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Applying Agency Theory & the Concept of Corporate Governance

APPLYING AGENCY THEORY & THE CONCEPT OF CORPORATE GOVERNANCE TO JUSTIFY ALTERNATIVES TO PROFIT MAXIMIZATION BY FIRMS

In an era of increasing attention to the demands of multiple stakeholders, the principal objective postulated by the traditional theory of the firmùprofit maximizationùincreasingly is being challenged. This study considers the justification for possible alternative objectives the profit maximization. This consideration is made within a theoretical framework of agency theory and the concept of corporate governance.

Economists use agency theory to study problems related to motivating and controlling cooperative action. Principals, especially in corporate organizations, require agents to conduct business and seek planned outcomes (Ghatak, Healey, & Jackson, 1998). Agents themselves, thus, must be motivated through incentives to perform for principals. Agency theory argues that shareholder interests require protection that is provided through a separation of roles between the board of directors and executive management. By contrast, the stewardship theory of corporate governance holds that shareholder interests are maximized by integrating the roles of these two bodies (Nicholson, 1998).

The traditional interpretation of the theory of the firm holds that the principal objective of corporate management is to maximize profits. Indeed, some economists, such as Milton Friedman, hold that the maximization of profits is the only objective of corporate management. In the decade of the 1990s, however, increasing recognition of the interests of competing groups of stakeholders are challenging this position. The justification for alternative corporate objectives is examined.

Justifying Alternatives to Profit Maximization

Agency, in law, refers to a practice where one party represents another in the transaction of activities (Getz, 1991). With respect to corporate control, agency refers to management's repres...

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Applying Agency Theory & the Concept of Corporate Governance. (1969, December 31). In LotsofEssays.com. Retrieved 05:05, March 29, 2024, from https://www.lotsofessays.com/viewpaper/1706098.html