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The Agency Theory and Penalties for Breaches of Duty

Discuss about the Governance Structure Influence Pension.

According the Corporation Law of Australia, the directors of the company have duties toward their company and employees. They have the same duties like the other directors duty in every country. They have duties of loyally and the duty of care to the company and the employees. The board member of the company appoints directors where they have duties of care and diligence toward the company and employee (Knepper et al. 2016). They must have good faith for the best interest of the company. They must have avoided the conflict of interest and solved the conflicts. They must use their position in proper way (Wolfe 2014). When and whenever they need to give proper information they must provide that to the company and as well as towards the employee.

As per the given article of “directors warned after boss jailed” the agency theory defines the relationship between the principals and the agent in business (Welsh et al. 2013). The theory only concerned with the resolving the problems between the agent who are related to the shareholders and company executives. As per the agency theory, the directors are the agent and the shareholders are the principals. Agent theory always manages the financial responsibilities, which generate the wealth of the shareholders (Welsh et al. 2013). The directors have duties and responsibilities of both the statutory and common law. If the directors mislead any statements at the time buying the shares or participate to any other market rigging then it will be breach of their duty. When they falsify the share records or any other records, which is related to the company or insolvent trading then they must act the offence under the corporation act.

As per the article “directors warned after boss jailed”, Company directors are on notice about the prospect of hefty penalties if they fail to meet their legal duties. Andrew Sigalla , a former chairman of Sydney-based technology company sTZ Ltd, was found guilty in November last year of 24 counts of defrauding the company. The Sydney Grammar old boy stole almost $9 million from the company, which, the court heard, he used to funds, feed a gambling addiction, and repay a $10 million mortgage.  The Australian Securities and Investments Commission (ASIC) Australian Securities and Investments Commission (ASIC) have the power and enforcement to proceed against the criminal offence by the directors. If the directors found guilty for an offense, as per the Sec- 184 they can face the financial penalty upto 2000 units or imprisonment up to five years. If they found the criminal offence in trading, they can face the financial penalty upto 4500 unit or imprisoned up to five years (Welsh et al. 2013). The principal agent problems occur when there is any conflicts take place and contrary with the principals of the agents (Wolfe 2014).  When the parties have different interest and asymmetric information related to the financial and political issues of the company then they have some conflict. However, the board members of the company can solve the issues. If any directors found guilty for a criminal offense, which affects not only the company but also the financial stages, and share market then the board member can take legal actions against that director for dishonesty and breach the duty of care (Zhang et al. 2017).

Board Diversity and Requirements for Directors

Board diversity is a place where the board members of the company make the structure of the organization. As per the corporate governance, the board of directors forms the pillars of the company. In board meetings, they ensure the strategic guidance of the company. As per the guidance, it will give the benefits to the company (Deegan 2013). In diversity, there are many people make their presence with different thinking. The different factors of age, race, gender, educational background and professional qualification of the directors make the board less equivalent (Sztompka 2014).

When company appoints a director, they must carry some important quality. As per the Corporation Act 2001 in Australia, the person must complete the 18 years and citizen of the Australia (Antonelli, D'Alessio and Cuomo 2017). They must have the consent of the position of directors. As per the ASIC or the court of the Australian government, a person may prohibit taking a position of director if he breached the Corporation Act (Sztompka 2014). Without the order of the court, they have no right to become the director of any company (Meutia and Febrianti 2017). Company can have more than one director. The proprietary company must have at least one director and who is the citizen of the country (Neubaum et al. 2017). For the public company there must have minimum of three directors and citizen of the Australia (Deegan 2013). If any person has, an undercharged bankrupt or convicted various dishonesty related offenses he may not eligible to be a director (Pratheepkanth, Hettihewa and Wright 2016).


