Research on the Stakeholder theory, Agency theory, Corporate Social restructuring and ethics
This report is presented to the financial director of the FTSE-100 company.The company is facing down turn due to the economic recession around the globe and due to its own corporate social responsible policies.This report shows research on the Stakeholder theory, Agency theory, Corporate Social restructuring and ethics.
This report also shows the different aspects of these theories linked with health of the organization. Many authors have different concern about each theory but directly or in directly linked it with the shareholder and profit maximization. On the other hand researchers prove that recent developments in corporate social responsibility and ethics save organizations from down fall in economic recession.
Stake holder theory:
Stakeholder theory was put forward by Freeman in 1984 as a proposal for strategic management of organization in the late twentieth century. By the passage of time the theory has achieve importance with the key workers Clarkson in 1994, Donaldson and Preston 1995, Mitchell in 1997, Rowley in 1997 and Frooman in 1999 enabling both greater theoretical depth and development of this theory (Mainardes et al. 2011 p.226).
In academic context there endless definitions of stakeholder have been put and there is no individual, definitive and generally accepted definition. In argue to that the works of Bryson (2004), Buchhloz and Rosenthal (2005), Friedman and Miles (2006) and Beach (2008) have an overall of 66 different approaches for the term “Stakeholder”.
The source of stakeholder theory based on four key academic areas i.e. Sociology, economics, politics and ethics. Freeman (1984) found that any group or individual that can affect or be affected by the understanding of organization goals and objectives.
Hence the objective of this report is to maximize the shareholder’s wealth and how the corporate social responsibility and ethics helps to increase the long term value of the organization. In addition to that the Financial Director has different views about these theories, CSR and Ethics.
In argued to that maximizing the returns to shareholders the managers must try to provide the satisfactory return to each group which comes under the stakeholder group. According to the Mygind (2009, p. 159) diversified stakeholder have different approaches and association to other stakeholders and they have an evaluation of their own benefits which is only related to them moreover they also give different importance to the satisfaction of the stakeholder’s interest.
In 1980’s and 1990’s maximizing shareholder wealth and corporate wealth maximization totally based on the board of directors how they form the corporate strategies to increase the shareholder returns (Blair, 1995). In contrast to this argument Mygind has found that current developments in the corporate social responsibility and ethics move the pendulum towards the border view of value creation which is beneficial for the stakeholders (2009 p.160). Moreover total shareholder maximization which is directly linked with the corporate social responsibility should be fulfilled under limited circumstances.
At all outcome of this analysis of the literature it may be accepted that stakeholder theory has diversified over into many fields. According to Carrol (1994) the stake holder theory grasp the relevance to financial management, human resource management , strategic management, organization ethics, research and development, corporate governed and many more.
Agency theory fundamentally involved with the relationship of managers and stockholders (Jenson and Meckling, 1976). In addition to this managers should make decisions that are linked with the objective of maximizing shareholder wealth. According to the Ross (1973) an agency is defined as on in which one or more persons (the principal (s) ) engages another person (the agent) to perform some service on their behalf which involve delegating some decision making authority to the agent. Moreover Eisenhardt (1985) and Kosnik (1987) linked the development of agency theory with organization behavior and strategic management.
Managers as an agents are very interested in maximizing their efficiency of wealth and they acquire this end though their salaries and bounces etc. When managers make decisions which is not consistent with the objective of shareholder wealth maximization then the agency problem occurs. Jensen (1998) explaining the problem of agency is that agents are not absolute. Their interests do not perfectly matches with the objectives of the principal and accordingly if authority is not sufficient then there will be divergence from the objectives of interest to the titleholder of the assets.
The dormant agency problem between managers and its stakeholders is not only agency problem that exists. Jensen and Mecking (1976) argued that the company can face series of agency relationships between the different interests of groups. According to the agency theory, principles can establish appropriate incentives for the agents on the basis of his or her level of interest and this thing leads towards the agency cost.
Moreover Jensen and Mecking (1976) suggested that there are two approaches about seeking to optimize the managerial behavior in order to stimulate goal congruence between shareholder and managers. The first way is for shareholder to monitor the action of managements. There are number of ways to check the performance of management for example use of independently auditors to audit the financial statements, additional reporting requirements and use of external analyst. The other way is to form the corporate managerial contract in which the goal congruence should be mentioned and it is linked with the incentives, constraints and punishments.
