2.1. Theoretical Perspectives Flashcards
Three levels of a theory…
Meta: the broad picture of societies, economies and cultures.
Meso: higher resolution looking at organisations and groups within society.
Micro: specifically focused on individual levels, internal to organisations.
Agency theory summary…
Situated within the neoclassical economic perspective.
Shareholders are the owners of the business and must delegate their control to managers.
The primary aim of shareholders is wealth maximisation and therefore managers should work to achieve this.
The agency theory occurs when managers manipulate their position to their own benefit to achieve goals other than the wealth maximisation of shareholders. This manipulation can occur due to information asymmetry.
The predominant way of reducing information asymmetry is accounting as managers must submit financial statements to the shareholders to demonstrate they have been working to maximise their wealth.
The power of sanctions is another way to mitigate this problem.
Agency theory mechanisms…
Legal: financial accounting ensures all laws, tax regulations and legal obligations are being fulfilled and reports key information back to shareholders and the government.
Capital market: if a company is on a stock-market, it must also satisfy their regulations.
Hierarchical: the intra-organisational relationship between agent and principal.
Stakeholder theory summary…
Suggests organisations are held accountable to their stakeholders.
Stakeholders are any party that can influence or be influenced by actions of the organisation.
Stakeholders can be in the market domain (investors, employees, suppliers and customers) or the non-market domain (such as NGOs, trade unions and government agencies).
Stakeholder theory and systems theory…
Believes organisations are open subsystems and not isolated because they interact with and influence their environment (and are influenced by their environment in return).
Works on an input –> conversion –> output process:
- Inputs: labour, capital, materials, knowledge etc.
- Conversion: manufacturing, logistics, management etc.
- Outputs: final goods and services, employment, contribution to taxation, sociocultural impacts etc.
Stakeholder theory in market and non-market domains…
Market: employees (labour), suppliers (factor), customers (output) and investors (capital).
Non-market: political parties, government agencies, trade unions, natural environment etc.
Corporations are held accountable to their shareholders and all stakeholders in wider society.
Stakeholders have conflicting interests. All corporations must balance these conflicting interests.
Legitimacy theory summary…
Suggests a corporation can only continue to exist if the society in which they are based perceive them to be operating a value system which is consistent with society’s own values.
Corporations must have a positive effect in the community.
This is a variant of the stakeholder theory as the corporation is still believed to be operating a sub-system in a wider environment.
This theory suggests that if corporations’ values don’t correspond to society’s values, they cannot legitimately exist.
Societal values can change over time and throughout geographical locations, so it is important for businesses to stay up to date.
Legitimacy theory and corporations…
Corporations may lose their customer base if their values are perceived to be going against society’s (products may fall out of favour).
Companies can communicate their values through the mission statement and through their financial statements and accounts. Society can assess whether or not the corporation’s values align with society’s.
Corporations, corporations, corporations…
Corporations are influenced by: traditions, the country it operates in, values of the owners and their customers.
Corporation values are expressed through: products and services they release, interaction with the system. Responding to a crisis. Organisational resilience and response to worldwide events.
Corporations can become legitimate through: educating the stakeholders about company values and plans; changing the stakeholder expectations about the corporation; manipulating the stakeholder perception of the corporation and distracting stakeholders’ attention away from the bigger problems.
Environmental and sustainability concerns…
Agency theory: would only consider environmental action if it was a legal requirement or saved on costs. This is because becoming environmentally friendly has costs which reduces shareholder wealth.
Stakeholder theory: considers the environment a stakeholder of the corporation and therefore the corporation has a duty to protect the environment.
Legitimacy theory: would act to protect the environment to ensure that people continue to support the corporation.
Consider the link between the three perspectives. If a corporation doesn’t protect the environment, are customers going to boycott them, costing them future profits (which erodes wealth maximisation of the shareholder).
Tax avoidance and tax evasion…
Agency theory: would support tax avoidance as it helps prioritise wealth maximisation of the shareholder. Tax evasion remains illegal and could result in the corporation paying penalties if discovered.
Stakeholder theory: the country, government and population are stakeholders therefore tax is owed as the entire country can benefit.
Legitimacy theory: all firms should pay appropriate taxes in good faith to maintain a good public reputation. Customers may shop elsewhere if a company is found to not be paying appropriate taxes.
