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Topic:

The Potential and Limitations of the Strategy Implementation Tools

Standard or Alternative one (Strategic Management)

Part 1: Governance and Stakeholder

Standard or Alternative one (Strategic Management) :According to OECD, 1999, corporate governance is a set of relationship between the executive board of company and its stakeholders. Also it provides the organizational structure for defining, processing, implementing and evaluating the firm’s objectives. It provides financers with information on company’s operations and performance. Agency theory and stakeholder theory have affected the development of corporate governance.

In Agency theory, one party (principle) delegates work to the other party (agent) Standard or Alternative one. It separates ownership and control therefore many limitations arise. Like agent might prefer self-interest as oppose to principle interest in certain condition. Also the information flow between agent and principle has significant effect on their relationship and performance. One advantage is that the compensation paid by the agent can be controlled, if principle appoints more than one agents and the one delivering the best outcome is given an incentive (Hauswirth, 2007)

Stakeholder theory is like a superset of Agency theory. Stake holder theory is more ethical and follows the notion that ‘good ethics’ is ‘good business’ (Solomon, 2007). Carrying out Corporate Social Responsibility is now a part of every company’s action plan, as it conveys good ethical practices and approach of the company. Enron, Energy Company, had to be delisted from SEC and faced failure due to its unethical behavior when Ken Lay, CEO, ignored taking action against its subordinates who were involved in corrupt trading schemes at the cost of bringing earnings to the company (Hill, et al., 2014).

In US and UK companies give preference to shareholders whereas in France, Germany and Japan companies prefer stakeholder theory focusing on firm continuity and employee preservation (Allen, et al., 1995- Present). The stakeholder theory seems a more holistic way of corporate governance than the shareholder approach, which only considers maximizing profits and interests of shareholders. Stakeholder theory enforces corporate accountability; taking social, ethical and environmental factors into account, which results in conductive financial performance. It is focused on making decision for company’s long-term profitability based on interests of suppliers, customers, employees, creditors and local community. The stake holder theory builds a relationship between people making up the company and the company itself. Having an ownership feeling, a say in decision making process or product designing method, motivates employees and they feel worthwhile thus deliver work with determination at a more responsible level.

When following stakeholder’s theory, firms argue that agency problem arises, that is, it is difficult to evaluate the performance of managers as short-term measures are not considered relevant. The directors will have to consider multiple objectives rather than the only criteria of shareholder’s profit maximization therefore it will be difficult for them to balance the demands of all the members having stake. However whatever the demands they will ultimately be directed towards company’s long term profitability therefore after balancing them the decision would be in interest of the company only.

Investors, one of an integral stakeholder, could show two different reactions to the organization practicing stake holder theory, it could either encourage them to invest or discourage them. In the prior condition the level of supervision of corporate governance and social responsibility followed by the company could attract the investor into investing on behalf of its stable performance and good reputation in the community. Whereas, in contrary company not focusing  on shareholder’s benefit, could dissuade investors from investing in the company.

Proctor and Gamble practices stakeholders’ theory, as they believe customer play a major role in the success or loss of the company. They spend a large amount of their resources annually on addressing customer complaints and make decisions and amendments accordingly (Freeman, 2010). They consider all of their stakeholders as an integral part of the organization which results in making them market leaders in many products around the…