Accounting Theories and Business Decisions: The Business World
Case Facts
Application of theories
Other cases of stakeholder theory application
Accounting theories and business decisions: The business world
There are many theories that explain the complexity of relationship between different groups of people directly and indirectly related to an organization. Two of the most comprehensive and most discussed theories are stakeholder theory and agency theory. Both the theories describe what the main purpose of each group is and how these groups ought to manage these relationships. In agency theory, it identified that agency relationship takes place when one or more than one principal, acting as owners, delegate their power to make decisions, to a person acting as their agent or steward. Thus, agency theory principally revolves around the relationship of principal and agent. While the principal delegates the authority or decision making power to agent (managers) to act in the best interest of principal (owner and shareholders), there may be a conflict between interest of agent and that of principal. Thus, in case of non-alignment between interests of principal and agent, the latter may make decision contrary to the interests of principal and thus deviate from his/her responsibility (Walsham 2005, 153).
The stakeholder theory also addresses the issue of presence of multiple interest groups but in a different context. Stakeholder theory states that an organization has many groups having stake in the successful functioning of the firm, such as the owners, shareholders, employees, government, and societal groups, therefore it is management's obligation to strike a balance between the interest of all stakeholders and maximize benefit of all, thereby making corporate decisions that does not compromise interest of one stakeholder for the sake of other (Jensen 2010, 32-42). This theory is fundamentally contrary to the traditional perspective regarding a firm having primary responsibility to its owner or shareholders only. This paper is concerned with business world scenarios where real organizational employees made some decisions and how best did these decisions serve the interest of all stakeholders. We selected 4 business journal articles and assessed how they have interpreted a decision when analyzed from the perspective of agency accounting theory and stakeholder theory of corporate governance.
Case Facts
In a real business world case, stakeholder theory of corporate governance propagates what Ray Anderson, CEO of Interface tried to achieve. In an article titled 'Executive on a mission: Saving the planet', Cornella Deans of 'The New York Times' reported that after reading a book regarding biosphere and how businesses are damaging planet Earth, Anderson decided that his company will become 'restorative' enterprise, a sustainable operation that takes nothing out of the earth that cannot be recycled or quickly regenerated, and that does no harm to the biosphere" (Dean 2007, F1). Ray Anderson as CEO of the company (an agent in context of agency theory and one stakeholder out of many in context of stakeholder theory) along with his executive management team of Interface set 2020 as a target year when the company would not taking out anything from Earth that could not be reproduced or regenerated quickly. From 1994 till 2007, use of fossil fuels at Interface has decreased 45% whereas sales increased by 49%. Use of water for carpet production has been cut by one third whereas contribution to landfill decreased by 80% (Dean 2007, F1).
On the contrary, another case in business decision making, while analyzing from agency theory perspective, was that of Morgan Stanley and Barclays bank. Douglas Keenan wrote for the Financial Times those banks such as Morgan Stanley and Barclays were found manipulating London Interbank Offered Rate (LIBOR). It is a benchmark interest rate that British Association of Bankers (BAA) publishes daily based on which banks lend money to each other. A lower rate being reported by a bank represents that bank's risk proneness is less whereas a higher LIBOR rate shows that a bank is risky to have been lent the money. This Morgan Stanley trader also revealed that (later confirmed by the U.S. Council of Foreign Affairs CFR as well) that many banks and their executive management has allowed for the manipulation of LIBOR rate. Keenan wrote that "There have been two distinct motivations for banks to misreport Libor rates. One motivation is discussed above: to directly increase profits. The other motivation arose during the 2008 financial crisis: to mask liquidity problems (Keenan 2012). Legal and regulatory proceedings against Barclays, UBS (Swiss banking giant), and RBS (Royal Bank of Scotland) resulted in heavy fines. Barclays paid $453 million, UBS $1.5 billion, and RBS $780 million...
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