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14/02/2016

Definition
If the principal is to exercise control and minimize the

residual loss, they will have to incur costs. They are called

agency costs

Agency costs are those costs that are incurred in aligning

the interties of the agents with the principal

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These costs can be divided into three main categories:


Contracting costs: these are the cost of contracting between
agents and the principal which involve compromises
Bonding costs: cost of arrangements that penalizes
misdeeds of the agents and/or reward alignment of interests.
They take form of incentive packages to the agents
Monitoring costs: incurred in observing the activities of the
agents
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Definition

Fiduciary duty is the duty that arises from a position


that a party hold in relation to another

Shareholders became too numerous that they cannot involve in


the day to day running of the organization
They elected agents to run the organization and they acted as the
principal

In the context of the agency relationship, agents have a


fiduciary duty to the shareholders to put shareholder
interest in front of their own interests

However, from that date onwards, there has been a non


alignment in the interest of the agent and the principal
The goals of the agent and the principal are in conflict

This duty is embedded in the law of many countries


like Singapore and UK

The problem of agency is mainly attributable to the


information asymmetry that exists between the two parties.
The result is a residual loss for the principal

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Fiduciaryresponsibilityandagencytheory

Agency problem started with the joint stock companies

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CorporateSocialresponsibility

Stakeholdertheory

Definition

A stakeholder can be defined as any party that are affected

In its broadest sense, CSR is the recognition of the


fact that the organization operates in a community
and that it owes to the community that instead of
pursuing short term profitability objectives only, it
also takes into accounts the long term welfare of the
community in which it operates

by the actions of the organization and/or can affect the


organization. This implies a bidirectional affect
The agency theory fails to take into account the wider

stakeholder base that is affected by the organization,


hence caters only to the shareholders. However, recent
trend in corporate governance is the recognition of
existence of wider range of stakeholders and hence an
extended fiduciary duty to all stakeholders. Some
proponents of stakeholders go so far to include animals and
future generations in the stakeholder groups
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extent

The
to which an organization is ready to take
the wider community into account is dependent on the
ethical and CSR stance that the company holds
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Stakeholdertheory

Definition(Continued)

stakeholders but that some may not have a legitimate


claim. The decision as to who has a legitimate claim is one
of judgment

There

are

generally

four

levels

of

CSR

[PELE/PEEL/LEEP]:
Economic responsibility to the stakeholders like quality to

Theorists have proposed the use of a stakeholder power

customers and fair wage to employees


Legal responsibility to confirm with the rules and
regulations
Ethical responsibility that is not required by the law but is
the fair and proper manner of behavior
Philanthropic responsibility to the community in which
they operate

and interest matrix in reaching a compromise


between stakeholder, often conflicting, interests. The
problem is that there may be many strong and interested
stakeholders who have conflicting interest. Positioning
stakeholders in a matrix is also not a simple task

There may be a potential conflict with the major

objective of the organization and the shareholders and the


interest of the other wider stakeholders

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CorporateSocialresponsibility

Most writers on the subject agree that there are many

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CorporateSocialresponsibility
There are many ethical stances on CSR that an organization may take. It

is actually a continuum within which organizations can be fitted

Ethics means the extent to which an organization is ready to exceed the

minimum obligation to stakeholders

Short term shareholder interest: where by the company takes the

narrow meaning of fiduciary obligation

PressuretoadoptCSRandtrendsinthe
society
Stakeholder groups ranging from government,
shareholders
(II),
media,
employees,
environmentalists, NGOs, Laws and political groups
are forcing organizations to take CSR more seriously

Long term shareholder interest: pursued to make sure that the

company image is withheld and to minimize buildup of pressure for


regulations

Multiple stakeholder interests: where an organization accepts that

The pressure has turned CSR from a peripheral


business issue to a core business issue

other stakeholders have a legitimate claim to the activities of the


organization and that it will not be able to survive without them

Shaper of society: may be the stance of public sector organizations or

well funded private entities. This is very difficult and demands even more
than the multiple stakeholder stances
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CorporateSocialresponsibility

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PressuretoadoptCSRandtrendsinthesociety

Organizations are now moving towards the middle of


the continuum due to pressure from many groups and
trends in the society

Some recent trends in CSR include:


CSR becoming a core issue
Wider acceptance of CSR among business community

There is also a strong business case for good CSR


practices

Increased sector specific issues faced by organizations: social

exclusion, excess consumption, fair trade

There have been an increased number of corporate codes that

encourage wider acceptance of CSR

Investors have become more aware of CSR and are now

prepared to pay a
premium for Socially Responsible
Investment (discussed later)

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HowtoenhanceCSRinourorganization

PressuretoadoptCSRandtrendsinthesociety
Most of the CSR debate is centered on the concept of

corporate citizenship issue

CC can be defined as the contribution of an entity through

its core business activities, philanthropy programs and


investment, to the society and the environment

CC is based on three main principles:


Minimizing harm
Maximizing benefits and
Accountability and taking responsibility

Gates takes on Malaria $250m


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HowtoenhanceCSRinourorganization
It is a

three step process:

board level
2. Communicate with the stakeholders
3. Voluntary disclosure

Triple bottomline reporting


SEE reporting recommended

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three step process:

1. Acceptance of its importance at the board level:


a wholehearted acceptance of CSR and the
importance to include it in the strategy development
process would be the first step in strengthening CSR
in an organization. Some organizations have a non
executive director experienced in this area or even a
board committee to take only CSR issues. The extent
to which these are practicable would depend on the
size and CSR stance of the organization
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HowtoenhanceCSRinourorganization

1. Acceptance of its importance at the

It is a

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2. The other step would be to communicate with the


stakeholders about their perception of the CSR
practices of the organization. Given the feedback,
more action can be taken. Involvement of a wide
range of stakeholders may be necessary to get a wider
perspective
3. Voluntary disclosure of the organizations CSR
practices. There are two methods that can be used
for disclosure
Triple bottomline reporting: on people, planet and
profit (to the community)
SEE reporting recommended: Society, Environment
and Ethics
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SociallyResponsibleInvestment

SociallyResponsibleInvestment
Many pension fund managers and insurance
companies are advised by their trustees to invest in
good CSR companies
The fund for SRI has increased tenfold in the decade to
2001 and continues to increase at a high rate

As mentioned before, II are interested in going through


the trouble because their shareholdings are not liquid in
the short run and they have a fiduciary duty to their
investors
However individual investors too, have become aware of
these issues and will take actions though not felt heavily
by the organization

This also shows the power of II

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SociallyResponsibleInvestment
Fund managers for SRI use the following strategies in

selecting organizations:

Screening: limiting the options by screening process


Engagement: suggesting improvement
Preference:

preparing a list for investee companies


to follow against which they will later be screened and ranked
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