Relationship between Agents and Principals according to Agency Theory
Question:
Write a Literature Review on Agency Theory.
Agency theory is used to identify the relation between agents and principles within an organization. The agent represents the principal in a specific business transaction and is naturally predicted to stand for the best interests of the principal regardless of the self-interest. As opined by Mohamed, Olfa and Faouzi (2014) various interests of the principals and agents might become a chief source of conflict, when some agents might not act perfectly according to the best interests of the principals. These sorts of situations bring in various disagreement and miscommunication within the workplace. Various incompatible desires might drive a hold between every stakeholders of the organization and cause various financial losses and inefficiencies within the workplace (Mohamed, Olfa and Faouzi 2014). The purpose of this research is to highlight various aspects like practical motivation and theoretical motivation and in details discusses about the effects of carbon emission in the climate change and what are the probable solutions that can be used by the management of organizations.
It is a matter of fact that due to rapid industrialization, a imbalance in the environment can be noticed and it is a well known fact that the organizations are the chief source of carbon emission that is polluting the environment day by day (Fernando and Lawrence 2014). This is a concerning situation nowadays as the uncontrolled emission of carbon is immensely negatively influencing the climate and the change in the climate is surely a difficult situation to deal with.
There are some organizations like IBM, Microsoft, Google, Walt-Disney and Unilever who are reputed in the global market for their brilliant initiatives regarding corporate social responsibility (Cheng, Ioannou and Serafeim 2014). Apart from these organizations there are many corporations who have the potential to make the necessary changes to significantly reduce the emission rate of carbon in the environment.
As stated by Mohamed, Olfa and Faouzi (2014), the climate changes due to rapid industrialization actually bring in several threats for the organizations. It is a matter of fact that the business organizations cannot actually ignore the climate changes as the carbon emissions from their manufacturing sites are immensely affecting the environment. In today’s world, the climate change is majorly accepted as a cause for worry and UK government has taken initiatives to reduce the emission of green gasses up to 80% by the year of 2050 (Cheng, Ioannou and Serafeim 2014). As the climate changes expose the future of some business organizations in front of uncertainty, it will surely affect the prices of the shares of those organizations. Thus it can be said that in this way the shareholder’s future also gets endangered.
Thus it can be said that the initiatives taken by the management of the business organizations and the incentives provided to the employees are a strategy to protect the interests of the shareholders of the organizations (Fernando and Lawrence 2014).
The management of the business organizations in this scenario cannot impose any targets to reduce the carbon emission rate as there is no practical experience of the employees in this regard and thus this particular tactic will not help the situation .
Effects of Carbon Emissions on Business
To explain various factors of theoretical motivation, and how the management can enhance the general productivity in the workplace, it can be said that Agency theory can be used to demonstrate to which extent the managements of the organizations will have to think regarding the workforce that is responsible to generate the productivity of the organization (Mohamed, Olfa and Faouzi 2014).
It can be said that the effects of the incentives and targets have been a major topic of study but it is seen that there are many instances where there have been several needs of research in this particular topic (Mohamed, Olfa and Faouzi 2014).
The effects of setting targets for performances related to environment is interesting as it is a new area of research and many organizations are coming forward to strategically deal with the situation.
There have been evidences where setting the targets higher increases the productivity, but as this area of improvement is relatively new, thus setting higher targets may not be the suitable idea (Cheng, Ioannou and Serafeim 2014).
Thus it can be said that the management should set targets which are achievable and that will surely help the condition.
Introduction
The purpose of this literature review is to analyze the different models and concepts of corporate social responsibility and agency theory by reviewing different research articles to have a better understanding of them. It can be mentioned that agency theory explains the relationships between Principal and agents within a business organization. According to Pepper and Gore (2015), agency theory also talks about resolving problems that may arise due to goals which are unaligned. Corporate social responsibility of companies include taking due to care to prevent any unethical practices from happening in an organization. It also takes into account the consequences and of its operations on the environment. On the other hand, Mohamed, Olfa, and Faouzi, (2014) opined that corporate social responsibility is referred to a set of ethical principles which state that organizations must be responsible for its actions that is likely to affect the society and environment. The principles of corporate social responsibility can be applied in every business organizations to prevent the occurrence of any accounting scandal. However some studies have suggested that corporate social responsibility although does not benefit the organization financially, but it benefits the managerial functions of the company.
Micro foundations of Agency Theory
It is to be noted that the researches have been conducted to analyze the micro foundations of Agency Theory. The Micro foundations provide new theories about behavioral economics literature. Several researches have aimed to provide a set of behavioral assumptions which is realistic in nature and is contrary to the theories proposed by agency theorists. According to Pepper and Gore (2015) it be said that the new micro foundations of behavioral agency theory focuses on the importance of monitoring costs and importance of opting for a behavioral theory which focuses primarily on placing the performance of the agent at the center of any agency model. However, as opined by Luger, Mammen and Haleblian (2015) it can be stated that the interests of the shareholders and their agents are expected to be aligned if the executives perform to the best of their abilities. It can be noted that behavioral agency theory provides a platform for making recommendation about the executive design of compensation plans.
