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Management Theory And Practice: Agency Theory

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Question:

Discuss about the Management Theory and Practice for Agency Theory.

 

Answer:

Introduction

Various factors determine the success of an organisation. Organisational theories help organisations to identify the problems and introduce patterns and structures that maximise the efficiency of problem-solving techniques and increases productivity. This report critically analyses the various theories of organisational action and discusses the possibility of combining the theories as one universal theory.

 

Critical Analysis of Agency and Determinist Theories in Organisational action

Agency Theory

Agency theory describes the management of relationships between the people who are setting the work and the people who are doing the work. When an individual hires someone to do a work, he creates a relationship with the person hired (Ashkanasy & Humphrey, 2011). The individual hires when he or she is unable to do the work or is not willing to do it. This theory refers the hiring party as the principal and the hired party as the agent. In the corporate sector, the shareholders are the principal who transfers the job to the management to do the duties on their behalf. These management people are the agents of the shareholders. This theory states that every individual be the principal or the agent is motivated to work to fulfil its self-interests. This is the main drawback of the theory. If both the parties work for their self-interest then the motivation of agents will inevitably conflict with the goal set by the principal. Principals expect agents to fulfil the goals set by them and work solely for the interest of the goal (Bergeron et al. 2013).

Agency Loss is the standard for measuring the difference between the expected results of the goal set by the principal and the actual outcomes, which the agents bring by their course of action. Agency loss becomes highest when the agent does not do anything to fulfil the goal but work only for fulfilling its self-interests. Both the parties are responsible for minimising the agency loss. Principal and agent can minimise the agency loss by sharing common interests. The principal can reduce agency loss by understanding the consequences of the agent's action. The main challenge of this theory is to set a standard for agents' actions in corporate level so that the agents work for the goal of the principal by setting aside their self-interest (Berry, Carpenter & Barratt, 2012). In Agency relationships, the agents should have moral responsibilities for their action and simply cannot deny them because they act as agents for their principals. Examples of agency relationships in finance include Investment bankers who act as agents for their principals or the clients and the financial advisors who act as agents for their clients or principals.

Agency theory is a controversial theory though it has immense importance. Williamson in 1985 identified that certain individuals exhibited opportunistic behaviour and not the entire mass. Hence, he suggested organisations develop methods for screening the trustworthiness of the employees (Sevenpillarsinstitute.org, 2017). Hill in 1990 stated that even in a situation where everyone is inclined to behave opportunistically, there would be individuals who will never break trust and work with co-operation. Donaldson in 1990 criticised this theory as less developed and an oversimplifying methodology. He stated that this theory disregards other research works and it has a very narrow definition of work motivation (Sevenpillarsinstitute.org, 2017). According to him, it has dominance in organisational economics and corporate governance defensiveness. He observed that organisations disregarded the traditional organisational theories and regarding behaviour and trustworthiness and worked on developing assumptions. Views are different for the supporters of this theory. For example, Podrug in 2010 stated that controlling individual behaviour leads to stronger opportunistic behaviour, reduces trustworthiness and finally results in distrust. Tipuric in 2008 supported this theory stating that the intentions of agents are clear when the principal and the agents have common interests (Sevenpillarsinstitute.org, 2017).

 

Population Ecology

This theory has faced many criticisms. Young in 1988 and Donaldson in 1995 stated that this theory is ambiguous and lacks a general agreement on the definitions of the key constructs. Young stated that the niches, inertia or rates of environmental change are hard to understand and describe. As there is a lacking of the precise definition of the construct, common conceptualization across the field is difficult and it is not feasible to generalise different contexts (Chiang & Hsieh, 2012). On the other hand, Singh and Lumsden in 1990 stated that the criticism of the lack of discipline-wide definition is not useful because according to them these constructs are used in other disciplines and does not have a workable definition in those fields also (Freepatentsonline.com, 2017). There are also issues with the application and methodology of this theory. The theory can be classified into two main types based on the method of population classification. One classification is of Hannan and Freeman. According to them as organisations are not alike hence, researchers need to define organisational forms according to the research problem. McKelvey stated that each organisation and population should have different scientific classifications. The theory faces criticism on the demography of the organisations that the researchers examine (Chun et al. 2013). Astley and Van de Ven in 1983 and Perrow in 1986 stated that the theory only deals with smaller organisations because bigger organisations are immune to a selection process. On the other hand, many theorists considered this criticism as narrow. Caroll in 1984 and Barnett in 1990 stated that researchers have also examined big and powerful organisations for its size dependence, domination in technological systems and size-based segmentation of population. Van Witteloostuijn in 2000 stated that this theory lacks detailed investigation because there is focus on large-scale quantitative studies. Delacroix and Caroll in 1983 stated that organisational funding studies of this theory are limited because they do not consider unsuccessful findings. Astley and Van De Ven in 1983 stated that this theory is too much deterministic (Freepatentsonline.com, 2017).

