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SYNTHESIS PAPER
COPIAR, RAYMART M.
BSA-401
designing governance and controls in organizations, adding that the theory helps
management to evaluate the company's strengths and weaknesses, and it uses case
study evidence to demonstrate how the theory has been applied in different industries
and contexts. Agency theory can be quite helpful to companies in a variety of industries
and contexts. For example, fully functioning supply chains are crucial for nearly every
relationships in which one party (principal) determines the work and which another party
theory, the principals of the company hire the agents to perform work. The principals
delegate the work of running the business to the directors or managers, who are agents
of shareholders. The shareholders expect the agents to act and make decisions in the
best interest of principal. On the contrary, it is not necessary that agent make decisions
short of expectations of the principal. The key feature of agency theory is separation of
ownership and control. The theory prescribes that people or employees are held
accountable in their tasks and responsibilities. Rewards and Punishments can be used
principals. The agent represents the principal in a particular business transaction and is
expected to represent the best interests of the principal without regard for self-interest.
The different interests of principals and agents may become a source of conflict, as
some agents may not perfectly act in the principal's best interests. The resulting
miscommunication and disagreement may result in various problems and discord within
companies. Incompatible desires may drive a wedge between each stakeholder and cause
The principal-agent problem occurs when the interests of a principal and agent
conflict. Companies should seek to minimize these situations through solid corporate
policy. These conflicts present normally ethical individuals with opportunities for moral
hazard. Incentives may be used to redirect the behavior of the agent to realign these
Corporate governance can be used to change the rules under which the agent
operates and restore the principal's interests. The principal, by employing the agent to
represent the principal's interests, must overcome a lack of information about the
agent's performance of the task. Agents must have incentives encouraging them to act
in unison with the principal's interests. Agency theory may be used to design these
Incentives encouraging the wrong behavior must be removed, and rules discouraging
moral hazard must be in place. Understanding the mechanisms that create problems
To determine whether or not an agent acts in his or her principal’s best interest,
defined, agency loss is the difference between the optimal results for the principal and
the consequences of the agent’s behavior. For example, when an agent routinely
performs with the principal’s best interest in mind, agency loss is zero. But the further an
agent’s actions diverge from the principal’s best interests, the greater the agency loss
becomes.
Agency costs refer to the conflicts between shareholders and their company's
the manager, the agent, to make decisions that will increase the share value. Managers,
instead, would prefer to expand the business and increase their salaries, which may not
necessarily increase share value. In a publicly held company, agency costs occur when
a company's management, or agent, place their own personal financial interests above
Agency costs are important because although they are difficult for an account to
track, they are just as difficult to avoid. This is because principals and agents can have
very different motivations, Investing answers explains, adding that management may
have more information than shareholders – principals – and can take advantage of their
Agency theory provides clear parameters for corporate officers and board
tendency to be greedy and profit at the expense of the company. It is also an invaluable
guideline when a company's long-term interests conflict with actions that may provide
vote in major company decisions. This right is diluted by the fact that some stockholders
may own a single share, giving them a single vote, while others own thousands of
shares, giving them thousands of votes. Executives and board members should
represent all shareholders, but they might over represent those who own the most
equity. Agency theory is a step toward navigating these complexes and sometimes
conflicting obligations.
