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.