness, integrity, transparency and responsibility & accountability are
considered as the four main pillars that mainly constitute effective corporate governance
(Bhimani, 2008).
Agency theory
The agency theory is mainly used to measure and understand interrelationship between
agents and principals. This theory is mainly defined as measuring relationship between agents
which is mainly termed as company's managers and executives and principles that is
shareholders. According to Ching Tan and Chi Ching (2006) this theory considers that owner of
the company is termed as principals that mainly hires or employ agents that is manager to
perform or renders the work (Ching, Tan and Chi Ching, 2006). Principals mainly delegate or
distribute the activities and tasks to the agents to that they may perform the task which is
basically managing the company. So, Clark (2004) argued that there are mainly two factors that
mainly impact prominence and importance of the agency theory (Clark, 2004). First, it is a
simple theory that minimizes corporation of associates that is manager and shareholders.
However, the theory also proposes that employees within the enterprise may be self-interested.
According to Harford Mansi and Maxwell (2012) the theory principals accepts that agents may
act and take effective decision which result in gaining their interest (Harford, Mansi and
Maxwell, 2012). On the contrary, it is not necessary that they should make decisions in the
favour principals. The agency theory of corporate governance is implemented within the
organization as it may act as the control system within the organization. One of the key functions
and responsibility of the manager include applying control over enterprise function and operation
so that agent may properly perform the task according to guidelines or strategic planning.
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Tricker (2015) has asserted that there are different element of management control systems that
include strategic planning, execution of the plan, comparing actual result with the standard plan,
preparing performance report, measuring variances as well as making corrective decisions,
evaluating the incentives and then future planning (Tricker, 2015).
According to Giroud and Mueller (2010) Principals who employs agents that is directors and
managers are accountable to the principals will follow agency theory that will also plays an
essential role in the management control systems (Giroud and Mueller, 2010). The first step
focus on strategic planning in which principals that is owner focuses on planning the guidelines
that need to be follow by the agent that is manager so that they may carry on the task effectively.
As per the view of Wintoki Linck and Netter (2012) has also stated that after that agent will
execute the plan framed by the principals so that they may accomplish the goals & objective in
the ethical manner (Wintoki, Linck and Netter, 2012). In addition to this system has also focus
on the preparing the performance report of the agent from comparing their actual result with the
standard planning done by the principals. However, Blair and Roe (2010) has also asserted that
providing incentive to the agents those who are rendering or performing the tasks in the
organization (Blair and Roe, 2010). This theory is often used to design the incentive schemes by
considering their interest so that principal can easily motivate them to work ethically within the
environment. On the contrary, Bebchuk and Weisbach (2010) has also stated that incentives that
promote the unethical and wrong behaviour within the organization must be removed so that
business organization may develop effective corporate policy (Bebchuk and Weisbach, 2010).
Alternative theories of corporate governance
There are different alternative theories of corporate governance that mainly include
stewardship theory, stakeholder theory and resource dependency theory. Stewardship theory
suggests that ownership or the manager does not own the company it just hold the trust. Stewards
are concerned as the executives and managers of the company working for the shareholders that
mainly results in making and generating the profits for the shareholders. According to Du Plessis
Hargovan and Bagaric (2010) despite of agency theory Stewardship theory does not stresses
upon the individualism (Du Plessis, Hargovan and Bagaric, 2010). On the contrary it focuses on
the role and function of the top management as the stewards that merges their objectives and
goals within the organization. Therefore, it has been stated that when organization or company
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attain the success then stewards get motivated and satisfied. Mallin (2011) has argued that under
agency theory of corporate governance they look employee as an economic being that hold in
their own desire (Mallin, 2011). On the other hand, stewardship theory acknowledge that top
management empowers them and that build the trust among the other members. Therefore,
stewardship theory reduces the cost of observation and controlling the employees behaviour.
According to Ammann Oesch and Schmid (2011) stewardship theory has been suggested that
intrinsic and extrinsic motivational factor impact the stewards in protecting and maximizing the
shareholder wealth that often result in increasing the profits and returns of the shareholder of the
company (Ammann, Oesch and Schmid, 2011). Therefore, this build trust and empower the
steward to take effective and ethical decisions for the overall organization.