Greedy executives. The people with the power to make high-level corporate decisions
are often directly in line to benefit from some of these decisions, especially with regard
to issues of corporate pay. In a perfect world, high pay and large bonuses for executives
would motivate and reward them for quality work that brings in extra income for all
shareholders. In the real world, high corporate pay can come at the expense of the
invest in the future, but these outlays often come at the expense of short-term rewards
theory will use the knowledge and skills that landed them in management positions to
about the inner workings of a company, they're likely to want to invest company
resources in ways that will bring the most income in the short term. However,
investments that bring about quick returns tend to be riskier than strategies that unfold
Shareholders purchase their shares and then enjoy returns over time if the
business is successful. Although the value of their shares may be at risk from
shareholders themselves aren't taking on any additional risks from these ventures. In
contrast, managers and board members who are more actively involved in the
company's day-to-day activities have a more sober assessment of the risks associated
corporate activity on all identifiable stakeholders of the corporation. This theory posits
that corporate managers (officers and directors) should take into consideration the
interests of each stakeholder in its governance process. This includes taking efforts to
reduce or mitigate the conflicts between stakeholder interests. It looks further than the
traditional members of the corporation (officers, directors, and shareholders) and also
focuses on the interests of any third party that has some level of dependence upon the
corporation. Stakeholders are generally divided into internal and external stakeholders.
concept is about what the organization should be and how it should be conceptualized.
purpose of the organization should be to manage their interests, needs and viewpoints.
managers should on the one hand manage the corporation for the benefit of its
stakeholders in order to ensure their rights and the participation in decision making and
on the other hand the management must act as the stockholder’s agent to ensure the
survival of the firm to safeguard the long term stakes of each group.
These stakeholders exert influence but are not directly involved in the process.
Key to the stakeholder theory is the realization that all stakeholders engage in some
manner with the corporation with the hope or expectation that the corporation will deliver
the type of value desired or expected. The benefits may include dividends, salary,
relationships to serve – this includes the suppliers, employees and business partners.
The theory focuses on managerial decision making and interests of all stakeholders
have intrinsic value, and no sets of interests is assumed to dominate the others
creditor protection, which is one of the foundational principles, is proof of this fact. The
stakeholder vision articulated in the recent times is, however, more expansive and
The definition of a stakeholder, the purpose and the character of the organization
and the role of managers are very unclear and contested in literature and has changed
over the years. Even the “father of the stakeholder concept” changed his definition over
the time. In one of his latest definitions he defines stakeholders as “those groups who
In one of his latest publications he adds a new principle, which reflects a new
trend in stakeholder theory. In this principle in his opinion the consideration of the
perspective of the stakeholders themselves and their activities is also very important to
recourse. Stakeholders may bring an action against the directors for failure to perform
All the mentioned thoughts and principles of the stakeholder concept are known
theories of how managers or stakeholders should act and should view the purpose of
and how they view their actions and roles. The instrumental stakeholder theory deals
with how managers should act if they want to flavor and work for their own interests. In
some literature the own interest is conceived as the interests of the organization, which
treat stakeholders in line with the stakeholder concept the organization will be more
In the past view years the concept of stakeholders has boomed a lot and
academics wrote a lot about the topic. But also non-governmental organizations
(NGOs), regulators, media, business and policymakers are thinking about the concept
and are trying to implement it in some way or the other. Most contributions are
particularly about the normative principle. They promote the vision of the company and
the role of managers whose objective is mainly to maximize shareholder value in order
to be sustainable.
However, this perspective seems to be giving way to that business has more and
broader responsibilities. Those are best defined in terms of the stakeholder approach.
Another reason why this topic is very popular and contested among theorists is that
there is quit an amount of contesting literature around which is tried to be replaced and
up dated. Along with the popularity has come a profusion of different overlapping
approaches to the stakeholder concept. This has led to a confusing situation in this
Brumberg (1954, 1980) assumes that individuals try to smooth consumption over their
lifetimes. Since labour income flows are uneven over the course of life, this theory
implies that savings rates will be uneven over the course of life. In particular, savings
rates will be low during early adult years, will rise with age as income increases, and will
macroeconomists think about saving, interest rates, and the capital stock. It implies that
aggregate saving rate, even in a closed economy, but that saving rates are an
price revaluations have different effects on the young and the old. An increase in the
present value of asset prices associated with a decline in interest rates should have
much less effect on the young than the old because the young recognize that the future
value of their retirement savings is little changed whereas the old will be enticed to
spend immediately.
spending and saving habits of people over the course of a lifetime. The concept was
developed by Franco Modigliani and his student Richard Brumberg in the early 1950s.
