LAW 7057 Corporate Governance : The Stake Holder’s Theory

Critical analysis of the governance in the case organization:
Governance systems: governing body structure and size, members, board committees, board information, Shareholders.
Governance processes: how the board interacts with top management, leadership, Internal Controls and external auditing; Risk management.
Corporate Governance Issues and their consequences in your chosen case organisation.

Assignment 3:

Corporate Governance Plan for the Project Study:
Recommendations based on Corporate Governance Best Practices.
Reflective Conclusion (not just a summary).
Design the presentation structure of your Plan.
Consolidate the contents from all the preceding activities, finalise your Corporate Governance Plan, and submit this as a power point presentation in-class, and online after the presentation

Answer:

Introduction:

BBY Ltd is the chief operational unit of BBY group which is a financial service organization based in Sydney. The organization has a global presence with offices in Adelaide, Auckland, Brisbane, Gold Coast, London, Melbourne, New York, Perth and Wellington. The organization is also involvement in market participation with ASX, Chi-X and SSX and a prominent involvement with ASX in clearing and agreement accomplices. The BBY group mainly has two different financial service licensees and other ten different bodies. The financial service licensees are BBY Advisory Services Pty Ltd and SmarTrader Limited. The collapse of BBY was a dramatic and sudden in Australia market as it is not quite a common phenomenon in Australian financial market. Prior to the collapse, BBY Ltd was one of the largest autonomous stockbrokers in Australasian market according to the market share of the organization.  The BBY Ltd collapsed because it engaged in unethical investment of its investor’s money in bad debts. Its failure emphasised on the industry that has been engaging in risky trading practices and suffocating in complex financial situations where sometimes market experts fails to understand. The collapse of BBY Ltd also draws attention to how rapidly and drastically risky decisions by stockbrokers can wipe out a successful business.

Corporate Social responsibility:

In the contemporary business situation, the most important raising concerns of the stakeholders, organizations and legislative bodies are about the social and ethical obligations of a business organization. According to traditional business model, the basic objective of a business organization was profit maximization. The organizations were less concern about their stakeholders and consumers. The very idea of corporate social responsibility rose in the eightieth century by Adam Smith, who was a Scottish philosopher. He insisted that interaction among the business and its stakeholders would meet the requirement of the society. He emphasised on the social responsibilities of the organization from which it earns profit and its business flourishes. The CSR is a process for integrated ethical business policies in the business practices (Okpara & Idowu, 2013). The CSR model offers business organizations a structure to follow a responsibility guideline for the society, community, staffs, investors, environment, etc. So in brief CSR is an ethical practice that a business conducts to promote welfare in the society. In this report the author is going to critically analyse the different CSR theories from various literary and academic resources (Griseri & Seppala, 2010).  

The Stake Holder’s Theory:

In the Stake Holder’s Theory there are mainly two parties who are the principals and the agents. Principals are the owner of the organization and the agents are the directors who work behalf of the principals. It is often regarded as the agents do not work in interest of principals because they have their own interest. In a stake holder’s theory’s circumstances, agents are regarded as the managers and the principals are the owners or investors and the board of directors perform as the supervising system (Bae et al, 2011). There are two literary features on two factors; the first is that business organizations are summarized into two members, the managers and the shareholders whose benefit are supposed to be both obvious and reliable. A second idea is those individuals are self-centred and unwilling to give up their personal welfare for the welfare of the others. According to this theory, business organization is a association of contracts between individual factors of production ensuing in the appearance of the agency theory (Blair & Roe, 2010). Here the organization is not any individual identity rather it is a legal resistance, where contradictory objectives of individuals are bring into balance in an outline of contractual relationships. The contractual relationship is not only built up with its staff, but rather with other stake holders also like suppliers, consumers, investors, etc. The basic objective of this contract is that to motivate the different individuals/parties acting on the maximization of organization’s value, minimizing the agency cost and accepting systematic methods to bring the most effective performance of the organization (Bob Tricker, 2012). According to this model, an individual has complete right to use and know about information and investors have important information about agent’s actions are in accordance with their interest or not. Although the agency theory does not explains the reason for such behaviour of individuals in utilizing social power.

Stewardship Theory:

The basics of stewardship theory emphasizes on social psychology that spotlights on the actions of executives. In this theory, the managers are regarded as the stewards who act in the best interest of the owners. Generally the steward act in interest of organizational benefits and gains more value than individualistic self-serving behavior and their behavior does not conflict with interest of the organization since the steward look for achieving the overall organizational objectives of the organization. According to this idea, as the shareholder assets is maximized, the stewards are also optimally utilized, as organisational achievement will fulfil most desires and the stewards have a well defined objective (Filipovic, et al. 2010). Also, it is the job responsibility of a steward to balance the stress among different beneficiaries and other interest groups. The Stewardship theory argues that it is the organizational performance and achievement that fulfil all requirements of different interest group in the organization, as a result of vibrant performance stability for balanced authority (Tricker & Tricker, 2015). The theory argues a strong relation between the managers and the organizational performance as a result the steward maximizes shareholders wealth with maximizing organization’s performance. One of the most prominent short coming of this theory is that when managers sense the difficulty in achievement of the objective, they lose thrust and credibility from the management.