All in all total shareholder maximization encloses advantages for all groups pure shareholder as well as stakeholders. This includes the maximization of the shareholder value, the value for the stakeholder and owner and the value for all stakeholders.
Corporate social responsibility:
Corporate social responsibility is concerned with the impact of their activities on society and on the environment. While there is no single commonly accepted definition of corporate social responsibility, it generally refers to business decision making linked to the ethical values, compliance with legal requirements, and respect for people, communities and the environment (Business for Social Responsibility, 2011).
Organizations are involved in diverse economic, cultural and political system around the globe and these organizations have different operating and governance standards. Lantos (2001) argued that to gain the essence business organization’s social responsibility people must do hard work and be successful.
To perform in a social responsible way Freeman (1984) stated that the organization need to act in accordance to moral, legal and social concerns which is represented by stakeholder. Stakeholder group consist of so many different units so it may cause difficulty to give the importance to each and every unit. Lippke (1966) argued that maximizing shareholder’s wealth should be the fundamental objective for managers.
Maximizing profits is an elementary mission for business organizations to gain long-term benefits. Hui (2008) argued that through competitive advantage firms create and sustain above the average economic performance. Moreover Maddjono (2005) argue that corporation sustainability relay upon the implementation of good corporate governance principals. There principals concern with the accountability, efficiency and transparency.
Furthermore building total corporate sustainability needs systematic corporate cultural conversion. Gao and Zhang (2006) stated that these changes require investment in related resources and engaging all stakeholders.
However role of CSR is not only build social corporate sustainability it also help to prevent the organization from acting unethically and help the organization outlining its economic growth. Haberberg and Rieple (2001) argued that the organization is in constant discourse with the society in which it acts, its affect them and affected by them. Hence rather than trying to highlight the problem whether CSR is good or bad for business, the one question should ask under which conditions firm social activities could be beneficial for society.
Financial director has only concern with the profit maximization but on the other hand researchers prove that the CSR also helps the organization to fulfill this objective. CSR also helps to sustain the corporate culture in better way and maintain healthy relationship with social community.
The word ethics derived from the Greek word Ethicos meaning habit or custom relating to the society. Guttmann (2006) believed that ethics is created when people think positively about the world, about life and about the needs to fulfill the goals and objectives.
Business ethics is that behavior which concerns with the daily dealings with the world. This thing not only applies how the business interact with the world it also focuses on everyday dealing with customers. Now days every business schools have business ethics courses and these modules mainly deal’s with new aspects of business ethics. However Swanson (2005) stated that business ethics in academic continue to face skepticism as to the legitimacy and practically of their newly emerged field. Many institutes around the globe associate this course with many other courses for example Management, Organization behavior etc.
Ethics in business is very important in terms of reputation with their clients. Ethics provide important outline to the business to ensure that the fair practice and other business opportunities to the business. An organization ethical values and culture are important to its society. There are different ethical concerns across the organization and they are linked with every interested group in the organization. Robin and Reidenbach (1987) develop a multidimensional scale for improving evaluations of business ethics. More over business ethics has an external impact on the market place and the society. On the other hand corporate ethics has an internal emphasis on the performance of the organization.
The area of ethical structure determines to support organization and without them there is no support for organization to implement ethical processes and evaluate them. This area help’s organization to make strategy, tactical and operational level of business practices Svensson and Wood (2008).
A sub area of ethical structure is a code of ethics. Code of ethics focuses on the social issues and it may arrange general principals about an organization beliefs, mission and quality of the environment. Code studies have also been executed on the largest multinational organization operating a wide range of jurisdictions around the globe Wood et al. (2004).
Moreover studies have found that having an ethical code does have a positive impact on the ethical actions and behavior of the organization Adam et al. (2001). Stajkovic and Luthans (1987) see code of ethics as one of the important frame work that linked together to influence the ethical standards of the organization.
