Individual Assignment

Assignment on Referencing

MBA/19/5223 B. S. D. Perera

Sub Group No.: D–4

Course : MBA 503: Business Communication

Instructor : Dr. Trevor Mendis

Term : January – March 2019

Postgraduate Institute of Management

University of Sri Jayewardenepura
Agency Theory

Berle and Means (1932), based on 20th century data in the United States, the United Kingdom
and the other economies, developed the Agency Theory which is the cornerstone of modern-
day Corporate Governance. This Agency Theory by Berle and Means is seen as the primary
seminal work on Corporate Governance where shareholder (principal) delegates work to
perform on behalf of him to another person called the agent (director). Agency theory is
defined as the agency conflicts arising from a divergence between agents’ and principals’
utility functions, creating the potential for mischief (Dalton, Daily, Certo, & Roengpitya,
2003). The rationalization for this is that the directors are agents of the shareholders. This
theory was further improved by Meckling and Jensen (1976) explaining as a theory where two
or more parties get involved to perform some activities or services by delegating some
decision-making authority to the agent by the principal. Though explicitly not stated, it implies
that shareholders who are the owners of the company hand over the company to directors who
are the agents to run the company on behalf of them.

However today there are many criticisms over the Agency Theory. Muth and
Donaldson (1998) say that the Agency Theory is very narrow in scope and the expectations
and the values that were there 1930s cannot be seen in the contemporary corporate
world. Heracleous (2010) also argues (as cited in Mendis, 2010) three (03) major points of the
Agency Theory based on modern-day competition and the complexities. The first argument is
that the principal is not the shareholder, but the company. Description of the second argument
is that the board of directors is not agents but an autonomous fiduciary that has been entrusted
with the powers to act on behalf of a beneficiary. The third argument is that the intention of
the board and that of the shareholders (principals) should be one that is to take action to
maximize the principal’s returns. But Heracleous argue that the board’s role is not a
“monitoring role” but a different role that balances and acts as mediators between the Managers
and the owners to avoid conflict of interest, allocate resources, control company’s assets and
to make key strategic decisions. Figure 1 displays the difference between the Agency theory
and the Legal theory argued by Heracleous.

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Okpara (2008) states based on the Agency Theory that the common question is that whether
the agent will be driven by self-interest rather than a decision to maximize the profits for the
principal? Though there are criticisms over the Agency Theory by Berle and Means (1932),
one has to understand that this theory was introduced about eight decades ago when people
valued ethics as esteem and perpetual.

Stewardship Theory

Donaldson and Davis (1992) explained the Stewardship Theory. Tricker (2009) explains this
theory as a flexible, adaptable and robust one though introduced about 150 years back, even
for modern-day limited liability companies. This theory is a process through which all
stakeholders of a firm seek to influence companies in the direction of long-term sustainability
which derives by sufficiently contributing to the organization, human beings and the
environment (Reisberg). Michael, McCuddy and Wendy (2007) argue that the stewardship
theory should be an integral component in financial decision making. Reisberg even integrates
this theory to spirituality attributes and says (as cited in Mendis, 2010) that the way directors
are answerable to God, they are answerable to the shareholders. Leopold (1998) described this
theory as the protective restraint taking care of resources through nurturing and managing them
properly on behalf of the shareholders. This theory as per Reisberg further explains, that
whether the company is growing or declining (under turbulent circumstances) directors have
to understand the situation, evaluate opportunities, assess the risks in the environment and act
accordingly.

Critics such as Mallin (2002) of Stewardship Theory says that this theory was introduced in
the 19th century when the United Kingdom was an empire to suit their requirements just like
the critics of the Agency Theory and does not suit the modern-day complexities.
However, Reisberg (2001) and Tricker (2009) say this theory compared to the Agency Theory
is more flexible and adaptable to modern day governance.

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Theory of Hegemony

The Theory of Hegemony was first introduced by Gramsci (1937) (as cited in Alvarado &
Boyd-Barrett, 1992) while in jail. This theory has two facets namely “Class Hegemony” and
“Managerial Hegemony”.

Class Hegemony explains that some directors in companies assume and believe that they
belong to an “elite” category. This self-perception leads to behaving in an elite way dominating
within the Board as well as with the external linkages. Leblanc and Gillies (2005) said class
hegemony recognizes that directors’ ego, self-image and this can create an impact overboard
behaviour and its performances. They Leblanc & Gillies further stated that due to this self-
image bolstered by access to information, qualification, acceptance in the business echelons,
may dominate board decisions. Fahr (2010) also states similar sentiments regarding the class
hegemony that the directors not only perceive as an elite set of personalities on top of the
company but also will recruit or appoint people who have same characteristics and caliber and
accept the dominance of the dominating directors.