It presumes that individuals plan their spending over their lifetimes, taking into
account their future income. Accordingly, they take on debt when they are young,
assuming future income will enable them to pay it off. They then save during middle age
in order to maintain their level of consumption when they retire. This results in a “hump-
shaped” pattern in which wealth accumulation is low during youth and old age and high
The life-cycle model predicts that aggregate saving rates should be an increasing
function of the overall growth rate. This is because the lifetime income of the young is
high relative to the old when economic growth is high, so the saving of the young should
exceed the dissaving of the old. This prediction is broadly consistent with the evidence
from cross-country data – countries that have higher growth rates tend to have higher
saving rates.
While the evidence is broadly in favour of the hypothesis, caution is needed as
the direction of causality between saving and growth rates is not clear cut. Economic
models suggest that countries that save more will also grow faster, at least in transition.
Moreover, there are several reasons to be cautious about the extent to which economic
capital, then it will lead to an increase in the incomes of the elderly but not of the young.
pension scheme, and if pension benefits are related to average wages, higher wages
for young people will also mean higher pension benefits for older people.
The theory states consumption will be a function of wealth, expected lifetime earnings
It assumes people run down wealth in old age, but often this doesn’t happen as
people would like to pass on inherited wealth to children. Also, there can be an
People may lack the self-control to reduce spending now and save more for
future.
Life-cycle is easier for people on high incomes. They are more likely to have
financial knowledge; also they have the ‘luxury’ of being able to save. People on
low-incomes, with high credit card debts, may feel there is no disposable income
to save.
smooth out leisure – working fewer hours during working age, and continuing to
not to save because lower savings will lead to more social security payments.
The life-cycle hypothesis has been utilized extensively to examine savings and
retirement behavior of older persons. This hypothesis begins with the observation that
consumption needs and income are often unequal at various points in the life cycle.
Younger people tend to have consumption needs that exceed their income. Their needs
tend to be mainly for housing and education, and therefore they have little savings. In
middle age, earnings generally rise, enabling debts accumulated earlier in life to be paid
since become popular with professional and average investors. Understanding that an
investment’s potential returns are directly tied to the level of risk involved, modern
portfolio theory (also known as MPT) offers investors a framework that can be used to
construct a portfolio that is designed to maximize potential return while minimizing risk.
Modern portfolio theory was created and pioneered by Harry Markowitz with the
1952 publication of his essay “Portfolio Selection” in the Journal of Finance. Since then,
in addition to eventually earning Markowitz the 1990 Nobel Prize in Economics, modern
portfolio theory would come to be one of the most popular investment strategies in use
of market risk, emphasizing that risk is an inherent part of higher reward. According to
the theory, it's possible to construct an "efficient frontier" of optimal portfolios offering
characteristics should not be viewed alone, but should be evaluated by how the
investment affects the overall portfolio's risk and return. It shows that an investor can
construct a portfolio of multiple assets that will maximize returns for a given level of risk.
At its heart, modern portfolio theory makes (and supports) two key arguments:
that a portfolio’s total risk and return profile is more important than the risk/return profile
of any individual investment, and that by understanding this, it is possible for an investor
to build a diversified portfolio of multiple assets or investments that will maximize returns
These arguments are built upon an understanding of three key concepts: The
All investments involve at least some risk (whether business risk, volatility risk,
inflation risk, etc.) which can limit your investment gains or even lead to a loss of capital.
While riskier investments bring with them a higher potential for loss compared to less
risky investments, they also tend to bring with them a higher potential for gain.
Conversely, less risky investments bring with them a lower potential for loss, paired with
out of different investments in order to reduce the exposure risk of holding too much of a
single investment.