The Shareholder and Stakeholder Approach:

There has been an ongoing debate among the management scholars that a manager should use shareholder approach or stakeholder approach in an organization. According to some scholars, maximizing the shareholder’s profit is the chief objective of a business organization. However, there has been a counter argument about these and other scholars disagree on that and state that stakeholder theory are more suitable for contemporary business organizations (Mason & Simmons, 2014). The basic dissimilarity is that the stakeholder theory needs that the stakeholder’s safety be impartial even it minimize the organization’s profitability. According to the competitive theory by Michael Poster, the basic objective of an organization should be higher Return on Invested Capital, and other objectives come next to it (Queen, 2015). Thus, shareholder assets maximization is a higher objective above stake holder interests. But in the contemporary business organizations to keep on term stability and sustainability, the agents should not only focus on shareholder’s wealth rather also balance with stakeholder’s interest.

Transaction cost Theory:

The organizations expand with time; the capital also needs to grow with it. As an organization raises capital and assists by including investors into the organization. So, according to this theory, with new owners increasing within the organization it is quite possible that chaos and issues may rises in the organization (Hennart, 2010). The theory was coined by Ronald Coase.

The best practice models for Corporate Governance:

In the present competitive scenarios, business organizations constantly work on keeping positive image in the public with good corporate governance within the organizational systems. The author has studied the concept of corporate governance and is recommending the best practices that are the key to good governance practice:

• The business organization should have ethical approach towards its business practices.
• The organization’s objective should be align with ethical decision making that should be reached through the formation of a appropriate stakeholder decision making model.
• The organization should adopt an effective and efficient strategic approach that should be incorporating the stakeholder’s value (Baker & Anderson, 2010).
• The culture of the organization should be suitable structured to promote good corporate governance.
• The organization should have a transparent, integrated and accountable feedback system so that the stakeholders get the correct information about the organization’s performance (Werther & Chandler, 2010).

Conclusion:

In the above study the author has discussed about the unethical business actions in BBY ltd which lead to the organization’s collapse. The main issue in the collapse of BBY was due to lack of transparency and not having good corporate governance within the organization to look after the stakeholder’s interest. To, understand about CSR and its basic principles the author has examined different scholarly and literatures on corporate governance theories by identifying their merits and shortcomings. The author has discussed the Stakeholder’s theory, Stewardship Theory, The Shareholder and Stakeholder Approach from CSR perspective and Transaction cost Theory. After analysis the author would conclude that the interest of conflict arises in an organization which facilitates in generating cost effecting on the business that can leads to violation of stakeholder’s interest and ultimately collapse of the organization. So, to treat this conflict, the managers need to work both on safeguarding stakeholder’s interest and as well profit maximization. Lastly, the author has also recommended the best practice models for Corporate Governance that an organization can follow in the present market situation.

Reference:

Bae, Kang, & Wang. (2011). Employee treatment and firm leverage: A test of the stakeholder theory of capital structure. Journal of Financial Economics, 100(1), 130-153.

Baker, H.Kent & Anderson, R,.  (2010). Corporate Governance: A Synthesis of Theory, Research and Practice, Wiley.

Blair, M. M., & Roe, M. J. (Eds.). (2010). Employees and corporate governance. Brookings Institution Press.

Bob Tricker, (2012) Corproate Governance: Principles, Policies and Practices; second edition ISSN 978-0-19-960796-9, Oxford.

Filipovic, Davor, Podrug, Najla, & Kristo, Mate. (2010). Assessment of relations between stewardship and stakeholder theory.(Report). Annals of DAAAM & Proceedings, 1229.

Griseri, P., & Seppala, N. (2010). Business ethics and corporate social responsibility. Cengage Learning.

Hennart, J. (2010). Transaction Cost Theory and International Business. Journal of Retailing, Journal of Retailing.

Mason, C., & Simmons, J. (2014). Embedding Corporate Social Responsibility in Corporate Governance: A Stakeholder Systems Approach. Journal of Business Ethics,119(1), 77-86.

Okpara, J. O., & Idowu, S. O. (2013). Corporate Social Responsibility. Springer Berlin Heidelberg.

Queen, P. (2015). Enlightened Shareholder Maximization: Is this Strategy Achievable? Journal of Business Ethics, 127(3), 683-694.

Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and practices. Oxford University Press, USA.

Werther Jr, W. B., & Chandler, D. (2010). Strategic corporate social responsibility: Stakeholders in a global environment. Sage publications.