MPT__WJ Essay Example

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10THEORIES

AGENCY AND DETERMINIST THEORIES

Student No

Agency and Determinist Theories

Introduction

The objective of management theories is too increasing organizational output and service quality. Managers are required to understand good management practices to create a business model that can improve their productivity and eliminate redundancy in processes. Managers are tasked with planning, staffing, coordinating, controlling among other functions. However, there are so many theories that demand that managers combine several for the best results. There are over 25 major management theories (Witzel and Warner, 2013). These theories often address different management strategies that touch on workplace, workforce, among other things. Others guide them how to interact and handle shareholders. The principles can be reconciled into a universal theory of organization so that they become easy to be implemented. It is therefore important that managers use the different theories to guide them in everyday operations of their companies and short and long term strategies for their organizations. This essay will analyze the agency and determinist theories and provide a unified approach that can be implemented easily by managers.

Discussion

Agency Theory

Agency theory seeks to solve the challenges that crop up due to the differences between organizations management and shareholders. According to the theory, coporates are invisible units and have to be managed by agents (Gajavelli, Chaturvedi and Singh, 2017, p. 70). Most shareholders may not be privy to information or actions taken by the management. They often become aware of changes in companies when decisions have been made, and this generates frictions or conflicts. Most times it is shareholders that bear the brunt of bad decisions made by managers especially of the former contribute resources that are used by the latter at their discretion (Bergstein, 2014). Moreover, the agency theory handles the various conflicts that may emerge between shareholders and managers (Elgoibar, Euwema and Munduate Jaca, 2016, p. 223)). It is an effective theory that shareholders use to guide their relationship with their managers.

The agency approach was emerged in economic literature during the 1960s and 1970s with the aim of establishing the maximum amount of risk-sharing among different people (Namazi, 2013, p. 40). Bamberg and Spremann, (2014) describes Agency Theory “has a new branch of economics which focuses on the roles of information and of incentives when people cooperate with respect to the utilization of resources”. However, it adopted in the management area to establish good relationship between various individuals with the different objectives of an organization, and the realization of a common agenda (Fernando, 2009, p. 48). In its basic form, agency theory is applicable in cases in which one person (agent) is given responsibilities or engaged by another person (principal) to act on his/her behalf based on an agreed pay. Since both want the best for the organization, problems often occur especially when there is uncertainty or the lack of information. In other words, the principal may initiate actions that negatively affect the principal’s profits.

There are many causes of agency problem. Boshkoska (2014, p. 205) explains that agency problems stem from information asymmetries. Managers by virtue of their positions have more information than owners of the company and can use it for other purposes. The other source is information asymmetry. This occurs when managers behave outside the code of conduct. Also, managers can make decisions according to their interest. Shareholders can use to reduce agency problems including instituting internal and external measures. The former includes internal audit, the concentration of ownership, good corporate governance, and change in salaries and payments to managers. On the other hand, external measures include external audit and the use of the law.

In large enterprises the interests of managers are different from the shareholders’ aim of profit maximization. Managers choose their own actions despite them being contracted by owners of the company to act in their best interests (Rond and Thiétart, 2004). . This results in a problem known as the agency problem. The problem comes about when a principal hires an agent to act on his/her behalf. There is need to control this issue as it leads to waste of limited resources and decline of the economy growth.

According to the stakeholder’s view, firms exist because of a set of compromises called a “nexus of contracts” that safeguards the interests of a particular group (Skjott-Larsen, 2007, p. 80). Some special costs, known as agency costs have to be met to limit conflicts between managers and shareholders. Basically, these are additional costs that shareholders incur to make managers concentrate on profit maximization and not enriching themselves. These additional costs are met owners of a company when ownership and control are set apart. They include incentives given to managers to maximize shareholder wealth and monitoring their actions. The main aim of incentives is to tie the wealth of managers to that of the company owners so that their interests are the same. Equally, shareholders can choose to fire and the threaten of takeover their companies in bid to keep the managers under check (Brigham and Houston, 2007). Others include giving them shares; other forms of financial compensation that companies provide some top managers include luxury cars, planes, boats, houses, etc.

Agency costs are connected with the way in which a company is structured. They are real costs which are based on legal requirements and the willingness of individuals to sign contracts among others. The costs are present all organizations and at every stage of management. These costs are incurred so that managers can act in the best interests of capital suppliers. Managers need to be highly compensated as they invest their time on coming up with strategies that are profitable to their organizations.

There are several reasons conflict exist between managers and shareholders. Firstly, managers tend to consume more and do less demanding work (Fox and Lorsh, 2012). Secondly, managers prefer less risky investments and lower financial leverage to decrease the danger of bankruptcy and minimize any actions that could hurt their image. Thirdly, managers prefer short-term investment options. Lastly, they avoid problems that could lead to employee layoffs which increase with changes in control of a company. Generally, managers tend to expand their companies which impacts positively on their remuneration and prestige. This often put them at loggerheads with shareholders who aim for maximum returns for their investments. Managers act in their interests first before considering shareholders.

The most effective way limiting the conflicts of interest between managers and company owners is providing the former with share options. Compensation in the form of shares is more likely to stem manager’s excessive consumption. Agency problems can be controlled when managers are given voting rights from the ownership of shares (Boshkoska, 2014, p. 206). As they increase their equity share, they are more likely to be effective. They are liable to make effective decisions and avoid pursuing risky investments that may affect their shares negatively.

The deterministic Theory

The deterministic theory of organizational structure dictates that the marketplace controls itself. Companies are forced to modify their operations and strategies in line with changes in the market and look out for new patterns including changing consumer habits (Rond and Thiétart, 2004). Managers are often forced to look at the factors that affect the performance of their business and use the information on formulating strategies to cushion their businesses from potential risks. These include industry in which they operate, market, and social environment. Therefore, company goals and objectives must be focused on survival and generating profit to stay afloat.