There are many different ways in which an investor might choose to diversify
their portfolio in order to mollify this risk. You might diversify within asset classes—by
investing in stocks from multiple companies, for example—or between asset classes—
minimizing the risk of loss. The portfolio will be only as risky as it needs to be in order to
realistically achieve the investor’s desired returns. This concept is often referred to as
the “efficient frontier,” which forms the bedrock of modern portfolio theory.
In seeking to build an investment portfolio that falls along the efficient frontier to
build their investment portfolio, an investor who follows modern portfolio theory is
primary goal of limiting their potential for loss. Their secondary goal, though, is to grow
their money as safely as possible. Risk-averse investors who understand the level of
risk that they are comfortable accepting from their investments (their risk tolerance) can
use modern portfolio theory to build a portfolio which falls within their acceptable risk
Other investors are comfortable taking on any level of risk in order to reach their
investment goals. Their primary goal is growth. But even the most risk-tolerant of
investors likely has at least some desire to limit their risk. Why take on more risk than is
necessary to reach your goals? Investors who know their investment goals can use
modern portfolio theory to create a portfolio that has the greatest likelihood of reaching
• Systematic Risk: This refers to market risks that cannot be reduced through
diversification, or the possibility that the entire market and economy will show losses
that negatively affect investments. It’s important to note that MPT does not claim to be
segment.
• Unsystematic Risk: Also called specific risk, unsystematic risk is specific to individual
stocks, meaning it can be diversified as you increase the number of stocks in your
portfolio.
itself contributes very little to overall portfolio risk. Rather, the covariances among the
Modern portfolio theory says that it is not enough to look at the expected risk and
return of one particular stock. By investing in more than one stock, an investor can reap
the benefits of diversification – chief among them, a reduction in the riskiness of the
portfolio. MPT quantifies the benefits of diversification, or not putting all of your eggs in
one basket.
For most investors, the risk they take when they buy a stock is that the return will
be lower than expected. In other words, it is the deviation from the average return. Each
stock has its own standard deviation from the mean, which modern portfolio theory calls
"risk."
The risk in a portfolio of diverse individual stocks will be less than the risk
inherent in holding any one of the individual stocks, provided the risks of the various
stocks are not directly related. Consider a portfolio that holds two risky stocks: one that
pays off when it rains and another that pays off when it doesn't rain. A portfolio that
contains both assets will always pay off, regardless of whether it rains or shines. Adding
one risky asset to another can reduce the overall risk of an all-weather portfolio.
For a well-diversified portfolio, the risk – or average deviation from the mean—of
risk. As a result, investors benefit from holding diversified portfolios instead of individual
stocks.
THE ATTRIBUTION THEORY
Attribution theory is concerned with how individuals interpret events and how this
relates to their thinking and behavior. Heider (1958) was the first to propose a
framework that has become a major research paradigm of social psychology. Attribution
theory assumes that people try to determine why people do what they do, i.e., attribute
causes to behavior. A person seeking to understand why another person did something
observe the behavior, (2) then the person must believe that the behavior was
intentionally performed, and (3) then the person must determine if they believe the other
person was forced to perform the behavior (in which case the cause is attributed to the
situation) or not (in which case the cause is attributed to the other person).
task difficulty, and luck as the most important factors affecting attributions for
achievement. Attributions are classified along three causal dimensions: locus of control,
stability, and controllability. The locus of control dimension has two poles: internal
versus external locus of control. The stability dimension captures whether causes
change over time or not. For instance, ability can be classified as a stable, internal
seem less likely than non-disabled peers to attribute failure to effort, an unstable,
controllable factor, and more likely to attribute failure to ability, a stable, uncontrollable
factor.
Attribution theory has been used to explain the difference in motivation between
high and low achievers. According to attribution theory, high achievers will approach
rather than avoid tasks related to succeeding because they believe success is due to
high ability and effort which they are confident of. Failure is thought to be caused by bad
luck or a poor exam, i.e. not their fault. Thus, failure doesn’t affect their self-esteem but
On the other hand, low achievers avoid success-related chores because they
tend to (a) doubt their ability and/or (b) assume success is related to luck or to “who you
know” or to other factors beyond their control. Thus, even when successful, it isn’t as
rewarding to the low achiever because he/she doesn’t feel responsible, i.e., it doesn’t
According to Heider, there are two main ideas of Attribution Theory, which hold
major influence.