Managerial Hegemony which is the second face of the theory indicates that the corporate
management members usually run the day to day activities of the company and as a result-
directors lose control to a certain extent. This would worsen if the top management members
are professionals and better than the directors. This is as per Okpara (2009) not only weakens
the influence of the directors but also directors have to play a passive role and merely become
statutory bodies. Monks (1995) states that the directors normally hate managerial hegemony
and also it depends on the national culture within which the directors operate. Williams (2006)
evaluated on Market Hegemony where economies or societies have to produce one type of
goods, distribute that people need to survive. Giddens (1998) and Gough (2000) analyzed three
types of markets taking the “market”, “state” and the “community”. Williams states that the
market hegemony is more skewed towards nations and not the companies or the
corporations.

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Stakeholder Theory

Freeman (1984) defines a stakeholder of a company as an individual or a group who can affect
the business or can be affected by the achievement of the organization’s objectives or even as
a set of people who have an “interest” over the company. The Stakeholder theory counts a
wider range of parties than focusing only on shareholders. From the corporate
perspective, Bhagat and Black (1998) states that stakeholders are employees, customers,
suppliers, creditors, and shareholders as well. Antic and Sekulic (2006) discovered five major
categories of stakeholders of a company namely the shareholders themselves, creditors,
employees, customers and society.

An in-depth analysis of this theory reveals that there are two types of stakeholders for a
company. Normal (not so important) stakeholders and crucial stakeholders. Hence the
organization has to give a voice to these powerful stakeholders as they can “make or break”
the company. Spitzech and Hansen (2010) state that from a normative perspective these
powerful stakeholders have to be included in corporate governance not only to respect their
moral rights but also to get them involved in crucial decisions. (Mendalow, 1991), (as cited
in Johnson, Scholes & Wittington (2008)), also discovered a Matrix called Mendalow Matrix
(Figure 2) under Stakeholder Mapping Theory assisting the companies to identify their major
and not so important stakeholders.

Figure 2: Mendalow Matrix

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Source: www.Google.com

Mendalow (1991) introduced the Mendalow Matrix to identify the important stakeholders in a
company. This naturally helps the directors to classify the vital, important and not so important
stakeholders in a listed company. In strategic management, this matrix is known as the
“stakeholder mapping theory". However, Phillips and Freeman (2003) placed an in-depth
argument about “stakeholder fairness”. This really led to the Stakeholder Theory. However,
moving a further step ahead of Antic and Sekulic (2006) and Freeman (1984), Donaldson and
Peterson (1995) introduced an “eight-part" model (Figure 3) to explain the stakeholders of a
company.

This model elaborates four types of stakeholders for a company. Empirical studies carried out
by Berrone, Surroca and Tribol (2007), Moore (2001) and (Waddock & Graves, 1997) reveal
that there is a relationship between the stakeholders and the company performance. However,
the recent empirical research carried out by Heracleous (2010) shows that the directors control
the stakeholders.

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Ricarts, Rodiguez and Sanchez (2005) speak about the importance of sustainable development
as the stakeholders should feel that the company to generate sustainable wealth over a period
of time. Mitchell, Agle and Wood (1997) found that though the shareholders are quite diverse,
they have one common objective in mind which is to generate maximum wealth for
shareholders.

Resource Dependency Theory

This theory provides a strategic view of Corporate Governance. Hillman and Dalzeil (2003)
said the directors are the driving force for various resources. In this theory, it is implied the
directors as a boundary-spanner of networks to integrate the businesses. As a result, some
degree of interdependence is created so that the directors can solve their problems, obtain
market information, recruit qualified people to the top management etc. due to these networks.
Pfeffer (1972) based on organization theories, found similar sentiments to prove that having a
sound network would help the top management to solve their problems. Abeysekera (2007)
and (“CSE’s Empower Board”, 2018) says Resource Dependency theory facilitates
empowering Corporate Governance mechanisms to allow the directors and the top
Management members to make decisions efficiently and effectively. Under this theory,
Donaldson and Davis (1992) found that the Executive directors are better than the Independent
directors at formulating strategies due to their experience.

Ethical Theory

Fundamentally, the Ethical Theory encompasses the rules and principles that determine right
and wrong for a given situation. As per De George (1993), the ethical theory has two
dimensions. Ethical Absolutism describes that at any given time there is a set of eternals
universally accepted moral principles. Hence as per ethical absolutism, one can view right or
wrong objectively and can be rationally assessed.

Ethical Relativism is to assess the position or the situation subjectively and relatively. Under
relativism, there is no universally accepted set of right or wrong aspects that can be rationally
assessed. Crane and Matten (2008) in their book titled Ethics in Business, describes that the

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notion of relativism varies from culture to culture hence moral judgments cannot be made or
argued from outside of that country.

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 References

Abeysekera, I. (2007). Intellectual Capital Accounting: Practices in a Developing Country.

New York, NY: Routledge.

Antic, L., & Sekulic, V. (2006). New Paradigm of Business Performance Measurement in
Contemporary Conditions. Economic and Organization Magazine, 3(1), 69–77.

