Agency theory and stakeholder theory Shareholders (
There is a risk that the directors do not run the company in the best interests of the shareholders … and this is the potential
The question is, is this necessarily a problem at all…
Earlier in the course, we defined corporate governance as "running the company in the best interests of shareholders
● Who are these other stakeholders?
● To what extent should / could / must the Board take them into consideration?
● What if what is good for one stakeholder is bad for another stakeholder?
● What if what is good for shareholders might be viewed as principals) employ directors (agents) to run the company for them. agency problem. and other stakeholders". This raises a number of questions: unethical behaviour? Types of stakeholder Later in the chapter, we will look at the extent to which organisations might want to deal with different stakeholders. But before we do this, we need to consider
It may be the case that different types of stakeholders behave in different ways towards the organisation, or are affected by the organisation in different ways … and this may result in an organisation treating them in different ways. who these stakeholders are, and whether we can group them into different types. What is a stakeholder? A stakeholder is someone who can affect, or be affected by, the operations of an organization as it seeks to meet its corporate objectives.
Note the
As such, stakeholders are likely to include:
● Shareholders
● Management
● Employees
● Customers
● Suppliers
● The local community
● The wider community, and planet in general?
Stakeholder claims Stakeholders may feel they have a claim on an organization – and may make demands in order to try to influence the behaviour of that organization:
● A desire to change the way that an organization affects them (e.g. a local resident may try to stop a local supermarket getting deliveries early in the morning, because of the noise it creates)
● A desire to change the way an organization behaves for ethical reasons (e.g. a protestor tries to stop a company selling certain products because it believes they have been made using child labour) Direct v indirect stakeholders Direct Stakeholders make their demands themselves – in other words they have their own voice.
Indirect Stakeholders do not have a loud enough "voice", or may have no voice at all … so their claims are represented by others (or may not be represented at all). Examples may include wildlife, the oceans, the ozone layer, planet Earth, children, future generations yet to be born, very small shareholders, very small customers.
With indirect stakeholders there is a potential form of agency problem, in that those representing their views may not represent them accurately, either on purpose or because they simply cannot be sure (e.g. what are the views of future generations?!!!) Influence of stakeholders If we ignore ethical concerns for a moment, and focus purely on practicalities, companies need to understand which groups of stakeholders can influence the company the most – as these stakeholders probably cannot be ignored.
Using a Mendelow Map analysis, those stakeholders with high power and a high level of interest are likely to be active and influential – so they cannot be ignored and need to be actively managed by a company.
Alternatively:
● High Power, Low Interest ... keep them satisfied, and do not upset them!
● Low Power, High Interest ... keep them informed (as they are interested!), and watch their power base. If they are upset, they may seek to increase their power (e.g. by forming alliances with other stakeholders)
● Low Power, Low Interest ... can largely be ignored.
Clearly, the Mendelow approach ignores any moral / ethical considerations of whether stakeholders need to be considered. Internal v external stakeholders Internal stakeholders are those within a business (management, staff) whereas external are those outside (government, communities, customers).
Internal stakeholders are likely to have more information, potentially greater interest, and potentially greater influence as a result. bi-directionality – it works in both directions, something the examiner has been keen to emphasise.
There is a risk that the directors do not run the company in the best interests of the shareholders … and this is the potential
The question is, is this necessarily a problem at all…
Earlier in the course, we defined corporate governance as "running the company in the best interests of shareholders
● Who are these other stakeholders?
● To what extent should / could / must the Board take them into consideration?
● What if what is good for one stakeholder is bad for another stakeholder?
● What if what is good for shareholders might be viewed as principals) employ directors (agents) to run the company for them. agency problem. and other stakeholders". This raises a number of questions: unethical behaviour? Types of stakeholder Later in the chapter, we will look at the extent to which organisations might want to deal with different stakeholders. But before we do this, we need to consider
It may be the case that different types of stakeholders behave in different ways towards the organisation, or are affected by the organisation in different ways … and this may result in an organisation treating them in different ways. who these stakeholders are, and whether we can group them into different types. What is a stakeholder? A stakeholder is someone who can affect, or be affected by, the operations of an organization as it seeks to meet its corporate objectives.
Note the
As such, stakeholders are likely to include:
● Shareholders
● Management
● Employees
● Customers
● Suppliers
● The local community
● The wider community, and planet in general?
Stakeholder claims Stakeholders may feel they have a claim on an organization – and may make demands in order to try to influence the behaviour of that organization:
● A desire to change the way that an organization affects them (e.g. a local resident may try to stop a local supermarket getting deliveries early in the morning, because of the noise it creates)
● A desire to change the way an organization behaves for ethical reasons (e.g. a protestor tries to stop a company selling certain products because it believes they have been made using child labour) Direct v indirect stakeholders Direct Stakeholders make their demands themselves – in other words they have their own voice.
Indirect Stakeholders do not have a loud enough "voice", or may have no voice at all … so their claims are represented by others (or may not be represented at all). Examples may include wildlife, the oceans, the ozone layer, planet Earth, children, future generations yet to be born, very small shareholders, very small customers.
With indirect stakeholders there is a potential form of agency problem, in that those representing their views may not represent them accurately, either on purpose or because they simply cannot be sure (e.g. what are the views of future generations?!!!) Influence of stakeholders If we ignore ethical concerns for a moment, and focus purely on practicalities, companies need to understand which groups of stakeholders can influence the company the most – as these stakeholders probably cannot be ignored.
Using a Mendelow Map analysis, those stakeholders with high power and a high level of interest are likely to be active and influential – so they cannot be ignored and need to be actively managed by a company.
Alternatively:
● High Power, Low Interest ... keep them satisfied, and do not upset them!
● Low Power, High Interest ... keep them informed (as they are interested!), and watch their power base. If they are upset, they may seek to increase their power (e.g. by forming alliances with other stakeholders)
● Low Power, Low Interest ... can largely be ignored.
Clearly, the Mendelow approach ignores any moral / ethical considerations of whether stakeholders need to be considered. Internal v external stakeholders Internal stakeholders are those within a business (management, staff) whereas external are those outside (government, communities, customers).
Internal stakeholders are likely to have more information, potentially greater interest, and potentially greater influence as a result. bi-directionality – it works in both directions, something the examiner has been keen to emphasise.
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