Use of Stewardship Theory to Appoint and Retain Directors - Assignment Example

BUSINESS MANAGEMENT Student’s Name Course Professor’s Name University City Date 1. Agency Theory Under the agency theory, an agency relationship exists between the directors and the shareholders. According to Bonazzi & Islam (2007), in a corporation, the shareholders are the principal while the managers are the agents. About this, the shareholders delegate the authority to the directors where they act to the best of their interests to ensure that the wealth of the shareholders grows. However, some of the managers who are given the authority to manage the wealth of the shareholders act dishonestly and opt to use their positions to steal from the shareholders in fraudulent activities. Under the agency relationship, the managers’ interests are expected to be in line with those of the shareholders. Contrary to this, some managers are concerned more with their interests rather than concentrating on the benefit of the shareholders to maximise the value of their wealth. Therefore, managers whose interests are found to be in conflict with those of the shareholders should be investigated and if they are found guilty, they be jailed and the funds they misappropriated as a result of conflicting interest be repaid since the shareholders’ interests is to see the value of their wealth grow which might be in conflict with the benefit of the directors. Directors do not lose a lot like the shareholders Under the agency relationship, the shareholders invest their wealth and delegate the authority of management of assets to the leaders who are expected to maximise the value of the shareholders’ value so as to see it grow. When the directors defraud the companies they are managing; they only lose their job while they remain with their professional skills which they obtained. However, the principal who is the shareholder, in this case, end up losing a lot of money which they had invested as capital in the enterprise. Additionally, the fraudulent activity is carried out by the agents may drain more than what the principal had invested in the business. Moreover, removing of more wealth from the shareholders may make them bankrupt. Corrupt Directors should be jailed for others to learn a lesson In the case published in a newspaper where the former chairman of the Sydney-based technology firm known as TZ Ltd was jailed for ten years for defrauding the company amount worth almost $9 million. The director used the money for his means rather that which was expected by the shareholders that the wealth of the business should be used to grow their value. As a result, extorting money from the company and using it for own means drains the pockets of the shareholders who invested in the company with the hope that the value of their wealth will grow. About the case of Andrew Sigalla who was the Chairmen of the TZ Ltd, the chairman was only using the money for his interests which are not expected by the shareholders. If the chairman was not jailed, other managers could use the same means in the future, but due to what the director was facing, this could have made them learn a lifetime lesson where they may not involve themselves in such activities in the future. In short, the fraudulent activities of the agents under the agency relationship make the principals suffer significant losses. However, the managers who are involved in these activities, they do not risk any of their wealth, but they end up gaining more. As a result, the directors should be criminally investigated and jailed if they are found liable since they are not honoring the agency relationship. 2. Board diversity doesn't matter, and directors should be appointed and retained based on merit. Having a board of directors which constitutes both males and females may not be a necessity. About stewardship theory, the board of directors should be trusted if they are doing what is considered as the best since they are motivated in achieving the best. Therefore, under the stewardship theory, the board of directors should be appointed and retained on merit. However, under the stakeholder theory, a company is composed of various stakeholders who fall under different categories with the various interests in them. As a result, the board of directors should not be appointed and retained based on merit since this may leave the benefit of other stakeholders. Therefore, electing the board of trustees based on merit is important so long as the board is performing well although diversity becomes necessary to ensure that the interests of all the stakeholders are catered. According to “Male-only Boardrooms under fire”, an article in The Age Newspaper, the super investment body was recommending that members should vote against the re-election of the company directors who sit on boards where there are no men. Therefore, members who are appointed and retained in these boards based on their performance and not diversification. Also, the policy has also not been reviewed, and most of the board members get reappointed since their merit has been found to be good. However, the super investment body is opposed to this as it wants the board to consist of both men and women. Use of Stewardship Theory to Appoint and retain Directors Appointment and maintaining of the board of trustees based on merit rather than diversification are supported by the stewardship theory. The reason is that the method relies on trust and if the benefit of the board members is good, the stakeholders should not have any option rather than appointing and retaining it to lead the company since they trust them with their wealth. Additionally, there is no conflict of interest under the stewardship theory like there exists in the agency theory (Bonazzi & Islam 2007). Therefore, excluding the conflict of interest and taking into account trust which is the core of the stewardship theory, boards should be appointed and retained based on merit since all the stakeholder's interests will be catered for no matter whether the board consists of male only. Use of the stakeholder theory to appoint and retain directors The stakeholder theory on the other hand views the organization in a pluralistic view which is concerned with balancing the interests of different shareholders in the group. Therefore, according to this theory, the team consists of various stakeholders who have different interests and all need to be represented on the board of management. Therefore, both genders should be represented when appointing and retaining the board of directors so as not to have the interest of one gender represented. When a board which consists of a board which is composed of one gender like that which the Australian peak super investment body is opposing with only men, the interests of women will not be well represented. According to the stakeholder theory, an organization consists of different groups of interested parties and the board of directors should not be chosen based on merit but in a way that the interests of these stakeholders are well represented. 