The paper "Corporate Governance as a Vital Tool for Business" is a good example of business coursework. The recent economic crisis and debacles have highlighted the importance of corporate governance. Corporations in the twenty-first century are looking for the well being of the “ customers, employees, and community and shareholders” . (Silva, 2004) The framework followed by corporations looks into the issues of “ accountability, effective communication and diversity of perspective” . (Silva, 2004) Many theories and rules have been framed to ensure that corporations adhere to corporate governance. The theories and models will help to ensure that “ there is effective monitoring, overseeing and evaluating the performance of the upper levels so that the management doesn’ t use it to their advantage but rather look into the well being of everyone” .
(Silva, 2004) One such theory is the Agency Theory. This theory puts a new perspective and deviates from the old philosophy of profit maximization. This theory says that “ corporations need to have agents who will work on behalf of the principal owner i. e. the shareholders and will be given certain incentive for it. ” (Nicholson, 1998) For this to happen and ensure that corporate governance follows it is essential to differentiate the role of the board of directors and executive management.
This will define the path each has to follow and will strengthen the core values of the unit. This thus looks into the problems encountered between the management and the shareholders. A study conducted highlights that “ while an agent works for the actual holders encounter a couple of problem relating to identifying the way the agent has behaved in a particular situation and the attitude of the agent towards the risk” .
(Eisenhardt, 1989) This makes it difficult to identify whether the agent has acted fair. The principal owner is in no position to identify the outcome which makes the agent take a decision which favours him. The principal, therefore, needs that the agent and the board are different and they work individually. This will try to ensure that the agent works for the well being of the principal owner and his behaviour won’ t be influenced by others. Despite the efforts to have a manager who monitors all the functions still the manager might act “ in his own self-interest “ .
(Fama, Eugene & Jensen, 1983) The objective of both the manager and the shareholder might clash which might result in the manager to act in his own advantage as “ there is the asymmetry of information and uncertainty which will make the shareholders unclear as to what needs to be done” . (Fama, Eugene & Jensen, 1983) There might be an instance when the manager might work leisurely as it won’ t benefit his personal interest. This will render the stakeholder useless and will give futile results. To ensure that they get proper governance shareholders need to “ incur agency cost where they hire someone from outside the organisation who audits the performances, communicates with the shareholders regarding the changes and brings forward issues which might harm the shareholders” .
(Fama, Eugene & Jensen, 1983) This cost will help to bring a check and ensure that there is a proper corporate governance and shareholders get their dues, as well as the society, is looked after.
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