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Assignment Notes (Topic 4 (Agency Theory, p.59 ('Economic…
Assignment Notes
Topic 4
Stewardship Theory, p.65
Assumes opposite to agency theory - that directors/managers can and do act responsibly with independence and integrity
Still determines that other stakeholders (employees / society / customers) come after to shareholders in the legal responsibilities of directors
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Agency Theory, p.59
'Economic rationalisation' - the expectation that an agent will calculate decisions based on reducing their pain or increasing their comfort
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'Sub-optimization', p.60, can occur within subsidiaries, where each is aiming for profit but to the detriment of other subsidiaries - MF addresses this by declaring each branch/division responsible for profit but cannot drop sell prices and share the drop with another branch, the other branch still gets its share so the selling branch takes a bigger portion of the reduced price.
'Information asymmetry', p.61 - directors/managers will generally have more info than shareholders and have control over the information the distribute, as such they can manipulate the situation if they wish - which accordingly the 'agency theory' they do
My main issue with Agency Theory is that it posits that shareholders must be the sole/top priority of directors/managers and that if d/m do anything to suggest otherwise this is bad. However, no matter how much money you put into a company, you do not have the right to expect returns at all costs, i.e. costs to the wellbeing of employees / society / environment. As such d/m have a whole lot more to consider than just 'themselves' OR 'shareholders', that is far too simplistic!
P. 62/63 - fantastic summary of criticisms, including the nature of humans
Stakeholder Theory/Philosophy, p.70
Advocates believe social responsibility is the cost of the benefits of incorporation (i.e. limited liability to shareholders)
Interesting argument above as when you think about it, shareholders have limited risk (i.e. not accountable for debts beyond their own holding), but expect to be the priority!
Places shareholder among all other possible stakeholder groups that a board should be responsible to.
Critics are dismissive of this, claiming boards cannot dilute their attention, and it is impossible to meet all stakeholders need at once
Enlighted shareholder theory, p.72
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Still puts shareholders first, but expects boards to consider other stakeholders needs as well
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Conformance v performance, p. 178
INEDs are there on a mandate of conformance so more INEDs can lead to neglecting performance responsibilities
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INEDS can be helpful in risk analysis, p.206