SHAHIRAH BINTI MUKHTAR

M172004514
MPW 3023 BUSINESS ETHICS AND CORPORATE GOVERNANCE

ESSAY
AGENCY THEORY, STEWARDHIPS THEORY, STAKEHOLDERS THEORY AND
CORPORATE GOVERNANCE
Agency theory is about understanding the relationships between agents and principals.
The agent represent the principal in a particular business transaction and is expected to represent
the best interests of the principal without regard for self-interest. Corporate governance can be
used to change the rules under which the agent operates and restore the principal's interests. The
principal, by employing the agent to represent the principal's interests, must overcome a lack of
information about the agent's performance of the task. Agents must have incentives encouraging
them to act in unison with the principal's interests. Agency theory may be used to design these
incentives appropriately by considering what interests motivate the agent to act. Incentives
encouraging the wrong behavior must be removed, and rules discouraging moral hazard must be
in place. Understanding the mechanisms that create problems helps businesses develop better
corporate policy. Agency loss drops when the following situations occur such as the agent and
principal both hold similar interests of achieving the identical income and the principal is
mindful of the agent’s activities, so the principal has a keen knowledge of the level of service he
is receiving.

The steward theory states that a steward protects and maximises shareholders wealth
through firm performance. Stewards are company executives and managers working for the
shareholders, protects and make profits for the shareholders. The stewards are satisfied and
motivated when organizational success is attained. It so stressing on the position of employees or
executives to act more autonomously so that the shareholders’ returns are maximized. The
employees take ownership of their jobs and work at them diligently. Stewardship models may
include environmental concerns, where a company believes it should operate with as little
impact as possible on the earth. Other companies may champion human or animal rights,
refraining from using products that are made in sweatshops or tested on live subjects. Still
others may honor the owner’s religious beliefs that show themselves in the form of servant
leadership. These models tend to be subjective, with management determining the boundary
between socially responsible or irresponsible behavior. These is can give a few effects such as
effects on business and effects on employees.

The stakeholder theory of corporate governance focuses on the effect

of corporate activity on all identifiable stakeholders of the corporation. This theory positions
that corporate managers (officers and directors) should take into consideration the interests of
each stakeholder in its governance process. The idea of the stakeholder as a factor in corporate
governance is quite new. Most of us were educated with conservative economist Milton
Friedman’s view that the only purpose of a business is to make money for its shareholders. But,
in 1963, a group of economists at the Stanford Research Institute in California coined the idea
that a business is actually responsible to a larger group: its stakeholders, including “employees,
customers, suppliers, creditors and even the wider community and competitors”, according to
British economist Andrew Gamble, who took up the concept. Everyone who has a “stake” in the
future of the business, as the Oxford English Dictionary defines the term ‘stakeholder’, is
included.