CORPORATE GOVERNANCE

Does stakeholder theory provide a better basis for the development of corporate governance in the 21st century than agency theory?

Table of Contents

Introduction1

Discussion1

Influence of Agency Theory2

Influence of Stakeholder Theory3

Conclusion4

References6

Does stakeholder theory provide a better basis for the development of corporate governance in the 21st century than agency theory?

Introduction

The corporate governance has evolved with time differently across countries and viewpoints of authors differ. The corporate governance as a subject is not easy to define. It also depends on the broad and narrow scope of corporate governance, which also gives rise to two separate theories, agency theory and stakeholder theory. There are other theories of corporate governance like Stewardship theory and political theory etc. however, these two (agency and stakeholder theory) are of concern in this paper. This paper discusses the theories, their influence in corporate governance evolution across countries. This paper also discusses the nature of both theories and which theory provides a better basis for the development of corporate governance in the 21st century.

Discussion

The corporate governance as a subject is not easy to define. Corporate governance is dynamic and keeps on evolving with time and also differs in scope with respect to theorist, practitioner, policy maker, researcher, industry and country (Solomon, 2010).

As per the definition of Cadbury Report (1992), the system to govern companies in other words controlling and directing the activities of organization is known as corporate governance. This system encompasses the market mechanisms and regulatory framework that guides the relationships and roles among company's management, shareholders and other stakeholders like government, customers, environmental groups etc. It also depends on the broad and narrow scope of corporate governance, which also gives rise to two separate theories, agency theory and stakeholder theory, although many other theories also exist but with respect to degree of broadness these two are most influential. The agency theory identifies the role managers as the agent. The view point of agency theory came from Alchian and Demsetz (1972) which was further developed by the Jensen and Meckling (1976). The managers act on behalf of the investors and therefore it is ultimately the interest of the shareholders that prevails as most important in this theory. The principal (shareholder/ investor) can limit the acts of agent by exercising the powers. The broader concept of corporate governance is the stakeholder's theory, which was embedded in the fabric of management in 1970 and afterwards gradually evolved by Freeman (1984). This theory views the stakeholders instead of shareholders and contends that it is the relationship with these diverse stakeholders that makes the system of corporate governance. The wheeler et al (2002) argues that this theory of stakeholder is a combination of organizational and sociological disciplines. Freeman (1999) argues that, it is more important to embrace the network of relationships in diverse stakeholders while understating the web of corporate governance rather than strictly adhering to the owner to manager to employee relation.

Influence of Agency Theory

Businesses were initially started and run by the same family meaning the investor and managers of ...