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Difference Between Agency Theory and Stakeholder Theory

Difference Between Agency Theory and Stakeholder Theory are the promonent framework. The Difference Between Agency Theory and Stakeholder Theory can be a helpful chanpter in class 12th Commerce. Learn about it here

Shruti Dutta24 Apr, 2024

Difference Between Agency Theory and Stakeholder Theory

Agency Theory and Stakeholder Theory : In corporate governance and management theory, two prominent frameworks work together to address the complex dynamics between organisations, their stakeholders, and those entrusted with their management. Agency Theory and Stakeholder Theory represent contrasting perspectives, offering unique insights into how businesses operate and interact within their broader socio-economic context.

While Agency Theory talks about the relationship between principals, typically shareholders, and their agents, often company executives. Stakeholder Theory takes a more expansive view, considering many parties beyond shareholders as important influencers on an organisation's direction and success. This article will explore the fundamental differences between Agency and Stakeholder Theory, shedding light on their distinct approaches to organisational governance, decision-making, and accountability.

What is Agency Theory

Agency theory is an important idea used to explain and deal with challenges between business owners and those who work for them. This usually involves shareholders as the owners and company leaders as the workers. It is also called the "agency problem" because it shows the difficulties that can happen in this relationship. However, agency theory also helps us understand how owners trust their workers to make important financial decisions that can have different results. In business, shareholders are the owners, and company leaders are the workers. Even though they seem different, shareholders and company leaders are closely connected and need each other for the business to do well.

Example Of Agency Theory

Imagine you own a dog (the principal) and hire a dog walker (the agent) to take your furry friend out for walks. You want the walker (agent) to prioritise your dog's well-being (your interests), but they might also be thinking about earning more money (agent's interests). This is where Agency Theory comes in.

Mismatched Needs : You want long walks in the park, but the walker might take shorter walks to fit in more clients (they get paid per walk).
Information Gap : You trust the walker but might not know if they're taking the best routes or letting your dog socialise enough.

To make sure your dog gets the best care:

Clear Instructions : Tell the walker exactly what you want (long walks, park time, etc.).
Ask Questions : Find out the walker's experience and how many dogs they walk at once.
Check In Regularly : See if your dog seems happy and healthy after walks.
Understanding Agency Theory allows you to be a better pet owner and ensure your dog gets the necessary exercise.

What is Stakeholder Theory

Stakeholder theory says that a company needs to consider more than just it is shareholders. It is not just about making money for them. According to this theory, anyone affected by the company's actions, like employees, customers, suppliers, and others, is important too. Stakeholder theory tells companies to care about everyone involved, not just the shareholders. It says that by doing this, companies can be truly successful in the long run. This idea is different from shareholder theory, which says that a company's main goal is to make as much money as possible for its shareholders.

Also Read: Difference between Enterprise Value and Market Capitalisation

Example:

Imagine running a lemonade stand (the company). You want to make money (profit), but you must also keep your customers (kids) happy with good lemonade and a fair price. Here's the Stakeholder Theory in Action:

Customers (Kids) want a reasonably priced refreshing drink. To keep them coming back, you could offer different sizes or discounts.
Employees (You) : You want to make money and have fun running the stand. Make sure it's enjoyable!
Parents (Community) : They might be concerned about sugar content or hygiene. You could use fresh lemons and clean cups to build trust.
By considering everyone involved, you can make your lemonade stand a success!

This is a simpler example, but it shows that Stakeholder Theory is about thinking beyond profit and considering everyone who has a stake in your business, just like the kids, you, and the parents in the lemonade stand example.

Difference between Agency Theory and Stakeholder Theory

Before delving into a comparative table, it is important to understand the fundamental differences between Agency Theory and Stakeholder Theory . Agency Theory primarily focuses on the relationship between principals, typically shareholders, and their agents, often company executives. On the other hand, Stakeholder Theory adopts a broader perspective, considering a multitude of stakeholders beyond shareholders who have a vested interest in or are impacted by the organisation's actions. Now, let us explore the key distinctions between Agency Theory and Stakeholder Theory in a comparative table:

Difference between Agency Theory and Stakeholder Theory
Aspect	Agency Theory	Stakeholder Theory
Definition	Agency theory assists in explaining the primary issues that arise when one party represents another in business but has conflicting perspectives or interests on various business matters.	Stakeholder theory aids in defining an organisation's structure as a conglomerate of multiple distinct groups with varying interests.
Primary Focus	Relationship between principals (shareholders) and agents (company executives)	Consideration of multiple stakeholders beyond shareholders, including employees, customers, suppliers, communities, etc.
Objective	Maximising shareholder wealth	Balancing the interests of various stakeholders for long-term organisational success
Perspective	A narrow focus on the interests of shareholders	Broad view encompassing the interests of all stakeholders
Governance Approach	Emphasises monitoring and controlling agents to align their actions with shareholder interests	Advocates for inclusive decision-making processes that consider the needs of all stakeholders
Accountability	Agents are primarily accountable to principals (shareholders)	Emphasises accountability to all stakeholders involved in or affected by the organisation's operations
Long-term Strategy	Focuses on short-term financial performance to satisfy shareholder expectations	Promotes sustainable, ethical business practices to create value for all stakeholders over the long term

Begin your journey towards academic excellence in Commerce with our comprehensive Class 11 Commerce courses . Master the CBSE syllabus with expert guidance and ace your exams. Enroll now!”

Commerce Related Topics
Index Numbers	Likert Management System	Joint Venture (JV)	Types of Insurance
Fiscal Policy	Corporate Finance and Investment Analysis	Business Economics	Customer Relationship Management (CRM)

Agency Theory and Stakeholder Theory FAQs

Who are considered stakeholders in stakeholder theory?

Stakeholders include individuals or entities affected by or having an interest in the organisation's activities, such as employees, customers, suppliers, local communities, and environmental groups.

Why is stakeholder theory important in business management?

Stakeholder theory emphasises the importance of considering the needs and perspectives of all stakeholders, not just shareholders, in decision-making processes to achieve long-term success and sustainability.

How does stakeholder theory differ from agency theory?

While agency theory focuses on the relationship between principals and agents within a business, stakeholder theory takes a broader view, considering the interests of multiple stakeholder groups beyond just shareholders.

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What is Agency Theory

Example Of Agency Theory

Mismatched Needs : You want long walks in the park, but the walker might take shorter walks to fit in more clients (they get paid per walk).
Information Gap : You trust the walker but might not know if they're taking the best routes or letting your dog socialise enough.

To make sure your dog gets the best care:

Clear Instructions : Tell the walker exactly what you want (long walks, park time, etc.).
Ask Questions : Find out the walker's experience and how many dogs they walk at once.
Check In Regularly : See if your dog seems happy and healthy after walks.
Understanding Agency Theory allows you to be a better pet owner and ensure your dog gets the necessary exercise.

What is Stakeholder Theory

Also Read: Difference between Enterprise Value and Market Capitalisation

Example:

Customers (Kids) want a reasonably priced refreshing drink. To keep them coming back, you could offer different sizes or discounts.
Employees (You) : You want to make money and have fun running the stand. Make sure it's enjoyable!
Parents (Community) : They might be concerned about sugar content or hygiene. You could use fresh lemons and clean cups to build trust.
By considering everyone involved, you can make your lemonade stand a success!

Difference between Agency Theory and Stakeholder Theory

Difference between Agency Theory and Stakeholder Theory
Aspect	Agency Theory	Stakeholder Theory
Definition	Agency theory assists in explaining the primary issues that arise when one party represents another in business but has conflicting perspectives or interests on various business matters.	Stakeholder theory aids in defining an organisation's structure as a conglomerate of multiple distinct groups with varying interests.
Primary Focus	Relationship between principals (shareholders) and agents (company executives)	Consideration of multiple stakeholders beyond shareholders, including employees, customers, suppliers, communities, etc.
Objective	Maximising shareholder wealth	Balancing the interests of various stakeholders for long-term organisational success
Perspective	A narrow focus on the interests of shareholders	Broad view encompassing the interests of all stakeholders
Governance Approach	Emphasises monitoring and controlling agents to align their actions with shareholder interests	Advocates for inclusive decision-making processes that consider the needs of all stakeholders
Accountability	Agents are primarily accountable to principals (shareholders)	Emphasises accountability to all stakeholders involved in or affected by the organisation's operations
Long-term Strategy	Focuses on short-term financial performance to satisfy shareholder expectations	Promotes sustainable, ethical business practices to create value for all stakeholders over the long term

Begin your journey towards academic excellence in Commerce with our comprehensive Class 11 Commerce courses . Master the CBSE syllabus with expert guidance and ace your exams. Enroll now!”

Commerce Related Topics
Index Numbers	Likert Management System	Joint Venture (JV)	Types of Insurance
Fiscal Policy	Corporate Finance and Investment Analysis	Business Economics	Customer Relationship Management (CRM)