Question

. Illustrate FIVE examples and explain how the Code is in line with the agency and stakeholder theories.

Answer 1

There are certain theories that explain business relationships and are used to understand and explain these relationships.

The theories provide a means of understanding business challenge. There are some problems in business that may be a result of genuine misinformation or may actually be caused by clashing business interests.

Many challenges that manifest within the business world as a result of incomplete information, miscommunication and conflict may be explained using these theories.

Agency theory which is based on the interest of shareholders, the other is stakeholder theory which is based on the profits of all stakeholders.

Origins of agency theory can be traced back to the 1969s and early 1970s.The aim of agency theory is to provide necessary monitoring to reduce the so called agency problems arise in agency relationship between the principal and the agent.

Our problem is that whether the behalf of agent is applicable or not can be testified by the principal. The expect or goals of the principal and agent conflict brings to the first agency problems, more over, when it is difficult or expensive for the principal to know what the agent is doing in details and exactly, agency problem rises either.

The other problem is risk sharing between principal and the agent. Due to different risk preference, there is distance between the action of the principal and the agent. Two famous example of agency theory are-​​​Enron Scandal and Bernie Madoff

Stakeholder theory agenda was proposed by the corporate revisionists and it was accepted by the business ethics professors.

All the participants and assistants who share the risk and creat profits for the firm are stakeholder. It is imperative for managers observe the following principles.

1) Monitor and respond to concerns and interests of all a levity stakeholders

2) Communicate with stakeholders about their concerns, contribution and risks.

3) Act with sensitivity to each stakeholder group.

4) Attempt to achieve a fair distribution of benefits and burdens.

5)Insure that risks are minimised and harms are compensated

6) Deal with the conflicts of its self interest and the interest of stakeholder through public institutions, public report, incentive system and third party review.

Stakeholder theory is considered as a theory of organisational management and ethics. Under this theory, whether managers should do is not only to maximize shareholder value but also benefit the profits of the stakeholder groups.