Corporate Social Responsibility
Corporate Social Responsibility
Researches have been conducted to analyze the importance of corporate social responsibility in the interest of the companies and its stakeholders. According to Mohamed, Olfa, and Faouzi, (2014) that the implementation of the concept of corporate social responsibility in an organization is a pressing need for protecting the interests of the stakeholders and the share holders of any company. However, as argued by Tai and Chuang (2014), the principles of corporate social responsibility are required to be implemented in every company or organization to prevent financial and accounting scandals from happening in such organization. It is to be stated that the most companies adopt moral and ethical codes to preserve moral values such as maintaining integrity in the daily operations of the company. As opined by Samuelson and Anderson (2014), that corporate social responsibility can be regarded as the responsibility of the company to promote the health and safety of the employees, fight against corruption and discrimination of any kind, protecting the environment to prevent any damage caused to the same by the operations of a company and respect the human rights of the employees and the staff. It is to be noted that a company must set out the principles to promote corporate social responsibility and must communicate the same with the employees and staff. The company must also develop a system to resolve conflicts that may arise within the organization.
Agency theory helps to explain
When a manager of a business organization faces a mixed financial structure, he or she would definitely choose a range of activities only for that particular business organization (Mohamed, Olfa and Faouzi 2014). for an example, it can be said that, for the organization, such that the whole value of the organization is somewhat lesser that it should be if he or she were the sole owner of the business organization, and why the result is independent of whether the organizational process is monopolistic or competitive product or factor markets. As opined by, Pouryousefi and Frooman (2017) these theories also explain the manager’s reason of failure to maximize the value of the organization should be perfectly consistent with the level of efficiency. The theories would also explain the reason behind why the stock would be issued.
Value Creation by Corporate social responsibility
As per the opinions of Cheng, Ioannou and Serafeim (2014), corporate social responsibility principles lead to value creation in companies. It can be stated that one specific mechanism of corporate social responsibility, if applied, adds to value creation of a company in the longer run. It can be said that numerous studies have been conducted by which has aimed to investigate the relation between corporate social responsibility and financial performance of an organization. As opined by Fernando and Lawrence (2014), researchers conducted in neo classical economics had proposed that corporate social responsibility unnecessarily increases the cost of any firm and also places the company in a disadvantageous position among its competitors in the market. In relation to the agency theory some studies have shown that employing firm resources, valuable in nature to engage in corporate social responsibility results in benefits of the management. According to Bank (2014) if the principles of corporate social responsibility are implemented in a company, it would result in financial loss but provide managerial benefits.
Unilateralism and Bilateralism in Agency Theory
Pouryousefi and Frooman (2017) stated, it is important to analyze the agency theory and discuss whether it is possible and permissible to have economic interactions without the presence of ethical behavior in an organization. According to this research agency theory is presented with a descriptive argument in addition to the unilateral theory to understand the social interaction and its structure. It is to be mentioned that Agency theory is a dominant in the studies of economic interaction in an organization. As argued by Barkin, (2015), agency theory enables economists to go beyond abstract theory and have a deeper understanding of issues of internal management at the micro level. As opined by Tai and Chuang (2014), as the agency theory is complex and analytical in nature, it has become an effective tool for taking decisions in situations which are complex. Therefore, it can be noted that assessing the relation between the principal and agents, problem of giving incentives and the task of evaluating the performance can be done by the application of the agency theory.
Hypothesis
H0: Carbon emission from the business organizations does not affect the climate change.
H1: carbon emission from the manufacturing organizations immensely affects the climate change.
References
Bank, D., 2014. Corporate social responsibility. Fidelity Bank.
Barkin, J., 2015. International organization: theories and institutions. Springer.
Cheng, B., Ioannou, I. and Serafeim, G., 2014. Corporate social responsibility and access to finance. Strategic Management Journal, 35(1), pp.1-23.
Cheng, B., Ioannou, I. and Serafeim, G., 2014. Corporate social responsibility and access to finance. Strategic Management Journal, 35(1), pp.1-23.
Luger, J., Mammen, J., & Haleblian, J. (2015). Security Analaysts’ Influence on Acquisition Decisions: A Joint Agency and Legitimacy Theory Approach.
Mohamed, T., Olfa, B.J. and Faouzi, J., 2014. Corporate social disclosure: Explanatory theories and conceptual framework. International Journal of Academic Research in Management (IJARM), 3(2), pp.208-225.
Mohamed, T., Olfa, B.J. and Faouzi, J., 2014. Corporate social disclosure: Explanatory theories and conceptual framework. International Journal of Academic Research in Management (IJARM), 3(2), pp.208-225
Pepper, A. and Gore, J., 2015. Behavioral agency theory: New foundations for theorizing about executive compensation. Journal of management, 41(4), pp.1045-1068.
Pouryousefi, S. and Frooman, J., 2017. The problem of unilateralism in agency theory: towards a bilateral formulation. Business Ethics Quarterly, 27(2), pp.163-182.
Pouryousefi, S. and Frooman, J., 2017. The problem of unilateralism in agency theory: towards a bilateral formulation. Business Ethics Quarterly, 27(2), pp.163-182.
Samuelson, P.A. and Anderson, H.C., 2014. corporate social responsibility. Morality and the Market (Routledge Revivals): Consumer Pressure for Corporate Accountability, p.43.
Tai, F.M. and Chuang, S.H., 2014. Corporate social responsibility. Ibusiness, 6(03), p.117
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