Question

Outline the key elements of the agency theory and the stakeholder theory.  Describe each theory and distinguish between them.  Discuss their application to the board of directors of an entity.  Determine how well these two (2) theories reflect reality

Answer 1

THE REALITY OF CONTEMPORARY PRINCIPAL/AGENT EFFECTIVENESS

Financial accounting scandals in U.S. companies reflect the ineffectiveness of principal/agent relationships and the insufficiency of current agency theoretical efforts. As a result of the cascade of scandals in the decade before 2002, the U.S. Congress enacted the Sarbanes-Oxley Act of 2002, which imposed new regulations on public companies and their auditors. Such rules are assumed to be effective in ensuring that executives fulfill their obligations. Such rules affect a hierarchy of principal/agent relationships: Shareholders are principals of public companies and their immediate agents are boards of directors. Boards of directors are principals; their agents are the executives selected to carry out policies and the independent auditors they engage to audit the financial statements of the company. The principal/agent relationships continue to lower levels of organizations.

Many opportunities exist within publicly owned companies for less than optimum effectiveness in principal/agent relationships. Such opportunities are predicted to decline with the successful implementation of the new rules and regulations. Even with new rules and regulations, however, there is an awareness that the knowledge of how equilibrium (where both the principal and agent are optimally behaving for both the interests of the entity and of the personal executive or employee) can be predicted continues to be insufficient.

How Practical is the Stakeholder Theory?

In every corporation, employees’ jobs are to perform their respective roles to strive for the success of the corporation. An interesting question to be asked is “what defines the success?” Often, we hear people suggest that success is all about delivering the maximum values to its stakeholders. To further probe – who are the stakeholders? Whose stakeholders’ interest that is relevant in this context? How Stakeholder Theory can be applied and why ethics is even relevant to the success of business corporations? Let’s examine a real example.

Uber, a very successful and innovative company achieves unbelievable growth without actually owning any cars/taxis. However, what we all initially saw was just the tip of an iceberg. Uber was very focused on delivering growth and service to its customers but failed to recognize that its employees and business partners are important stakeholders too. Uber employees “hate their corporate culture” of competitiveness [,] peer harassment which resulted in departures of many senior management/ employees,(Forbes.com, 2017) In the short run, Uber business may continue to grow. However, the sustainability of its business becomes questionable.

The question is the thorough consideration given to these negative outcomes? Did the corporation pay much attention to assess the impact on various stakeholders apart from their target customers? Was the ethics aspect even considered before the product was launched?

We could go on and on with similar examples that have happened with many successful companies who claimed that their goal was to maximize stakeholder value. Also, they all are very ethical corporations. Yet, why all these are still happening?

I do agree with the stakeholder theory. However, the reality of the world can be very different when it comes to implementation. The success of a business is not just one snapshot, but rather sustainable success is what counts. The stakeholder’s interest is not always aligned. Also, they change along with time. So how should deal with that? Here are my solutions:

“Stakeholders” could be any of, or combination of, or all of the following; shareholders, business partners, suppliers, customers, social/communities, government agencies, its employees, etc. So, it all begins with having a clear understanding of the business and defining the relevant stakeholders and their respective interests relating to such business or corporation in question. Once this is well understood, clear communication and strong commitment throughout the organization must be in place to set the goals that will the right balance of various stakeholders’ interests.

Lastly, it is the business’s responsibility to be vigilant of the stakeholder’s interest that may evolve. Corporations shouldn’t see the world as standstill. One must always assess the surroundings and adapt as necessary to balance the priorities of stakeholders to keep the Sustainable Success.