The Stewardship Theory is applied as an alternative view of agency theory where the managers or the directors must act as per their own self-interests at the expenses of the shareholders whereas, the Stakeholder Theory define the organizational management and business ethics which helps to maintain  the moral values of any company (Pratheepkanth, Hettihewa and Wright 2016). As per the given statement, through the Stewardship and stakeholders’ theory the directors and the board members can manage the managements of the company (Meutia and Febrianti 2017). These specifies some mechanism which increase the loss of agency’s executive compensation, levels of benefits and the incentive schemes by giving the reward through financially or offering shares which help to motivate the employees for better performance (Antonelli, D'Alessio and Cuomo 2017). Therefore, the above-mentioned theories actually formed for the framework of management in any company where the board members of the company appoint the directors through their merits and organize the company (Neubaum et al. 2017).

Stewardship Theory and Corporate Governance

Corporate Governance is fundamental for the success of any business organization. It is considered as a mode of attaining the goals of the organization. Every organization must adopt a good governance policy to ensure that the operations of the company is not only benefitting the members of the organization and but also the society as a whole (Tricker and Tricker 2015). Family ownership business may be looked upon either as an opportunity or a threat, depending on various factors. The ownership and commitment to the business by the family may add value to the company provided the family controlling the business is able to respond to the concerns of the investor community.

Corporate governance is evaluated around certain significant theoretical frameworks of which the most essential theories are the resource dependency theory and stewardship theory. The resource dependence theory refers to the study of how the behavior of the organization is influenced or affected by the external resources of organization. The basic proposition of resource dependence theory is that there must be an environmental connection between the outside resources and the business organization. The directors of the organization must prevent the firm from any critical environmental uncertainty. The organizations rely on sources and such sources usually originate from the environment of an organization. Now, the environment includes other organizations, therefore, the needs of one organization are often in the hands of the other organizations (Hiller 2013).


Since organizations depend on multidimensional resources such as capital, raw material the organizations may not be able to find out any alternate initiatives for all the multiple sources, therefore an organization should adopt the principle of scarcity and criticality. Resource dependence concerned beyond the external organizations that distributes, provided compete or finance a firm. Although executive decisions are more important than non-executive decisions, the organizational impact is greater in case of the latter. The managers of the organization are aware that the success of an organization depends on the demand of the customers (Watson et al. 2016).

The stewardship theory refers to the theory that managers shall act responsible stewards with respect to the assets of the company over which the managers exercise their control. A steward may be defined as a person who safeguards and cater to the needs of others. Under the stewardship theory, the company executives safeguard the interests of the shareholders and the owners and usually take decisions on behalf of the same. This theory aims at obtaining satisfaction of the shareholders of the company (Tan and Cam 2015). Stewardship modeled based companies include environment concerns as well where the company aims at carrying out its business operations without having any drastic adverse effect on the environment.

Resource Dependence Theory

In case of family owned business, the shareholders and the creditors may not trust the companies completely owing to the probable risks relating to the misuse of rights of other shareholders. Under family owned business, where the motive of the members of the business should be to act in a way that its members are benefitted. However, such type of business suffers from inherent risks such as highly– concentrated ownership, absence of accountability, poor transparency and absence of fairness principle which leads to abuse of the rights of the minor shareholders. As mentioned in the article, Joseph Gutnick have been alleged to have hidden assets of the family owned business from his future creditors ahead of the bankruptcy.

The main objective for family owned business should be adoption of effective corporate governance conditions in order to retain the positive aspects of family ownership to ensure addressal and recognition of the investor’s interests.

In Australia, both member representation and independence are considered as essential features for the pension fund boards. The trustee and the directors of a business organization are solely responsible for the management of a regulated superannuation fund. They are obligated to exercise a professional standard of care, diligence and skill. The variety of decisions that is required to be made by the superannuation trustee and its directors must include the discretions pertaining to the investment of fund assets, the management of risk and the provision of insured benefits (Madison et al. 2016).


The superannuation funds operate as trusts with trustees who are responsible for the operation of their funds and in developing and executing an investment strategy (Coffee Jr,  Sale and Henderson 2015). The superannuation trustees are under statutory obligation to make sure that the superannuation monies are prudently invested and consideration is given liquidity and diversification. A very few specific provisions in the Superannuation industry laid down under the Supervision Act 1993, are subject to investment exposure flaws or any asset requirement. There is neither any government guarantee of benefits nor any minimum rate of return requirements; however, there are very few minor limitations on the use and borrowing of investments and derivatives in the property and shares of employer sponsors of funds.

