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Bower and Paines Criticism of Agency Theory
To sustain an organization, one needs to delineate the roles for each participant clearly, which includes the shareholders as crucial agents of the business setting. However, locating the extent of the influence that shareholders should exert on a company is quite a challenge due to the unique circumstances in which every organization operates and the complex relationships between its agents. According to Bower and Paine, the existence of the agency board as the tool for controlling managers and limiting the threat of them abusing their power does not represent an accurate model of the modern business setting anymore, which is why it needs to be replaced with a better option. Although the introduction of corporate governance does allow reducing financial risks posed by external threats, Bower and Paines method of approaching organizational management and the extent of shareholders agency seems legitimate (Bower and Paine 54). Bower and Paines theory provides leadership tools to the people that are aware of the company-specific issues as opposed to shareholders, who are familiar with the market, but may have a vague idea about the companys specifics.
Arguably, there is a grain of reason to the standpoint that Bower and Paine offer in their assessment of the impact of the agency theory. Without proper control tools established in an organization, managers may abuse their power when making decisions in regard to the companys functioning. However, the described concern is related to the promotion of corporate ethics code as opposed to the leadership issues and the reinforcement of shareholders influence (Bower and Paine 50). Due to the lack of accountability possessed by shareholders, the presence of legal boundaries to the extent of influence that they can exert, and the limitations in their understanding of how a company operates in its target market, shareholders should not be provided with an unlimited power of decision-making.
Overall, the extent of authority that should be given to shareholders needs to be considered on a case-by-case basis. The analysis of case-specific circumstances is critical since it will help to determine the boundaries of the influence that shareholders can have on a companys decision-making. Due to the lack of insight into the specificities of the organizational relationships and the aspects of a companys performance that may inform decision-making, shareholders may take the steps that will entail serious long-term consequences for a companys financial situation. For example, the choice of investments as one of the areas in which shareholders are likely to be willing to have a say may require a nuanced understanding of not only a companys current financial situation, but also the factors that influence it. Therefore, a careful assessment of the firms supply chain, insight into different aspects of interactions between the company and its suppliers, and many other issues need to be integrated into the analysis. Shareholders, in turn, may be unaware of the specified aspects of a firms performance, being familiar mostly with the external environment in which it performs.
Therefore, the amount of agency that shareholders should have in the business setting has to be decided after a detailed analysis of a companys characteristics and its position in the market. Moreover, the authority of shareholders can be expanded after providing a communication channel through which they will be informed about the key changes within a company. Until then, Brown and Paines criticism of the agency theory remains a legitimate issue that warrants a discussion.
Work Cited
Bower, Joseph L., and Lynn S. Paine. The Error at the Heart of Corporate Leadership. Harvard Business Review, 2017.
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