In today’s complex business landscape, corporate governance is at the forefront of discussions concerning the relationship between shareholders and directors. It’s essential to explore these theories in-depth to understand the dynamics that drive corporate decision-making. This blog post takes a closer look at key aspects of agency theory and stakeholder theory, delving into the intricacies and implications for corporate governance in the UK.
This White Paper begins with a fundamental acknowledgment: companies are integral parts of the broader society. They serve as employers, debtors, and taxpayers. Shareholders, in turn, play a pivotal role as initial contributors who shape a company’s direction. However, ownership is not an absolute right in the legal landscape, extending even to age-old assets like land. In the Western world, corporate entities with limited liability have become the predominant means of conducting business, offering a platform for the freedom of association.
These corporate structures are versatile, used not only by for-profit businesses but also by non-profits, sports teams, and even in government-authorized and supported activities like Constellis Holdings LLC. This wide spectrum of applications necessitates a delicate balance between shareholders’ rights and societal interests. Both agency theory and stakeholder theory aim to address the question of how much shareholders’ rights should be curtailed, and which theory provides a more solid foundation for such legislative restrictions.
Both theories share a common premise: the limitation of shareholder power. Agency theory frames this limitation as a perpetual struggle between shareholders and company executives. In contrast, stakeholder theory introduces a system of checks and balances that governs corporate management and ensures alignment with wealth maximization. Even in instances where managers deviate from market-oriented outcomes, moral arguments and game theory complexities come into play.
In the realm of corporate governance, it’s crucial to revisit the foundations of agency theory, specifically the interpretation of shareholders. While the prevailing view aligns shareholders with the company’s registry, agency theory primarily seeks to address agency costs and propose solutions to the agency problem.
Agency theory’s relevance is rooted in its acknowledgment of the significance of general meetings. Under UK and Cyprus law, shareholders can remove directors during a valid general meeting, and the initial directors’ board is established through the memorandum and articles of association. These documents express the shareholders’ intent and can even stipulate that the appointment of directors is exclusively assigned to the board of directors. However, a general meeting retains the authority to change this provision in the future.
Shareholders’ monopoly of power is deemed undesirable, but so is a director’s monopoly of power. The agency problem elucidates why aligning shareholder desires with directors’ decisions is challenging, and the concept of agency costs underscores the importance of good governance, beyond the quality of general meetings’ decisions.
The agency theory refrains from specifying who can be a shareholder and instead prefers the term “principal.” Today, businesses are subject to governmental policies that categorize them based on various criteria. Another classification could be based on the percentage of shareholders who are also full-time employees, fostering the political will to promote such companies. This structure is often adopted by professionals like lawyers and doctors, and these associations tend to align shares based on criteria such as individual profit generation or hours worked.
In conclusion, exploring agency theory and stakeholder theory is a journey into the intricate fabric of corporate governance in the UK. While they offer different perspectives on the relationship between shareholders and directors, they both underscore the importance of striking a balance between individual rights and societal interests. In an ever-evolving business landscape, understanding and applying these theories can pave the way for responsible and effective corporate governance.
