Chapter 9: Business Theories

Question 1

What are the different business theories

Answer 1

• shareholder theory
• agency theory
• stakeholder theory
• stewardship theory
• resource dependency theory

Question 2

Explain the shareholder theory

Answer 2

• the main objective of the management of an organization is to increase the wealth of its shareholders, which could encourage unethical behaviour
• the notion that organisations have a social responsibility, in which the organization’s state that only people have responsibilities
• organisation should only adhere to both the basic rules of society embedded in law and in ethical practise

Question 3

Explain the agency theory

Answer 3

• explains the relationship between the owners of a company and the agents/employees that they employ to manage the company on their behalf
• owners of a company are usually not the managers, but are the shareholders known as the principals and the managers are the agents
• there is an inherent conflict of interest between the principals and the agents, and that the goal of the agents is not always in line with that of the principals

Question 4

Explain the stakeholder theory

Answer 4

• seeks to find a balance between the interest of the shareholders and all other stakeholders of the organization, and therefore states that all stakeholders must be considered not only the shareholders
• Freeman was the first to present the role of internal and external role players, besides the shareholders

Question 5

Explain the stewardship theory

Answer 5

• managers are stewards of the owners of the business and will therefore act responsibly in managing the business.
• replaces the authoritative role of management in agency theory with that of trust because they do not seek to act in their own self-interest
• managers have a need for success and accomplishment which will be satisfied if the organization is successful. which means that managers are satisfied and motivated when the organization is successful, so much so that employees might be willing to work harder even for less compensation if they feel that they’re a part of something bigger

Question 6

Explain the resource dependency theory

Answer 6

• concerned with the effect of external resources on the behaviour of the organisation
• it recognises the importance of the primary stakeholders and argues that organisations are dependent on external resources for its survival.
• obtaining external resources is an important part of the management of any organisation
• management will pay more attention to stakeholders that have control over resources.

Question 7

Explain the concept of business theory

Answer 7

This is a set of assumptions, propositions or accepted facts that attempts to explain the relationship between the different role players in an organization

Question 8

What are the common role players in an organization

Answer 8

• Shareholders (owners)
• Board of directors
• Management team (achieve goals of organisation)
• Employees
• Clients
• Other stakeholders

Question 9

The agency theory revolves around what two problems

Answer 9

1) the goals of the two parties might be different and it can be difficult or expensive to monitor and determine if the agent is behaving appropriately

2) that the principle and agent might have different attitudes towards risk