3. Governance and shareholders’ interests in family-owned companies Family owned businesses are the businesses in which the voting majority lies in the hands of the managing family. The interests of the shareholders in a family owned business are therefore merely the interests of the household members who own the business and therefore the business operates in such a way to benefit the family members. Additionally, the contribution of of family members is important for business survival (Al-Dajani et al., 2014).Therefore, in order to ensure that the interests of the shareholders are represented, a family owned business forms a board that constitutes members who can provide links to the external environment and thus make their dealings private and stop the dependence of the foreign environment as provided by the resource dependence theory. Also, the family owned business is the governed based on trust in the stewardship theory. Based on the resource dependence theory and the stewardship theory, the corporate governance of the family owned business is different from the companies which constitute non-family members. Governance based on resource dependence theory Based on the resource dependence theory, the family owned business is governed in a different way that non-family owned business is regulated. The reason is that the family owned business is a private company and somehow require that some of its dealings not to be taken into public. Therefore, governance in a family business is guided by resource dependence theory which provides that the board of directors must constitute members who can access the resources in the external environment rather than always depending on the external parties. Dependence on the external parties will end up revealing some of the information that the family members do not want to be known by the public. The board acts as a link to the external environment (Muller-Kahle, Wang and Wu 2014). Therefore, the rules of governing in the privately owned business is therefore different from the non-family owned business, since the family-owned business is regulated in such a way that it ensures that the information of the company remains private by providing that the board of governance constitutes members who can access the resources on behalf of the companies instead of depending on the external parties. Governance based on Stewardship Theory Stewardship theory relies on trust as its primary objective. Management in family owned business relies on the trust which is contained in the stewardship theory. Family-owned companies are different from non-family owned businesses since, in the former, the members have some close relationship with each other thus making trust the most important thing to them. In public owned company, confidence among the shareholders is different from the confidence that the family owned has on each other. Therefore, rules governing family owned companies tend to be not so rigid like the rules that govern the non-family owned since the former has trust on the household members overseeing them. Additionally, the close relationship helps to improve trust which makes the governance made so easy. In short, rules governing the family owned company are not so rigid like the rules governing the non-family owned business. However, having flexible rules end up giving some directors like Joseph Gulick an opportunity to exploit the company resources. The reason why the governing of the family owned company is different is the inclusion of the members of the family in the board thus improving the trust on board thus making the rules flexible. 4. Influence of Corporate social responsibility by Superannuation shareholders The corporate social responsibility refers to the way firms operate in a responsible manner taking into account the impacts of the decisions that the company makes to the society and the general environment. Therefore, about this, the company has to act in a socially responsible manner to ensure that the decisions of the enterprise do not affect the company in a negative way but bring positive effects to the society and the environment that is within the territory that the business operates. Moreover, to ensure that the company acts in a responsible manner, the board of directors and the management are the ones who make decisions and therefore they should make sure that the decisions made have positive impacts on the environment. Additionally, the government has also put rules and regulations that ensure that the company act in socially responsible manner. However, besides the decisions by the directors and the control from the government that ensure that the firm operates in a socially responsible manner, the superannuation funds have the right and responsibility of ensuring that the enterprises in which they own shares act in as socially responsible manner. Understanding of the effects of the environment on shareholders One of the primary reasons that the superannuation funds have the right to ensure that the decisions of the company are made in a socially responsible way is because these shareholders understand the environments in which the corporation operates. Moreover, the shareholders know the impacts that some of the decisions may have to the climate thus giving them the right to ensure that the decisions made by the company are not the one that is affecting the environment (Young and Thyil 2013). Understanding the environment that the enterprise operates puts the shareholders in a position to predict the impacts of the decisions of the company to the environment. Therefore, since the shareholders are aware of the environmental implications of the decisions, they have the rights to ensure that the decisions do not affect the environment in a negative way. Social responsibility improves the reputation and in turns the competitive advantage When a company enhances the corporate social responsibility behaviour, its reputation tends to grow positively to the general public. The growth of reputation of business in a positive way gives a positive image to the public at large. Consequently, as the reputation of the company grows, the competitive advantage of the firm will grow (Young and Thyil 2013). The increase in the competitive benefit of the firm helps in improving the profit of the company which increases the value of wealth of the shareholders. The shareholder's interest is to see the value of their money grow and therefore if involvement of the company in the socially responsible way will promise an increase of wealth of the shareholders should influence the decisions of the enterprise. Therefore the shareholders have the right to influence the decisions of the companies to ensure that the competitive advantage of the business increases thus increasing their wealth. In brief, apart from the control of the company by the government to ensure that a business acts in a socially responsible manner, the superannuation funds has the right to influence the decisions of the enterprise to make sure that they are in a socially responsible way. The reason is that the shareholders are aware of the impacts of the actions of the company to the environment and also because involve of business in social responsibility helps in improving the reputation of the firm which favors the shareholders. References Al-Dajani, H., Bika, Z., Collins, L. and Swail, J. (2014). Gender and family business: new theoretical directions. International Journal of Gender and Entrepreneurship, 6(3), pp.218-230. Livia Bonazzi, Sardar M.N. Islam, (2007) "Agency theory and corporate governance: A study of the effectiveness of board in their monitoring of the CEO", Journal of Modelling in Management, Vol. 2 Issue: 1, pp.7-23, doi: 10.1108/17465660710733022 Muller-Kahle, M., Wang, L. and Wu, J. (2014). Board structure: an empirical study of firms in Anglo-American governance environments. Managerial Finance, 40(7), pp.681-699. Young, S. and Thyil, V. (2013). Corporate Social Responsibility and Corporate Governance: Role of Context in International Settings. Journal of Business Ethics, 122(1), pp.1-24. Read More