Another alternative theory of corporate governance that may be implemented by the
business organization include stakeholder theory. According to Conyon and He (2011) with the
stakeholder theory management incorporate accountability to the wide range of stakeholder
(Conyon and He, 2011). A group of individuals that affect or can get easily affected by the
operations of the business is termed as the stakeholder. According to Abdullah and Valentine
(2009) the core concept of stakeholder theory is that organization or enterprise that manage
relationship with their stakeholders will survive within the competitive environment for the long
period of time (Abdullah and Valentine, 2009). However, the stakeholder theory mainly include
assessing the different stakeholders and monitoring their interests so that organization may easily
accomplish them. As per the view of Freeman (2012) agency theory focuses that agents that is
manager is accountable to shareholders while, stakeholder theory suggests that organization
managers must network with the different stakeholders to perform the job effectively (Freeman,
2012). Namazi (2013) also stated that relationship with the different stakeholders and groups
may result in affecting or influencing the decision making processes (Namazi, 2013). However
on the contrary Bonazzi and Sardar (2007) has argued that stakeholder theory mainly concentrate
on the taking managerial decisions so that they must accomplish all the interests and objectives
of the stakeholders so that they may get satisfied (Bonazzi and Sardar, 2007).
In addition to this, another corporate governance theory include resource dependency
theory. This theory focuses on how the external resources and factors of the organization
influences the behaviour of enterprise. According to Ibrahim Fazila and Samad (2011) resource
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dependency theory mainly focuses the function of directors in securing the important resources
of the organization so that external environment may not affect their operations and activities
(Ibrahim, Fazila and Samad, 2011). For instance, outside resources that is law firm that render
legal advise to the firm so that it may affect their operations as well as structure so that they may
render ethical practices in the environment. Thomsen (2004) has also stated the argument of the
resource dependence theory that mainly concentrate the organization key depended on their
resources that is internal and external organization (Thomsen, 2004). Therefore, establishment
mainly depends upon the different resources that is labour, capital, raw material, employees etc.
hence, organization must focus on conserving the resources so that it may overcome the barrier
in the future scenario. According to Roberts (2005) the theory has been underpinned by the idea
that resources that considered as the key element that assist in gaining the organizational success
(Roberts, 2005). Organization often has control on the resources in order to minimize the
wastage and redundancy. However, Ching Tan and Chi Ching (2006) has asserted that director
within the resource dependency theory generally concentrate on the four form of directors that is
insiders, business experts, community influential and support specialists (Ching, Tan and Chi
Ching, 2006). The first is insiders that are mainly known as current or past executives of the
organization that basically renders the expertise or professionals in the areas so that they may
provide correct direction. According to Harford Mansi and Maxwell (2012) second director
include business expert that provide expertness within the decision making or problem solving
situations (Harford, Mansi and Maxwell, 2012). The third director is defined as specialist that
mainly include lawyer, insurance company, financial company that provide resources to the
organization. For instance, financial company or institute may provide finance for the
organization so they may accomplish the objectives as well as meet the different requirement ad
expectation of the stakeholders. However, the last director include community influential i.e.
political parties, social organization etc. that mainly focuses on the ethical practices within the
organization.
