The Role of Business in Society

The primary concern of the agency theory is monitoring within organizations and their external relationships with stakeholders.

Divergence from the mutual goals and the risk preferences are two potential pitfalls that emanate agency problems. These two pitfalls are also compounded by information asymmetry favoring the agent.

Finding the most effective form of governing the organization is the theory’s ultimate goal.

Authority is defined as the power to hold people accountable for their actions and to make decisions concerning the use of organizational resources.

Agency relationship is defined as “a contract under which one or more persons (the
principal(s) and the agent(s)) to perform some service on their behalf which involves delegating some decision-making authority to the agent.”

The agency problem arises when the principal determines managers’
accountability while delegating authority. Agency problems will develop when
the principal’s interests are not coherent with the manager’s interest, and the manager begins to pursue self-interest instead of the owners’ best interests.

Due to their proximity, the agent will be more knowledgeable about the day-to-day operations than the principals. As the organization grows, the distance between the operation and the principal’s position will enlarge, thus putting them in an even more disadvantaged situation. This situation is called the principalagent problem.

To make the agent fully act according to the owners’ interests, agency costs must be incurred. These costs include rewards, motivation, and auditing costs associated with agency problems.

• Functional management
• Divisional management
• Corporate management
• Trusteeship
• Ownership

C-level managers are responsible for setting organizational goals and objectives, allocating organizational resources, designing organizational structure based on several contingent factors.

First of all, the CEO is responsible for setting organizational goals and designing its structure. Secondly, the CEO is responsible for forming the top management team by appointing other managers. The third responsibility is related to performance management. The CEO is responsible for designing rewards and incentives for other top managers. Organizations use resources to create value, and the fourth responsibility of the CEO is about making resource allocation decisions. The
last responsibility of the CEO is an interpersonal one.

Resource allocation determines organizational priorities, thus enormously affects what others can and cannot do within the organization.

Self-dealing is the term used for defining the situation when managers take advantage of their positions to furthertheir self-interest instead of the organization’s interest.

The logic behind these governance mechanisms is quite simple; these mechanisms try to align the managers’ interests with the organization’s, binding their faith together provides a control mechanism keeping the managers away from divergence.

According to stakeholder theory, any party that affects the organization’s continuance and performance are called as stakeholders.

Stakeholder democracy is related to allowing stakeholders to influence and control organizational decisions.

Wages, bonuses, stable employment, and promotion

Shareholders, managers, and workforce ould be considered as the inside stakeholders.

Customers, suppliers, government, unions, community, and general public could be considered as the outside stakeholders.

Carroll regards corporate social responsibility as a multilayered concept made up of four interrelated aspects: economic responsibilities, legal responsibilities, ethical responsibilities, and philanthropic responsibilities.