Internal attributions that we often hold responsible for others behavior are motives,
rather than international characteristic is called external attribution. We often explain our
new actions and b behavior using the environment or situational features, something
THEORIES OF ATTRIBUTION
common sense psychology was espoused because he believed that every individual
observed analyzed and explained behaviors and actions with their explanations.
Correspondent Inference Theory
Davis in 1965, which accounts for a person’s inferences about an individual’s certain
behavior or action. The major purpose of this theory is to try and explain why people
choice
expectedness of behavior
effects of behavior
Covariation Model
Covariation Model was proposed by Kelley, which deals with both social
Consensus
Distinctiveness
Consistency
Three Dimensional Model
attempt to explain their success or failure determines the effort they are willing to exert
in the future. Affective and cognitive assessment influences the behavior in the future
One of the major criticism of the attribution theory has been the assumption of
people as logical and systematic thinkers. Because of this, attribution theory is criticized
for being mechanistic and reductionist. Attribution theories also fail to take social,
historical, and cultural factors into consideration, which shape attributions of cause.
Weiner’s theory has been widely applied in education, law, clinical psychology,
and the mental health domain. There is a strong relationship between self-concept and
achievement. Students with higher ratings of self-esteem and with higher school
ability, while they contribute failure to either internal, unstable, controllable factors such
trace the roots of these principles to the first modern cooperative founded in Rochdale,
England in 1844. These principles are a key reason that America’s electric cooperatives
operate differently from other electric utilities, putting the needs of their members first.
Credit unions are financial cooperatives and, like cooperatives around the world,
they generally operate according to the same seven core principles and values adopted
in 1995 by the International Cooperative Alliance. Cooperatives can trace their roots to
philosophies that guide credit unions and cooperatives in equality, fairness, and mutual
self-help. Today, more than 1 billion people are members of cooperatives, or co-ops.
You will find co-ops involved in a variety of businesses, from food to hardware stores
and taxis; and though their businesses differ, their mutual goal is a commitment to
While they have been updated from their original form, many credit unions use
the Seven Cooperative Principles as part of their mission to serve their members; and
1. Voluntary Membership
people willing to accept the responsibilities and benefits of membership, without gender,
with volunteer board of directors. In the case of credit unions, members are drawn from
Membership in a cooperative is open to all persons who can reasonably use its
Cooperatives are voluntary organizations, open to all persons able to use their
services and willing to accept the responsibilities of membership, without gender, social,
actively participate in setting policies and making decisions. The elected representatives
voting rights (one member, one vote) and cooperatives at other levels are organized in
a democratic manner.
Cooperatives are democratic organizations controlled by their members, who
actively participate in setting policies and making decisions. The elected representatives
voting rights (one member, one vote) and cooperatives at other levels are organized in
a democratic manner.
Members are the owners. As such they contribute to, and democratically control,
the capital of the cooperative. These benefits members in proportion to the transactions
For credit unions, which typically offer better rates, fees and service than for-
Members contribute equitably to, and democratically control, the capital of their
cooperative. At least part of that capital is usually the common property of the
the following purposes: developing the cooperative, possibly by setting up reserves, part
transactions with the cooperative; and supporting other activities approved by the
membership.
4. Autonomy and Independence
members. If the cooperative enters into agreements with other organizations or raises
capital from external sources, it is done so based on terms that ensure democratic
volunteer directors, and financial education for their members and the public, especially
the nation’s youth. Credit unions also recognize the importance of ensuring the general
public and policy makers are informed about the nature, structure and benefits of
cooperatives.
cooperative movement by working together through local, state, regional, national, and
international structures.
7. Concern for Community