Level of returns affected by CSR/Ethical Issues:
Snow brand milk Co. known is the Japan’s premier dairy food company. Now days this company known as Meg Milk Snow Co. as they have changed their name after 2002. The year 2000 was catastrophic year for the Snow Brand Milk Co. As they were facing very severe CSR/Ethical issues of food poisoning in Japan. Around 15,000 people had been affected with food poisoning after using Snow Brand dairy products. After inspection the problem was traced, the bacteria Staphylococcus Aurous was found on the valve which proceeds low fat milk. Later on Japan Public Health Association issue the recall for the Snow Brand milk products.
Moreover media reported the judiciary about all facts and figure and judiciary take action against the Snow Brand and banned all the dairy products of snow. In addition to that the president tries to win the support from society but he fails and admitted to hospital suffering from the stress of the incident. The end result was he and seven executives resigned from company.
The outcomes of the actions for Snow Brand have been breathtaking and awful. Sales of the company have been collapsed and consumer confidence has eliminated. The company had ceases its five factories including the offending site from the poisoning. Later on this figure increased to eight.
The company suffered with great loss and its financial position is badly affected. Snow Brand announced consolidated net loss was 52.9 billion yen (about 430 million US dollars) for the fiscal year ending in March 2000. Further more Snow Brand loses the 45% market share after these circumstances. After this incident company faces 40% decrease in the share price in Tokyo Stock exchange.
Source: (Japan Times, 2002)
A key element for the company to come back in the market is to revamp its social responsibility. In the first, the new president made statement of regret and acknowledges the mistakes of the past and determines to move forward. In addition to restructuring plan following things also include:
Improving quality assurance
Reform of corporate culture
Renew corporate social responsibility
Enhance corporate governance
Case study illustration of arguments:
ITE plc one of the world foremost organizers of international trade exhibitions and conferences and develop oneself in organizing events in growing and developing market.
ITE is a multinational firm and the board of the company is aware about the social benefits and risks which are linked with their various groups in social responsible manner. As an operator internationally oriented business in developing markets the company guarantee that they are culturally sensitive in dealing with the local community, development polices for employees and go for those projects which are supportive for the local community.
In 2010, ITE plc faced problem with corporate social responsibility and some other ethical issues and economic down turn which leads towards the no increase in the share price and there is no significant increase in profits. Weber (2008) argued that they are numerous benefits of CSR and these include pure financial benefits which lead towards the risk reduction, efficiency gain and tax advantages. In addition to financial benefits Maignan et al. (1999) find that CSR is positively linked with employee’s commitment and customer loyalty. This show that how CSR improve overall health of the organization (ITE Website, 2011).
Later on by the mid of 2010 the board of the company revamps their approach to corporate social responsibility in addition to that the board also reform their corporate culture and corporate governance. In figure 1 the first three months in graph shows level of share price of ITE which was approximately 143.5 and there is no increase in the share price. After implementing new reformed Corporate social responsibility company share price increase with full boost. In the figure form the August 2010 to March 2011 Company enjoys the significant positive change in the share price. Delevingne (2009) found this recession is wiping away a lot of things but so far CSR seems to be survivor.
Figure 1: Increase in Share price (Source: ITE Website)
In all corporate social responsibility has gain amazing recognition in the last recent times. However organization must consider the importance of CSR and give full concentration to it and maintain high standard of relationship with society.
At the end this report shows that the stakeholder theory, agency theory, CSR and ethics are diversified over different fields. Further stakeholders have very specific resources and interest and it must be fulfilled by the agents of firms in order to satisfy them. Total shareholder or stakeholder maximization includes benefits for all groups; researchers prove that implementation of these theories helps the organization to perform in the favor of stakeholders, economy and society.
I initially faced lots of difficulties in the making of this assignment the reason is I am an international student and for me this is first time studying in the new environment and culture with so many international student. I have some knowledge of finance however it is not quite enough. After starting studying Financial Management I assumed that the knowledge which I have is not sufficient for me. Since the theories and practices uses by my tutor are very depth in the nature. This assignment is very helpful for me and increases my knowledge about the latest concepts of finance.
I worked very hard for this assignment to fulfill the requirement of the assignment. On the hand I also faced many difficulties when I was working on my assignment. After spending a lot of time in the library I come up with some facts and figures which were really helpful for me in the making of assignment.
While working on this assignment I also learnt effective communication skills by talking and sharing ideas with other students in the class. In the future I will do research in more depth so I will implement more theories and practices in my upcoming modules.
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