Problem in these theories into practices
Agency theory demonstrate the relationship between stakeholders and managers of a
particular organizations (Baker and Anderson, 2010). One of the major feature of this theory is
that the stakeholders expects that the agents will make best decision which will benefit the
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principal. At the time of putting this theory into practice, the main problem which is faced is that
it may happen that the agent do not make decision which benefits principals (Cuñat, Gine and
Guadalupe, 2012). In addition to this, if the agent is self centrism or self concerned then issues
can be also arise. The relationship between corporate management and its shareholders gets
affected when both of them have different sort of interest. For instance a doctor recommend
expensive treatment for his patient. The patient thinks that the treatment is beneficial for him but
on the other hand, the doctor has recommended expensive treatment to earn higher profit. While
putting the agency theory into practice, the principal cannot be always sure that the agent is
always acting for the benefit of him. It has been also observed that in situations where the task
and activities which are beneficial for principal are costly or expensive then the agents, do not
perform such activities (Hazarika, Karpoff and Nahata, 2012). On the other hand, it is also
possible that after applying this theory into practice, difference between morale and interest of
between both the parties may arise. Further such situation will have an negative impact on the
understanding and relationship of the two. As per the view of it may happen that the managers
might become satisfiers rather than becoming maximizers. Another problem is morale hazards
which has been confronted by corporate governance. Any of the party can utilize extra benefits
which are beyond the rules. On the other side of this, stewardship theory lay emphasis on the fact
that the stewards are required to perform such activities which maximises the wealth of
stakeholders. It explains that the performance of an organization has an direct influence on
performance of all the people within organization (Walls, Berrone and Phan, 2012). People often
gets confused between agency theory and stewardship theory. Further they are required to
understand the fact that agency theory demonstrate the relationship between agent and principal
whereas stewardship theory depicts difference in the interest of the both. In addition to this, it
can be stated that in agency theory the manger or principal gets motivated because of two main
factors which are extrinsic rewards and personal interests. On the other hand, as per the theory of
stewardship, a manager is inspired by factors such as self actualizations and achievements. It can
be also explained that these two theories provides different assumptions regarding the corporate
governance, internal and external relationship and the decision making (Giroud and Mueller,
2011).
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The stakeholders theory is defined as any individual or group of people which are directly
or indirectly affected by the activities and operations of an organization. One of the major
problem which is associated with stakeholder theory is that it is not specific. This theory
demonstrate no criteria related to decision making which will help in corporate governance.
Another problem which has been associated with this theory is that interest of stakeholders can
be easily balanced against each other (Bruno and Claessens, 2010). Due to this reason use of this
theory is problematic in terms of applying it in practise. Resource dependency theory is also an
important theory in aspect of corporate governance. While the other theories focuses on the
relationship between different people within and outside an organization, this theory depicts the
role of people in the top level management in allocating the resources which are required by a
firm to meet its objectives. Some of the major argument which were done in context of this
theory is that organization entirely depends on resources in order to achieve growth and good
governance (Levine, 2004). Along with this, the arguments was also made on the fact that the
resources are developed within an business organization. However argued that resources
dependency theory states that the resources of an organization are its main power which is not
so. It is just an important part of any organization and there are other factors also which can be
termed as power. This theory demonstrates the fact that resources are the mots important assets
of an firm and without them businesses cannot perform effectively.
Therefore, it can be stated that all the above mentioned theories are effective and also ave some
sort of problem associated with them. It can be stated that corporate governance can be termed as
social relationship of a business entity rather than a structure or a policy (Brickley and
Zimmerman, 2010). One of the major problem which has been associated with the agent theory
is that it may happen that the mutual understanding and restraint of agent and principal may vary.
The problem associated with stewardship theory in practical implication is that it is not possible
that every time individuals are affected by the operations and activities of an organization. The
theory of stakeholder is not specific as it covers various aspects and some of them are not so
important. At last the resource dependency theory cannot be termed as effective as it depicts that
organization are totally dependent on resources. Thus, it can be stated that all these theories have
their own benefits and disadvantages which are required to be taken care of. The competition
among businesses is getting more and more tough with the passage of time. This has resulted in
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never ending theories and models with regards to corporate governance (Giroud and Mueller,
2011). One thing which is common in all these theories is that all of them are based on cause and
effect relationships.
CONCLUSION
From the above report it can be concluded that corporate governance within the
organization is essential in the current environment so that organization may avoid the unethical
practices and activities within the firm. Therefore, to ensure the ethical practices within the
organization, it is required to follow proper systems mainly known as corporate governance. It is
defined as set of ethical system through which business organizations is being governed and
controlled. The report has also concluded that there are different theories of the corporate
governance that need to be ensure within the establishment so that they should value different
stakeholder interests in the effective manner. The different theories of corporate governance that
mainly include stewardship theory, agency theory stakeholder theory and resource dependency
theory.
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