 

Structural Contingency Theory

This theory states that one structure does not fit all organisations. The structure that fits certain contingencies are the most effective structures (Colquitt, Lepine & Wesson, 2011). Galunic and Eisenhardt in 1994 stated that this theory is static and cannot deal with changes in the organisation. On the other hand, Parsons in 1961 stated that this theory is based on a functionalist tradition of social science and considers organisations fit to adapt to changing environments (Freepatentsonline.com, 2017). According to Hamilton and Shergill an organisation in fit is highly productive which leads to its expansion of size. Chandler, on the other hand, stated that this expansion causes a change in contingencies, which is a misfit in existing structure and hence leads to low performance. SARFIT is a process depicted in the main theory of structural contingency, which denotes structural adaptation to regain fit. There is a contrast between the main structural theory and SARFIT. The structural theory is an equilibrium theory in which organisations are depicted as attaining fit and then in equilibrium. SARFIT on the other hand considers organisations as temporarily fit until there is a surplus of contingencies caused by its expansion. Critics of this theory argue that it is not a good suggestion for the organisations to change according to the change in contingencies because the contingencies itself change to fit with the organisation (De Wit, Greer & Jehn, 2012).

Institutional Theory

This theory provides a rich and complex view of organisations. It studies the internal and external factors affecting organisations. This theory is a rewarding theory for an organisation because it gives much more importance to the stakeholders for deciding the legitimacy of an organisation, unlike other theories (DuBrin, 2013). This theory is considered as the best-fit approach. Rowan examined that this theory and found out that an organisation is steady and long lasting when there is co-operation in its environment. Tolbert and Zucker also supported this theory that organisations under pressure adopt changes quickly. Di Maggio and Powell stated that the institutional pressures increase the homogeneity of organisational structures.

 

Resource Dependency Theory

This theory describes the organisational terms with respect to those resources that the organisations need to survive. It is a useful theory for describing the differences of power across organisations and the choice of strategies (Eatough et al. 2011). According to some theorists, this theory is the main reason why some nonprofit organisations have commercialised more. Hillman et al. (2009), Davis and Cobb (2010), Drees & Heugens (2013), Sharif & Yeoh (2014) have discussed the importance of this theory in influencing organisational behaviour through alliances, joint ventures, mergers and acquisitions (Hrmguide.co.uk, 2017).

The theory has received many criticisms. Donaldson in 1995 stated that as the theory focuses on the relevance of power structures it neglected economics and efficiency factors that influence organisational behaviour. Tolbert in 1985 stated that the objection that this theory receives because of its concentration of material resources is not wholly true. Johnson in 1995 stated that the theory can be extended to include symbolic resources. Clegg in 1998 stated that the theory is wrong based on a narrow concept of power controlling objective resources. The major drawback of this theory is that it fail to regard the role of cultural, ideological and institutional forces in organisational behaviour (Fishbein & Ajzen, 2011).

Probability of Reconciliation of Organisational Theories as one Universal Theory

Every organisational theory has its own advantages and disadvantages. Organisations cannot ignore any of the theories totally. A combination of all the above theories will help organisations to increase effectively their productivity (Fisher & To, 2012).

The operations of nearly all organisations are same. However, they differ in size and function but they follow the basic structure of operating through the division of labour, a decision-making structure and rules and policies (Locke, 2011).

The Population Ecology theory classifies organisations according to the common characteristics and behaviours. This theory helps to identify what kind of organisational strategies are required for a particular type of organisation population.  Here comes the importance of the resource dependency theory (Miner, 2015). According to this theory, the organisations need external resources that are resources from other organisations to survive. It emphasises that organisations are interdependent. The institutional theory focuses on implementing the strategies of competitors for becoming legitimate to stakeholders. The Contingency theory describes the strategies that are fit for particular organisations. The global theory can be a combination of all these theories for organisational behaviour (Moore et al. 2012). This theory can identify the strategies followed by parallel organisations through population ecology followed by resource dependency for identifying the companies for working in the joint venture for production improvement. Then the organisations can implement institutional theory for implementing the strategies identified from the previous theories and then can implement strategies that are relevant to that particular organisation and are identified from contingency theory (Umphress, Bingham & Mitchell, 2010).

