This essay will begin by providing an overview of a company and its shareholders. It will be followed by the purpose of company that why companies exists, who does it exists for and to what extent. Further on analyse the different theories including agency theory and investigate the difficulties applying these theories into real life. In the end I will conclude with my opinion and views based on fact.
A company is a business driven organisation. It is a group of various people with a same goal of making profit. The company is for its shareholders. They hold it. They manage it. That's the way it is, and the way it should be. It doesn't indicate that other stakeholders' interest should be ignored. Survival and death of the company depends upon the employees and customer satisfaction, all of them to be acknowledged. Since companies are the part of society, should act as excellent neighbourhood and accept the liability of citizenship. (Welch, 2006)
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Based on economic system the main motive of the shareholders is the success of the company. Shareholders interest lies in the continuous achievement and profitability. Maintaining profitability results in the welfare of customers, the employees and other interested societies. The main purpose of company existence is to act in terms of those who appoint the board of directors who then hire management to run the company for its owners. The primary objective of the company is to act collectively in concern of their shareholders in order to generate wealth for themselves and for the state. (Darling, 2006)
Directors' major responsibility is to encourage the success of the company to benefit its shareholders. Directors have to keep in mind while running the company's functions, the long-term penalty on the society and surroundings. This approach will facilitate the directors to stay focused on significant issues and success of the company to generate sustainable profit for shareholders, so for themselves.
Most of the directors of the companies believe that operating in favour of shareholders is an essential corporate principal. To get most out of customer satisfaction should be the aim of the company not the shareholders. The best managed companies are that trade's in such a way; outcome provides the maximum value for shareholders. (Mctaggart and Kontes, 1993)
Chief Executive of Xerox (Paul Allaire) said: "I have to change the company substantially to be more market driven. If we do what's right for the customer, our market share and our return on assets will take care of themselves". No doubt the stakeholders have imposed massive challenge to the interests of shareholders. But the company can only generate good value for its shareholders when customers are satisfied and willing to spend. (McTaggart, Kontes and Mankins, 1994)
American Airlines, one of the recognised U.S. leading airlines has developed advance SABRE booking system and privilege flyer club in order to provide customers with best service and to win the trust of the customers which attracts far more new customers. Airline is working tough to meet the customer satisfaction and generating excellent benefits for the shareholders.
The investment in the extreme levels of customer satisfaction may not only increase the capital of the company but also bring economic growth rapidly. There will be no challenge of maximizing stakeholders' value and shareholders. Company failure to benefit the shareholders may lead to permanent loss in the employees and their benefits. Possibly may collapse of the whole business in worse case.
Another example would be Microsoft when they launched user friendly software "Windows". It was developed to provide similar sort of functions as founded in Apple's Macintosh. After the launch in 1990 it has swiftly received 20% of the overall market. Positive and satisfied reviews from the customers increased in the capital of the company more than $10 billion thus created more than twice value for its shareholders. A number of companies select to act in the favour of stakeholders provided that it will raise the benefits and value of shareholders. (Allen, 2007)
Research and past scandals demonstrated that the losses happened to be the failure of corporate governance to some extent. The collapse of Enron 2001, America's largest company is the real example of corporate governance failure. After the collapse of Enron, has diverted international attention to the failures of the company and need of appropriate corporate governance in place to play role for the prevention of these events in future. Corporate downfall can take place in the strongest companies no matter what is the size of the company. There are only two standards in United Kingdom which serves the investors to protect from the creative accounting done by Enron. First of all there is a fifth accounting system, requires regular reporting of substance transactions. This standard makes sure that the commercial controlled operation is in process. The second standard in UK is twelfth accounting standard, deals with the contingent liabilities. Companies in the UK have to provide true explanation and quantification of the result of each and all contingent accountability. (Courthold, 2010)
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Corporate governance is the structure by which companies are directed and controlled. Responsibility for the governance of the company rests with board of directors. Shareholders play their role in governance to hire directors and auditors in order to satisfy them by ensuring proper governance is in place. The board's tasks include supervising the overall management of business, reporting to shareholders, setting the aims and objectives of the company, give direction to put them into practice. The actions of board are limited to regulation, laws and shareholders.
"The system of checks and balances, both internal and external to companies, which ensures that companies discharge their accountability to all their stakeholders and act in a socially responsible way in all areas of their business activity"
A number of theories have developed in respect to understand and evaluate corporate governance. There is a minor difference in every theory approach and look at corporate governance from different point of view. Agency theory occurred from the finance and economics while the stakeholder theory comes across from social driven perception on corporate governance.
