A Critical Factor In Economic Development Accounting Essay

Prowse argues that a chief agent relationship is motivated entirely by self-interest. Stockholders ends are to maximize their wealth regardless of the value of debt, whereas the agent ( director ) wishes to maximize their wages. Jensen and Meckling ( 1999 ) reference this job as ‘separation of ownership and control ‘ . Enron which is one of the universe ‘s greatest dirts shows the extent of drastic impact that can take topographic point as a consequence of the bureau problem.A A There are two grounds that the job arises. Firstly under conditions of information dissymmetry, inauspicious choice and moral jeopardy, secondly there is a certain sum of hazard that is evident when the principal and agent have different attitudes towards hazard ( Eisnenhardt m.k. ) . The Enron dirt arised due to a combination of both the factors. Information dissymmetry and moral jeopardy existed as Enron did non honor their several relationship with their stockholders and concealed the existent value of the company. This was in order to pull and make a healthy portfolio, and the stockholders did non have their portion of Enron and their expected return of investing was non accomplished due to the fact that directors distorted the assets therefore the existent value of the company was non reflected. This illustration illustrates the struggle of involvements the principal and agent. The directors received more investings so it was perceived as a more successful company and this would increase their creditworthiness and have higher wages. As can be seen Agency theory comes with significant bureau costs due to the divergency of involvements from parties. Research in the ownership of portions in the FTSE 100 companies has shown that less than 5 % of all portions are held by direction of companies. This implies that most of the stockholders hold bulk of the portions in listed companies instead than direction and this is a ground for the separation of control and ownership has led to a misalignment in involvements.

A Corporate administration intervened by happening effectual mechanisms of reducingA A the bureau jobs caused by the chief agent relationshipA A andA A can be closely seen in the Uk and USA. Under the corporate administration codification in the UK: a wage commission is required which will do certain that the wages are just and based on public presentation. All companies require external hearers that provide confidence over the fiscal statement of the company which enables transparence to the stockholders and helps cut down information dissymmetry.

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Stakeholder theory is any group or person who can impact or is affected by the accomplishment of the organisations aims. Unlike the bureau theory whereby directors are working entirely for the stockholder, this theory suggests that directors have a web of groups to function that have a interest such as providers, employees, clients and other community administrations with which it co-operates. Quinn and Jones ( 1995 ) believe that directors should act ethically whether profitable or not.A A The undermentioned illustration shows that effectual stakeholder direction can take to a successful growing of a company. Chrysler treated their provider as a valued member of the stakeholder web instead than merely a beginning of stuff. When the Chrysler was on the threshold of catastrophe, the company responded with monetary value cuts, accepting late payments and financing.A A

However there is a job that is presented with this theory as it can be hard to find who the stakeholders are and how many groups to provide for until it affects the effectivity of a house ‘s net income.

Stakeholder theory can be seen implemented by many states in the universe. Germany has a legal demand to take into history the involvements of the stockholders and parties beyond. Spindler ( 2004 ) shows this is done by a procedure known as co-determination whereby the stockholders and employees own an equal figure of seats on the board. This procedure has besides been adopted Austria. China has a two -board system with a supervisory board above the direction board in which the employees account for no less than one tierce of the supervisory board. They have a demand that when carry oning their concern operations must understand their societal duties. Japan shows a system whereby the managers are lawfully obligated to execute their carelessness responsibilities including 3rd parties otherwise they will be held apt. France has a system whereby private companies must reserve three board places to be elected by employees. Even though the UK is has majorly adopted the bureau theory, it is easy enforcing stakeholder values. UK companies ‘ act 2006 and its alteration have been in consequence

It is now lawfully required for managers of a company to take into history effects of the determinations they make, the involvement of employees, associations with clients and providers, environmental impact every bit good as effects on local communities. In the UK this is the first clip non stockholders are being considered. Developing states find it hard to conform with both the theories because they have weak judicial systems and frequently ill defined belongings rights, tend greatly to weaken effectual contract enforcement.

All the states who are stakeholder influenced have different particulars in their systems of administration ; nevertheless they all portion a common nonsubjective whereby the parties beyond stockholders are involved in the determinations made in the company.A A In all the states above employees are seen to play a outstanding function as they regarded as of import stakeholders in the house

Shankman ( 1999 ) argues that stakeholder theory is derived from bureau theory and suggests that the theories are non sole to each other. This is becauseA bureau theory promotes four rules which are to avoid injury to others, represent liberty of others, avoid lying and honour understandings ( Quinn and Jones 1999 ) . These factors should besides be incorporated into the stakeholder position of the house. Furthermore he believes stakeholder theory leads to value maximization in the long term and for it to be widely accepted it must integrate the thoughts of cut downing bureau costs as it besides promotes the importance of inducements and supervising the efficiency of the firm.A A Hill and Jones ( 1999 ) show a similar and suggest that the stakeholder theory can be viewed as a alteration of bureau theory. Under the rules of bureau theory and their duty and answerability, director ‘s involvements need to be aligned with the stockholders every bit good as stakeholders involvements therefore the constructs used under bureau theory can be every bit applied to stakeholder theory. Freidman believed in a purely bureau attack whereby the lone duty of a company was to maximize stockholder wealth and non give the stockholders ‘ financess to charities etc.A ” The concern of concern is to maximise net incomes, to gain a good return on capital invested and tobe a good corporate citizen obeying the jurisprudence – no more and no less. “ ( Milton Friendman 1970 ) . Wheeler and Sillanga ( ) on the other manus suggest a rhythm including all stakeholders aimed at uninterrupted betterment of procedures, merchandises, public presentation and relationships.

There are alternate attacks to corporate administration that are used. Donald ( 1990 ) suggested an alternate hypothesis called the stewardship theory, which opposes the bureau theory. It proposes that managers should be ‘pro organisational ‘ , more trusty and public presentation should be achieved by a harmoniousness between the managers and stockholders because it insists they both have an involvement in maximizing the long term stewardship of a company and hence already good aligned. Another alternate theory is the resource dependence theory which focuses on the function that managers play in supplying or procuring indispensable resources to an organisation through their linkages to the external environment. This theory emphasises on the function of board of managers in supplying entree to resources that are required by the house, whereas stakeholder theory focal points on the attention of persons and a large group of people.


Overall bureau theory looks to take any hazard and information issues between the agent and the chief.However with all the grounds gathered we can reason that the stakeholder theory is a better attack in the 21stA century because in order to provide for stakeholders, bureau theory jobs must be solved, therefore the stakeholder theory encapsulates the bureau theory. After many corporate dirts that have emerged there is clear grounds that a stakeholder attack will assist heighten efficiency and trust in the fiscal universe therefore forestalling farther crisis.


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