The Superannuation Industry (Supervision) Act 1993 outlines the rules and regulations that must be complied with by any superannuation fund that is the funds must adhere to the rules stipulated in the Act. The government should criminal and civil penalties for the directors of the company who fail to discharge their duties and perform their respective functions in the best interest of the members of the organization. The directors should be entitled to civil and criminal penalties if they misuse their position or take unfair advantage of their positions to the detrimental of the members of the organization (Biesenthal and Wilden 2014). In the given article, the Australian Council of Superannuation Investors claimed that the directors had sufficient time to include women directors in the Board but failed to do so which is inconsistent with the Act.

The directors are legally obligated to give more priority to the interest of the business organization than to their personal interests, in the event there arises any conflict of interest while carrying out the operation of the business organization. In order to ensure that appropriate arrangements are made for dealing with the any conflict of interest that may arise out of the business operations, every director must disclose their respective interests.

Reference

Antonelli, V., D'Alessio, R. and Cuomo, F., 2017. Beyond Stakeholders Theory: Financial reporting and voluntary disclosure in Italian SME according to a System dynamics point of view. Economia Aziendale Online, 7(4), pp.285-304

Biesenthal, C. and Wilden, R., 2014. Multi-level project governance: Trends and opportunities. International Journal of Project Management, 32(8), pp.1291-1308.

Coffee Jr, J.C., Sale, H. and Henderson, M.T., 2015. Securities regulation: Cases and materials

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

Hiller, J.S., 2013. The benefit corporation and corporate social responsibility. Journal of Business Ethics, 118(2), pp.287-301.

Knepper, W.E., Bailey, D.A., Bowman, K.B., Eblin, R.L. and Lane, R.S., 2016. Duty of Loyalty (Vol. 1). Liability of Corporate Officers and Directors.

Madison, K., Holt, D.T., Kellermanns, F.W. and Ranft, A.L., 2016. Viewing family firm behavior and governance through the lens of agency and stewardship theories. Family Business Review, 29(1), pp.65-93.

Meutia, I. and Febrianti, D., 2017. Islamic Social Reporting in Islamic Banking: Stakeholders Theory Perspective. In SHS Web of Conferences (Vol. 34). EDP Sciences.

Neubaum, D.O., Thomas, C.H., Dibrell, C. and Craig, J.B., 2017. Stewardship climate scale: An assessment of reliability and validity. Family Business Review, p.0894486516673701.

Pratheepkanth, P., Hettihewa, S. and Wright, C.S., 2016. Corporate Governance and Financial Performance: The Case of Australia and Sri Lanka. Corporate Governance, 7(1).

Shi, W., Connelly, B.L. and Hoskisson, R.E., 2016. External corporate governance and financial fraud: Cognitive evaluation theory insights on agency theory prescriptions. Strategic Management Journal.

Sztompka, P., 2014. Agency and Structure (RLE Social Theory): Reorienting Social Theory. Routledge.

Tan, M.G. and Cam, M.A., 2015. Does governance structure influence pension fund fees and costs? An examination of Australian not-for-profit superannuation funds. Australian Journal of Management, 40(1), pp.114-134.

Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.

Watson, J., Delaney, J., Dempsey, M. and Wickramanayake, J., 2016. Australian superannuation (pension) fund product ratings and performance: A guide for fund managers. Australian Journal of Management, 41(2), pp.189-211.

Welsh, D.H., Memili, E., Rosplock, K., Roure, J. and Segurado, J.L., 2013. Perceptions of entrepreneurship across generations in family offices: A stewardship theory perspective. Journal of Family Business Strategy, 4(3), pp.213-226.

Wolfe, R.P., 2014. The Fiduciary Duty of Directors and Officers Under the Louisiana Business Corporation Act of 2014. Loy. L. Rev., 60, p.523.

Zhang, F., Wei, L., Yang, J. and Zhu, L., 2017. Roles of Relationships Between Large Shareholders and Managers in Radical Innovation: A Stewardship Theory Perspective. Journal of Product Innovation Management.

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