In agency theory the shareholders delegate the operations of the company to the management. There should be breakup of the ownership and control. The managers act as an 'agent' on behalf of their shareholders who are 'principal'. (Jensen and Meckling, 1976). Another statement of agency theory in terms of finance is that the chief aim of the company is to maximise the value of shareholders. As mentioned above that company exists for the benefits of the shareholders to increase the profitability of the business, to provide good value to its owners. While applying this theory into practice could lead to some problems. Shareholders exercising to delegate the decision making to the management of the company may cause wrong decision because managers not always take decisions in benefit of its shareholders. This is where self interest of managers takes place to get the highest incentives and meet their own aims in terms of funds. This might provide short term high profits to them but would ignore the long term investment through its shareholders. British industry mostly present crisis in banking region has been target of short-termism. Short-termism is to aim for the short run benefits and put a damper on long run maximization of profits and investments. (Demirag and Tylecote, 1992)
The perspective of self interest in the management of the company is growing day by day. Top positions are being used to gain their own benefits rather than focus on the target which is best for the company and its shareholders. Frauds and scandals of company directors and executives proof the statement. Bernard Ebbers the chief person of World.com has been sentenced to 25 years jail due to committing a fraud which caused the company $11 billion, resulted insolvency of the company..(McConvill and Bagaric, 2005)
These agency problem encouraged shareholders to monitor the management of the company. There is a hindrance while monitoring the management, it is expensive and time consuming because it takes involvement of shareholders plus rewards for management to monitor. Further on very hard for shareholders to keep watch on management due to limited resources for agency cost and time. To maximize the capital of the business it is very crucial to a company to be a magnet for different investors for economic and total growth of company. .(Eisenhardt, 1989)
Stakeholder theory framework is an outstanding way of understanding business ethics, moral, social and corporate accountability. The operations of the company have vast impact on the societies, stakeholders and shareholders. Two essential ideas, first is that the success and breakdown of the companies completely rely on their stakeholders. Second is the two faced theory of ethics. (Phillips, 2003). The main concept of stakeholder theory is that the companies are so large and thus left impact on the society just not shareholders. They should demonstrate responsibility towards numerous area of society instead just for shareholders. Another characteristic of stakeholders is to encourage engagement in exchange relationship which means that if the stakeholders are affected by the operations of the company, they affect the company one way or another because they contribute towards goal of the company and wish that their interests are met. They want to improve their standard of living by paying contribution not lessen it. (Solomon, 2010).
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Stakeholder theory somewhat draw the similar framework as agency theory interlinked. Accurately modification of agency theory is the excellent form of stakeholder theory. Both the theories have minimum hidden moral rights and best guess of human behaviour. (Shankman,1999). Agency and stakeholders each have obstacles in their theories. Agency theory can lead to debate of self interest by the managers while stakeholder theory leads to social responsibility. Solution to the agency theory could be by removing limits on market and having strong incentive schemes in operation to respect the efforts of directors to avoid unethical behaviour. To avoid hindrance to stakeholder theory companies should build long term contractual relationship between the companies and stakeholders. Exercising business ethics while, employees' demonstrate full participation in all aspects in favour of stakeholders. (Letza, Sun and Kirkbride, 2004)
Cadbury report 1992 illustrated that board has the responsibility to identify the performance and company's position. The board of directors should have well-organized control on the company and have formal scheduled agenda in place for board discussion. The service agreements should not be more than 3 years unless the approval of shareholders. Executive directors should demonstrate good ethical behaviour and disclosure of the profits. Directors should report on the process of company's goals and achievement of effective internal control.
The leading aim for all the companies should be to maximise the value of its shareholders. Accomplishing this goal will raise the investment from different investors, also economic interests of all the stakeholders. Maximizing the benefits of shareholders is not the only way to achieve the goals of the company. Customer satisfaction plays vital role in contribution to increase the profitability of the company and economic growth, thus doubled the value for shareholders and encourages more investment. It must be understood that investors are the main assets of the company when investment starts falling company may lead to bankruptcy in the worst case scenario. Board of directors should act ethically in way that bearing in mind the benefits of shareholders and other stakeholder who have contributed to the maximization of the common objective. Theoretical framework could make the company's successful when exercise in good ethical behaviour. Companies and directors should seek the relationship between corporate social responsibility and corporate financial performance in respect to make business more ethical and profitable. Acknowledgment the responsibility of shareholders and other stakeholders interest in long term is beneficial for all the parties. Learning from the past scandals is the key to success.