Determinism suggests that every choice is determined by causal conditions that influence decisions. For every decision, the circumstances preceding it are enough to produce that decision and that the decisions could have been different unless these causal conditions were different also. Causal conditions, in this case, refer to a variety of variables such as habit, circumstance, experience, institutional pressures, culture, and technological environment among others. Most shareholders should be aware that strategy is unlikely to be the outcome of a straight process. Rond and Thiétart (2004) argue that past behaviors influence today’s actions, which in turn determines the future ones. Managers ought to present strategic thinking in a clear vision. It should anticipate and consider the problems in a broad context across specializations (Bilgin et al., 2016, p. 364). When formulating a strategy, rationality mixes with intuition, chance and other processes where internal and external agents fuse to take advantage of existing opportunities.

Universal Theory of Organization

Based on the evaluation of the agency and determinist theories, it is possible to reconcile the two to have one universal method of organization. It’s important to note that both strive to guide the decisions that companies make. This helps the actions taken by managers to be consistent and in line with their business’s mission and vision. The two theories guide managers on how to arrive at decisions that would minimize conflict and ensure that their organizations are operating optimally.

Companies should make sure that all the shareholders are involved in both long and short term goals for their enterprises. Moreover, all the decisions should be guided by careful analysis of the past, present, and the future. Mainly, it will prevent managers from making decisions that favor themselves at the expense of their shareholders. However, shareholders should be aware that they are limited in their decision-making rights (Davies, 2010, p. 80). When shareholders are provided with necessary information on why certain decisions have to be effected, they are more likely to bless the managers in effecting the modifications. As stated before, businesses are usually affected by changes in the environment and need to change their operations severally to fit in. These can be changes in regulations, technology, and social trends among others. Managers must always support their decisions with facts and prove that it is in the best interest of the company and not guided by their own selfish motives.

In addition, the concept of compensation would be vital in this inclusive theory. Managers would be given shares and bonuses to make sure that they act in the best interest of the company. On their part, shareholders should not be a bottleneck to decisions that managers want implemented. Fox and Lorsch (2012) write that the relationship between corporate executives and shareholders appears blocked. Managers complain, with justification, that second-guessing and interference from shareholders are making it increasingly difficult for them to perform functions effectively. The need to include the conflicting interests of all shareholders present management with impossible task (DesJardins and McCall, 2014, p. 74) The authors argue that managers should focus more on tradition, ethics, and professional standards (Fox and Lorsh, 2012). Moreover, favorable roles should be given to long-term shareholders who help foster closer constructive relationships between shareholders, managers, and boards.

Conclusion

Effective organizations are those that managers act in the best interest of shareholders with minimal conflicts. It is evident that shareholders often question some of the decisions taken by managers as it may affect their shares in the short term. Some of the actions or strategies proposed and implemented by managers may be for long term and may not sit well with short-term shareholders. However, it is not entirely wrong for shareholders to have an active role in the way their organizations are managed since managers have been involved in a lot of scandals that seek to benefit them at the expense of shareholders. Some managers may take actions that hurt the investment of shareholders. To minimize this, the shareholder theory proposes that managers be given shares that make them owners of their companies. That way, they will always make decisions that are in the interest of their enterprises. The determinist theory proposes that organizations have to undergo continuous changes due to changes in external environment. This influences the actions that managers take to steer their companies. Such actions should be well researched and analyzed to avoid adverse outcomes for their businesses.

Reference List

Bamberg, G. and Spremann, K. (2014). Agency theory, information, and incentives. Berlin: Springer-Verlag.

Bergstein, S. (2014). Financial Management and the Agency Theory. Munich: GRIN Verlag.

Bilgin, M., Danis, H., Demir, E. and Can, U. (2016). Financial environment and business development. London: Springer.

Boshkoska, M. (2014). The Agency Problem: Measures for Its Overcoming. International Journal of Business and Management, 10(1).

Brigham, E., & Houston, J. (2007). Fundamental of Financial Management (11th ed.). USA.

Davies, P. (2010). Introduction to Company Law. Oxford: OUP Oxford.

DesJardins, J. and McCall, J. (2014). Contemporary Issues in Business Ethics. Boston: Cengage Learning.

Elgoibar, P., Euwema, M. and Munduate Jaca, L. (2016). Building trust and constructive conflict management in organizations. Switzerland: Springer.

Fernando, A. (2009). Corporate Governance: Principles, Policies and Practices. New Delhi: Pearson Education India.

Fox, J. and Lorsh, J. (2012). What Good Are Shareholders?. [online] Harvard Business Review. Available at: https://hbr.org/2012/07/what-good-are-shareholders [Accessed 2 Jun. 2017].

Gajavelli, V., Chaturvedi, K. and Singh, A. (2017). Recent Trends in Sustainability and Management Strategy. New Delhi: Allied Publishers.

Namazi, M. (2013). Role of the agency theory in implementing managements control. Journal of Accounting and Taxation, 5(2), pp.38-47.

Rond, M. and Thiétart, R. (2004). Chance, Choice and Determinism In Strategy. [ebook] Cambridge: University of Cambridge. Available at: https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/workingpapers/wp0405.pdf [Accessed 2 Jun. 2017].

Skjott-Larsen, T. (2007). Managing the global supply chain. Copenhagen: Copenhagen Business School Press.

Witzel, M. and Warner, M. (2013). The Oxford handbook of management theorists. Oxford: OUP Oxford.