Berle, A., & Means, G. (1932). The Modern Corporation and Private Property. New York,
NY: Macmillan.

Berrone, P., Surroca, J., & Tribo, J. (2007). Corporate Ethical Identity as a Determinant of
Firm Performance. Journal of Business Ethics, 76(1), 35–5.

Bhagat, S., & Black, B. (1998). The Uncertain Relationship Between Board Composition and
Firm Value. Business Lawyer, 54(3), 921–963.

Crane, A., & Matten, D. (2008). Incorporating the Corporation in Citizenship: A Response to
Neron and Norman. Business Ethics Quarterly, 18(1), 27–33.

“CSE’s Empower Board” (7 Oct 2018) Sunday Times (Sri Lanka), does not appear in-text
citations.

Dalton, D. R., Daily, C. M., Certo, S. T., & Roengpitya, R. (2003). Meta-Analysis of Financial
Performance and Equity: Fusion of Confusion. Academy of Management Journal, 42,
674–686.

De George, R. T. (1993). Competing with Integrity in International Business. New York:

Oxford University Press.

Donaldson, L., & Davis, J. H. (1992). Stewardship Theory or Agency Theory: CEO
Governance and Shareholder Returns. Australian Journal of Magazine, 1(1).

Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Boston, MA: Pitman.

Giddens, A. (1998). The Third Way: The renewal of Social Democracy. Cambridge: Polity
Press.

Gough, I. (2000). Global Capital, Human Needs and Social Policies. Basingstoke: Palgrave.

Gramsci, A. (1937). Gramsci Hegemony. Retrieved on 25th April 2012 from www.google.lk.

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Heracleous, L. (2010). Rethinking Agency Theory: The View from Law. Academy of
Management Review, 35(02), 294–314.

Hillman, A. J., & Dalzeil, T. (2003). Board of Directors and Firm Performance: Integrating
Agency and Resource Dependency Perspectives. Academy of Management Review,
28(3), 383–396.

Leblanc, R., & Gillies, J. (2005). Inside the Boardroom: How Boards Really Work and the
Coming Revolution in Corporate Governance. Retrieved from www.willy.com

Leopold, A. C. (1998). Stewardship. In, Encyclopaedia of Applied Ethics (Vol. 4, pp. 225–
232). San Diego, CA: Academic Press.

Mallin, C. (2002). Editorial Discussion. Corporate Governance, 10(4), 253–255.

Mendis, T. (2010). Abiding Boards. Lanka Monthly Digest, 11(1), 157.

Michael, K., McCuddy, L., & Wendy, P. (2007). Spirituality, Stewardship, and financial
Decision-Making: Towards a Theory of Inter-Temporal Stewardship. Journal of
Managerial Finance, 33(12), 957–969.

Mitchell, R., Agle, B., & Wood, D. (1997). Towards a Theory of Stakeholder Identification
and Salience: Defining the Principle of Who and What Really Counts. Academy of
Management Review, 22(4), 853–886.

Monks, R. A. G. (1995). Corporate Governance in Twenty-First Century: A Preliminary

Outline. Washington, DC: Lens Inc.

Muth, M. M., & Donaldson, L. (1998). Stewardship Theory and Board Structure: A
Contingency Approach. Corporate Governance, 6(1), 1.

Okpara, J. O. (2008). Human Resource Management Practices in a Transition Economy:

Challenges and Prospects. Management Research News, 31(01), 57–76.

Pfeffer, J. (1972). Size and Composition of Corporate Boards of Directors: The Organization
and it’s Environment. Administrative Science Quarterly, 17(2), 218–229.

Phillips, R., & Freeman, E. (2003). Stakeholder Theory and Organizational Ethics. San
Francisco CA: Berrett-Koehler.

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Reisberg, A. (2011). A Notion of Stewardship from a Company Law Perspective: Re-Defined
and Re-Assessed in the Light of the Recent Financial Crisis. Journal of Financial Crime,
18, 126–147.

Richart, J. E., Rodriguez, M. A., & Sanchez, P. (2005). Sustainability in the Boardroom. An
Empirical Examination of Dow Jones Sustainability World Index Leaders. Corporate
Governance, 5(5), 24–41.

Tricker, B. (2009). Corporate Governance: Principles, Policies and Practices. NY, USA:
Oxford University Press.

Williams, C. C. (2006). Beyond the Market: Representing the Work in Advanced Economies.
International Journal of Social Economics, 33(4), 284–297.

Following References cited in text but does not appear in the references:

Alvarado & Boyd-Barrett, (1992).

Donaldson & Peterson, (1995).

Fahr, (2010).

Johnson, Scholes & Wittington, (2008).

Meckling & Jensen, (1976).

Mendalow, (1991).

Moore, (2001).

Spitzech & Hansen, (2010).

Waddock & Graves, (1997).

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