Agency Theory:

Agency Theory: A Cause of Failure in Corporate Governance

David Crowther, London Metropolitan University, UK & Renu Jatana M. L. Sukhadia University, India

Introduction A growing number of writers over the last quarter of a century have recognised that the activities of an organisation impact upon the external environment and have suggested that such an organisation should therefore be accountable to a wider audience than simply its shareholders. Such a suggestion probably first arose in the 1970s and a concern with a wider view of company performance is taken by some writers who evince concern with the social performance of a business, as a member of society at large. This concern was stated by Ackerman (1975) who argued that big business was recognising the need to adapt to a new social climate of community accountability, but that the orientation of business to financial results was inhibiting social responsiveness. McDonald and Puxty (1979) on the other hand maintain that companies are no longer the instruments of shareholders alone but exist within society and so therefore have responsibilities to that society, and that there is therefore a shift towards the greater accountability of companies to all participants. Recognition of the rights of all stakeholders and the duty of a business to be accountable in this wider context therefore has been largely a relatively recent phenomenon. The economic view of accountability only to owners has only recently however been subject to debate to any considerable extent. Implicit in this concern with the effects of the actions of an organisation on its external environment is the recognition that it is not just the owners of the organisation who have a concern with the activities of that organisation. Additionally there are a wide variety of other stakeholders who justifiably have a concern with those activities, and are affected by those activities. Those other stakeholders have not just an interest in the activities...