Stakeholders, Economic and Agency Theory:
The stakeholder theory states that businesses exist to create value for all parties directly
involved, like employees, customers, suppliers, investors, and communities. Managers are
responsible to all who have a stake in the success or failure of the business. Freeman’s
version of this theory is one of the most recognized. It recognizes that every business
decision affects all stakeholders, benefiting some and imposing costs on others. The
managers must recognize their ethical duty to shareholders but also acknowledge that
other ethical responsibilities to other stakeholders have equal value (Mintz & Morris,
2020).
The economic theory believes that companies must do the financial functions designed to
help the profit increase, placing shareholders at the center and expecting managers to
focus on serving the shareholders. Under this theory, managers’ responsibility is to
increase profit. This theory recognizes that any decision that doesn’t involve fraud or
deception is ethical, and the other stakeholders must work with the primary purpose of
fulfilling the owner’s interest (Mintz & Morris, 2020).
Under the agent theory, one party (owners) employs another (management) when the first
party thinks this will result in value creation. The owners expect it to create value for them
in the future. One of the problems with this theory in corporate governance is the possible
resulting behavior of CEOs. CEOs seek to increase their utility at the expense of an
organization by withholding effort or improving their compensation through self-dealing
or honest incompetence. The CEO could conceal selfish actions at the organization’s cost
(Bosse D.A. & Phillips, R.A. 2016).
Analysis of corporate governance under the stakeholder, economic, and Agency
theories:
The main corporate governance components I have experienced are accountability and
fairness, which ensures the management’s responsibilities to shareholders and other
stakeholders. I am lucky to share that I have mostly worked for companies that follow the
stakeholder theory of corporate governance that focus on creating value for all the
stakeholders involved. For example, in most of the companies I have worked for,
management’s primary focus has been to increase profit but always taking into
consideration employees by evaluating the amount of work that is expected from each
employee in a fair matter and allowing employees opportunity for growth within the
company.
Only on one occasion in my career as an accountant, I experienced the economic/agency
theory, where all the focus was on creating profit for the shareholders at the employees'
costs. Employees had a ridiculous amount of work assigned that kept increasing, they were
not valued for the work performed, and had minimal growth opportunities. This place
showed me the importance of adequate corporate governance because it directly affects
the company's ethical climate. a Treating people equally and fair is a moral/ethical value
that must be cultivated as a component of corporate governance. The lack of it causes
management to abuse employees by overworking them to achieve expected profits.
References:
Mintz, S., & Morris, R. (2020). Ethical obligations and decision making in accounting
(5th ed.). McGraw-Hill Education, New York, NY
Bosse D.A. & Phillips R. A. (2016). Agency Theory and Bounded Self-interest. Academy
of Management Review 2016, Vol. 41, (2), p. 276–297.
https://gmdconsulting.eu/nykerk/wp-content/uploads/2020/02/Agency-Theory-and-
Bounded-Self-Interest.pdf
