L3 - Agency Theory and Stakeholder Theory

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
Kendhoo
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
MNUBusinessSchool/ACC235/2016S1/Kendhoo
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
Fiduciaryresponsibilityandagencytheory
Agency problem started with the joint stock companies
14/02/2016
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
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
5
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
Most writers on the subject agree that there are many
14/02/2016
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
11
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)
10
12
14/02/2016
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

13
It is a
three step process:
board level
2. Communicate with the stakeholders
3. Voluntary disclosure
Triple bottomline reporting

SEE reporting recommended
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
15
1. Acceptance of its importance at the
It is a
14
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
16
14/02/2016
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
17
19
20
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
18

L3 - Agency Theory and Stakeholder Theory

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14/02/2016

Agency costs are those costs that are incurred in aligning

the interties of the agents with the principal

These costs can be divided into three main categories:

Fiduciary duty is the duty that arises from a position

Shareholders became too numerous that they cannot involve in

In the context of the agency relationship, agents have a

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

This duty is embedded in the law of many countries

The problem of agency is mainly attributable to the

Agency problem started with the joint stock companies

A stakeholder can be defined as any party that are affected

In its broadest sense, CSR is the recognition of the

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

stakeholder base that is affected by the organization,

stakeholders but that some may not have a legitimate

Theorists have proposed the use of a stakeholder power

customers and fair wage to employees

and interest matrix in reaching a compromise

There may be a potential conflict with the major

objective of the organization and the shareholders and the

Most writers on the subject agree that there are many

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

Long term shareholder interest: pursued to make sure that the

company image is withheld and to minimize buildup of pressure for

Multiple stakeholder interests: where an organization accepts that

The pressure has turned CSR from a peripheral

other stakeholders have a legitimate claim to the activities of the

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

Organizations are now moving towards the middle of

Some recent trends in CSR include:

There is also a strong business case for good CSR

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

corporate citizenship issue

CC can be defined as the contribution of an entity through

its core business activities, philanthropy programs and

CC is based on three main principles:

Gates takes on Malaria $250m

three step process:

Triple bottomline reporting

three step process:

1. Acceptance of its importance at the board level:

1. Acceptance of its importance at the

2. The other step would be to communicate with the

As mentioned before, II are interested in going through

This also shows the power of II

Screening: limiting the options by screening process

preparing a list for investee companies

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