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The history of the agency theory goes back to time during the 1960s and
1970s, where the economists tried to know about risk sharing among individuals
or groups. This literature described the risk sharing problem as one that arises
when working together with other parties that have different risk tolerance
(Sagarphul, n.d.).
Agency theory broadened this risk sharing literature to include the so
called agency problem that happens when working together with other parties
that have different goals and division of labor (Sagarphul, n.d.).
This theory is directed and focused at the ubiquitous agency relationship,
in which one party assigns work to another party which is called the agent, who
will be the one who performs that specific work. Agency theory attempts to
describe this relationship with a contract. Agency theory also suggests that the
firm can be viewed as a nexus of contacts between resource holders (Sagarphul,
n.d.).
There are two (2) problems that the agency theory addresses.
The first one is the problems that may arise when there is a conflict of
interest between the gents and the principals. These problems arise when the
desires or goals of the principal and the agents are in conflict. The agency theory
attempts to deal with this problem by aligning goals of the principal so that they
are not in conflict.
The second problem that the agency theory addresses are problems
arising when the principals and the agents have different risk tolerance. These
problems arise when the principals and their agents have different attitudes
towards risk. Because of their different risk tolerance each party may be inclined
to take different actions. The agency theory attempts to reconcile that the
principals and the agents reconcile their different tolerances for risk.
Agency Practice and Coca-Cola Company
Found in the official website of Coca-Cola Company, it stated that: "At The
Coca-Cola Company, we aim to lead by example and to learn from experience.
We set high standards for our people at all levels and strive to consistently meet
them." They have established their own code of business conduct with 49 pages
containing the established standards of corporate governance and ethics to be
followed by the employees to meet consistency with the company. All of their
associates and directors and required to read and understand the Code and
practice it in the workplace. Coca-Cola is a worldwide company with different
branches all over the world and therefore they have to deal with various people
with different values. In order for the Coca-Colas employees to cope up with the
differences, the company has an office called ethics and compliance office which
is given the operational responsibility for education, consultation, monitoring and
assessment related to the Code of Business Conduct and compliance issues. It
determines code violations and administers training sessions on the Code of
business for the employees. The training sessions may be online and is given to
all associates with Company-provided computers discussing topics related to the
ethics and compliance of the code, including the Anti-bribery policy of Coca-Cola.
The company's associates are requested to participate in ethics training on an
average of 60 minutes per associate per year. The company also revise their
Code to further improve its effectiveness if they find it useful. Continuous training
and consistency in the code is the key to the Coca-Cola Companys good
governance.
The Agency practice and Enron
Enron has been well-known for being an energy, commodities, and
service company even before the Enron Scandal in 2001. One of the many
factors of the sudden bankruptcy of Enron was because of the strong agency
culture. Enrons executives were well educated in business and economics to be
sufficiently familiar with the agency theory. Even if the agency theory was not that
familiar with other executives or employees, one of Enrons central assumptions
was that of self-interested parties. This is a fairly common theory and it is this
assumption that is essential to thinking within an agency theory framework. The
executives and employees were given incentives with a combination of
perquisites and high pay, which then was an active control mechanism for the
(n.d.).
Agency
theory.
Retrieved
from
http://www.slideshare.net/sagarphul/agency-theory-24234940
United Nations Economic and Social Commission for Asia and the Pacific. (n.d.).
What is good governance? Retrieved from
http://www.unescap.org/sites/default/files/good-governance.pdf
What is good governance? (n.d.). Retrieved from
http://www.goodgovernance.org.au/about-good-governance/what-is-goodgovernance/