Hence, organisations combine all the organisational theories into one universal approach for better functioning and increasing the productivity of an organisation (Walumbwa, Hartnell & Oke, 2010).

Conclusion

Organisational behaviour is the key to success of any organisation. Hence managers need to understand that individual needs and expectations and organisational goals and expectations are interrelated. Good leadership skills along with the knowledge of strategies for developing a group will help perform an individual in the group at its peak level. Managers can avoid problems like social loafing and groupthink by resolving issues related to the team member differences and giving a clear guideline of roles and responsibilities, company expectancy and motivating the employees through constructive feedback and rewards.

 

References

Ashkanasy, N. M., & Humphrey, R. H. (2011). Current emotion research in organizational behavior. Emotion Review, 3(2), 214-224.

Bergeron, D. M., Shipp, A. J., Rosen, B., & Furst, S. A. (2013). Organizational citizenship behavior and career outcomes: The cost of being a good citizen. Journal of Management, 39(4), 958-984.

Berry, C. M., Carpenter, N. C., & Barratt, C. L. (2012). Do other-reports of counterproductive work behavior provide an incremental contribution over self-reports? A meta-analytic comparison.

Chiang, C. F., & Hsieh, T. S. (2012). The impacts of perceived organizational support and psychological empowerment on job performance: The mediating effects of organizational citizenship behavior. International Journal of Hospitality Management, 31(1), 180-190.Elangovan, A. R., Pinder, C. C., & McLean, M. (2010). Callings and organizational behavior. Journal of Vocational Behavior, 76(3), 428-440.

Chun, J. S., Shin, Y., Choi, J. N., & Kim, M. S. (2013). How does corporate ethics contribute to firm financial performance? The mediating role of collective organizational commitment and organizational citizenship behavior. Journal of Management, 39(4), 853-877.

Colquitt, J., Lepine, J. A., & Wesson, M. J. (2011). Organizational behavior: Improving performance and commitment in the workplace. McGraw-Hill Irwin.

De Wit, F. R., Greer, L. L., & Jehn, K. A. (2012). The paradox of intragroup conflict: a meta-analysis.

DuBrin, A. J. (2013). Fundamentals of organizational behavior: An applied perspective. Elsevier.

Eatough, E. M., Chang, C. H., Miloslavic, S. A., & Johnson, R. E. (2011). Relationships of role stressors with organizational citizenship behavior: a meta-analysis.

Fishbein, M., & Ajzen, I. (2011). Predicting and changing behavior: The reasoned action approach. Taylor & Francis.

Fisher, C. D., & To, M. L. (2012). Using experience sampling methodology in organizational behavior. Journal of Organizational Behavior, 33(7), 865-877.

Freepatentsonline.com. (2017). FPO IP Research & Communities. [online] Available at: https://www.freepatentsonline.com [Accessed 16 May 2017].

Hrmguide.co.uk. (2017). UK Human Resource Management Articles. [online] Available at: https://www.hrmguide.co.uk [Accessed 16 May 2017].

Locke, E. (Ed.). (2011). Handbook of principles of organizational behavior: Indispensable knowledge for evidence-based management. John Wiley & Sons.

Luthans, F. (2010). Organizational behavior: An evidence-based approach. McGraw-Hill Irwin.

Miner, J. B. (2015). Organizational behavior 1: Essential theories of motivation and leadership. Routledge.

Moore, C., Detert, J. R., Klebe Treviño, L., Baker, V. L., & Mayer, D. M. (2012). Why employees do bad things: Moral disengagement and unethical organizational behavior. Personnel Psychology, 65(1), 1-48.

Sevenpillarsinstitute.org. (2017). Cite a Website - Cite This For Me. [online] Available at: https://sevenpillarsinstitute.org [Accessed 16 May 2017].

Umphress, E. E., Bingham, J. B., & Mitchell, M. S. (2010). Unethical behavior in the name of the company: the moderating effect of organizational identification and positive reciprocity beliefs on unethical pro-organizational behavior. Journal of Applied Psychology, 95(4), 769.

Walumbwa, F. O., Hartnell, C. A., & Oke, A. (2010). Servant leadership, procedural justice climate, service climate, employee attitudes, and organizational citizenship behavior: a cross-level investigation. Journal of Applied Psychology, 95(3), 517.

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