Comparing and contrasting agency theory and stakeholder theory Essay

Comparing and contrasting agency theory and stakeholder theory - Essay Example In a corporation the principal are the shareholders, whose agent is the chief executive officer hired by them; thus, the agent is expected to act in the interest of the shareholders. The main challenge is in motivating the agents to increase their productivity to a level they would achieve if they were the owners. Further, one of the key factors of agency theory is that principals and agents have different preferences or goals; and these divergent preferences can be aligned with the help of incentive contracts. Stakeholder theory is to a great extent not a formal, unified theory, but is more of â€Å"a broad research tradition, incorporating philosophy, ethics, political theory, economics, law, and organizational social science† (Solomon, 2007, p.23). Stakeholder theory is underscored by the fact that companies are large and have a far-reaching impact on society; hence they are accountable to many more sections of society than their shareholders alone. A common feature among a ll stakeholders of a company is their participation in an exchange relationship with the company by providing contributions while expecting their own interests to be fulfilled through ‘inducements’. ... has to maintain the support of all of these groups, balancing their interests, while taking measures to ensure that all the stakeholder interests can be maximized over time in the organization. Thesis Statement: The purpose of this paper is to compare and contrast Agency theory and Stakeholder theory; and to determine which theory offers the most useful insights into corporate behaviour. Agency and Stakeholder Theories are Based on Essential Moral Principles: of Honouring Agreements and Respecting the Autonomy of Others Firms with high levels of agency may face threats from other firms in the business environment, through the mechanism of the market for corporate control. These assumptions are based on presuming the presence of a functional, â€Å"efficient, competitive environment, in which information asymmetries are minimal, and competitive pressures are high† (Udayasankar, Das and Krishnamurti, 2005, p.1). Agency theory pertains to discussion on moral hazards and agency co sts. Agency theory can only be applied effectively if four moral principles were observed: â€Å"avoiding harm to others; respecting the autonomy of others; avoiding lying; and honouring agreements† (Solomon, 2007, p.25). That is, the principal-agent model would be applicable only if it was based on the setting of these moral principles. Thus, the principle of agent morality stated that only when agents fulfilled their basic moral duties as human beings, could they involve themselves in maximizing shareholders’ wealth. Further, Agency theory is interwoven with transaction cost theory. Both provide different views of the theory of the firm and of managerial behaviour, while using different terminology to describe the same problems and issues. For example, while agency theory confronts moral hazards