CH2 - Stakeholders & Social Responsibility Flashcards
Agency Relationship Definition
(Jensen & Meckling 1976)
Is a contract under which 1 or more persons (‘the principals’) engage another person (the agent) to perform some service on their behalf that involves delegating their decision-making authority to the agent
Agency Theory => Use
Agency theory is used to study the problems of motivation and control when a principal needs the help of an agent to carry out activities
Agency Theory, according to Berle and Means (The Modern Corporation and Private Property) is:
- separation of ownership and control
- division of authority and responsibility
- agents are accountable towards their principal
Agency Problem
Potential conflicts of interest between management (agent) and shareholders (principal)
- Agent => short-term thinking, principal => long-term
- Agent => personal wealth of agent which may be detrimental to the principals wealth or long-term goals/strategy
- Principals may suffer from a lack of visibility of whats going on within the Company. Principal will have to trust the info & that the agent is acting in the principals best interests.
Agency Monitoring Systems
- Principles can take a no. of steps to monitor their agents:
- Increase number of NEDs
- Request formation of committees
- Employ consultants
- Attend AGM & questions board
Agency Solution
- Shareholders (principals) posses the right to remove directors from office
- Shareholders can take steps to exercise control (expensive, time-consuming and difficult to manage)
=> any steps taken by shareholders are likely to incur ‘agency costs’
Agency issues
=> why shareholders may become concerned about management:
- Deteriorations in: => share price => profits => market reaction - poor transparency - economic factors - loss of staff
Ways in which principals can align their interests with agents:
Incentives (increase agents personal wealth): - Bonuses - Shares - Share options => performance related pay
Stakeholder Claims:
- Direct
- Indirect
Classifying stakeholders
Classified by proximity to Org: - Internal - Connected - External Or classified as: - Active - Passive
Why Orgs need to recognise its stakeholders when making significant strategic decisions
- to identify way of communicating with and managing stakeholders
- to pre-empt negative reactions and manage stakeholder conflicts
- to assess level of interest and power
- to establish support for strategic goals
Power and Interest
Mendelow 1991
(Mendelow 1991)
=>Low power, low interest = Minimal effort
=>Low power, high interest = Kept informed (community representatives)
=>High power, low interest = Kept satisfied (Institutional Investors)
=>High power, high interest = Acceptable (Key players)
Level of Power:
Mendelow 1991
- Who can exercise the most influence over a particular decision.
- Those who actively participate in decision making
- Those who’s views are regularly consulted
- Those who have right of veto over decisions
- Can be more influential if their power is combined with:
=> Legitimacy
=> Urgency
Level of Interest:
Mendelow 1991
Reflects the effort stakeholders put in to attempting to participate in the org’s activities.
Problems with stakeholder mapping
Mendelow 1991
- Difficult to measure each stakeholders power & influence
- Map is not static. Changing circumstances may mean stakeholders change positions
- Map is based on the idea that strategic positioning, rather than moral or ethical concerns, should govern org’s attitudes to stakeholders
- If there are a no. of key players and their views conflict, it can be very difficult to resolve the situation.
Fiduciary Duty:
Is a duty of care and trust which 1 person or entity owes to another. It can be a legal or ethical obligation.