mba02 ethical theories

8/2/2019 MBA02 Ethical Theories

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CORPORATE

GOVERNANCE

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ETHICAL THEORIES


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Corporate Governance-

Ethical Theories

oAgency Theory (1900s)

o Stewardship Theory

o Shareholder vs. Stakeholder Approaches

o Stakeholder Theory (1930s)

o Sociological Theory

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Agency Theory

Adam Smith identified an agency problem Terms :- Principal, Agent, Agency cost and agency problem

Principal:- Shareholders (the owners)

Agents:- Management

Agency problem:- the mismatch in the objectives ofshareholders and managers

Agency cost :- The extent to which the returns to the owners

fall.

The core corporate governance is designing and putting inplace disclosures, monitoring, oversight and corrective

systems that canalize the objectives of the two sets of

players as closely as possible and, hence, minimize agency

cost.

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Agency Theory

Agency theory is traced back to the early periodof the 20th century, when ownership of capitaland ownership of firm were

first distinguished.

Separation of decision making and risk bearing was not

clearly defined. An Agency agreement between financers and

managers (the Agent) did specify utilization of fundsand the division of profits; but freedom in decision

making process. The Agent appointed its own internal Board (of

Directors)

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Problems with the Agency Theory

The total control of management is neither feasible norrequired under this theory.

The utility of theoretical model to promote corporate

governance is questionable.

Assumption that the agents must accept a certain level

of self-interested behavior in delegating responsibility to

others.

Assumption that the shareholders must get correct andadequate information to make effective control.

Equity investors neither get these nor make known their

targeted returns, and yet delegate authority to meet the

target. 6


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Stewardship Theory

This theory assumes that managers are basically trust-

worthy and attach significant value to their own

personal reputation.

The managers are stewards whose motives are aligned

with the objectives of their principles.

Given a choice between self-serving behaviour and pro-

organisational behaviour, a stewards behaviour will not

depart from the interests of his/her organisation. Control is considered potentially counterproductive as it

undermines the professional behaviour of a steward by

lowering his/her motivation.

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A Steward is Motivated to act in the best interest of the governance

principles

Pro-organisational decision making based on

collectivism; and less individualistic

The Steward appointed its Board (of Directors) made up of

primarily inside directors

The Directors are trust worthy and attach importance totheir own reputation

Strong personal reputation controls their behaviour

Such directors are offered higher compensation packages

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Stewardship Theory


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Differentiation:

Agency versus Stewardship Theory

The fundamental difference betweenAgency Theory and Stewardship Theory

can be broadly classified into:1. Behavioral factors

2. Psychological factors

3. Situational factors

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Behavioral Factors

BEHAVIORALRESPONSE

AGENCYTHEORY

STEWARDSHIPTHEORY

Managers act as Agents Stewards

Behavioral Pattern o Individualistico Opportunistico Self-serving

o Collectivistico Pro-organisationalo Trustworthy

Motivation by Own objectives Principals objectives

Identification Managers andPrincipals InterestsDiffer

Managers andPrincipals InterestsConverge

Management

Structures

Monitor and control Facilitator and

empowerment

Owners behavior Risk AvoidanceAttitude

Risk taking Attitude

Relationship betowner manager

Control-based Trust-based

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Psychological Factors

PSYCHOLOGICAL

RESPONSES

AGENCY

THEORY

STEWARDSHP

THEORY

Motivation o Lower order

economic needs

psychological,

economic)

o Higher order needs

growth, self

actualisation

Socialcomparison

Other manager/Competitor

Principal

Attachment with

company

Little attachment Great attachment

Power Institutional(legitimate/

coercive / reward)

Personal (expert /consultant /

referent) 11


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Situational Factors

SITUATIONAL

RESPONSES

AGENCY

THEORY

STEWAREDSHIP

THEORYManagementPhilosophy

Control oriented Involvement oriented

While dealing withincreasing

Uncertainty and risk

Greater controlMore supervision

Training andempowering people

Making jobs to be morechallenging andmotivating

Risk orientation Through a system ofcontrol

Through trust

Time frame Short term based Long term based

Objective Cost control Improving performance

Cultural differences IndividualismLarge power distance

CollectivismSmall power distance

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Shareholders vs. Stakeholders

Approaches

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Shareholder approach focuses on satisfying the

owners of a business

Stakeholder approach attempted to satisfy the

stakeholder of a business The separation of society and business is supported

by the shareholders view

This view is challenged by the stakeholder theorists

and it includes responsibility as another measure ofbusiness success


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Stakeholders Theory

The stakeholder theory is a theory of organizationalmanagement and business ethics that addresses

morals and values in managing an organization.

It was originally detailed by R. Edward Freeman in thebook Strategic Management: A Stakeholder

Approach.

It identified the stakeholder groups of a corporation,

and

Recommended methods by which management can

give due regard to the interests of those groups.

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o The Stakeholders theory (1930)o considers a firm as a system of stakeholders

o operating within in an environment for the firms

activities

o providing legal and market infrastructure

o for converting their stakes into goods and services.

o Managers can be seen as the agents for all the

stakeholders under this theory.

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Stakeholders Theory


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Sociological Theory

focuses on the Boardcomposition and wealth distribution. To promoteequity and fairness in society the theory assumes

board composition, financial reporting, disclosureand auditing as essential mechanisms to achievesocio-economic objectives.

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Sociological Theory


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CLASS TEST: MBA IVDATE: 27-1-2012 Time allowed: 45 min.

a) Discuss salient differentiation features ofAgency Theory and Stewardship Theory.

b) OR

c) Shareholders and Stakeholders Theory discuss its merits and demerits.

mba02 ethical theories

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