Innovative Enterprise Solves Agency Problem In Corporate Governance

Introduction to Accounting Theories

Accounting theories are the theories that have been developed over time for controlling and regulating the various accounting treatments that are incorporated in the different corporate entities all over the world. Accounting theories generally refers to the methodologies that have been established in order to guide the preparation of a financial report. The accounting theories have been modified over time in order to suit the current requirements of the corporate entities and other stakeholders of business.

The journal article that has been chosen for the purpose of analyzing this particular study is “Innovative Enterprise Solves the Agency Problem: The Theory of the Firm, Financial Flows, and Economic Performance” by William Lazonick.

The journal that has been chosen in this particular project suggests that the dominant ideology of the corporate governance has been to earn more profits. The primary tool for the firms for elevating the economic performance has been increasing the amounts of revenue earned instead of maximizing the shareholder value (Bosse and Phillips 2016).

This particular journal conveys the essential idea that the agency theory should be replaced by the innovation theory. The author further supports this statement by stating in his journal that the public shareholders do not invest in the productive assets of the company. The agency theory proposes the maximization of the shareholder value, which can only be achieved by the distribution of the free cash flow to the public stakeholders. The shareholders who are holding onto the shares will receive a part of the reaped revenue as increased stock prices can be achieved through stock repurchases. The agency theory indicates that the shareholders extract value due to the fact that they assume risk of contribution to the processes that lead to the creation of value. Therefore, at the time when the companies pay back the profits, the agency theory characterizes these distribution as the as the return of capitals to the shareholders (Hoenen and Kostova 2015).

The author further develops an innovation theory for the purpose of achieving the better understanding as to how a business enterprise can work much more efficiently compared to the previous standards. The innovation process that will be able to generate such outcomes are:

• The innovation process needs to be properly strategized. This is because when the investments in the required technologies and the markets that are to be accessed are  done the results are unknown (Hoenen and Kostova 2015)
• The capabilities and the work performances of the different employees need to be linked with the roles and responsibilities that these employees are delegated with. This will help in the generation of higher quality and lower cost products (Chrisman caes at al., 2015)
• Optimum amount of financing is needed for achieving the proper establishment of the collective learning and ensuring the proper returns from the sale of such innovative products (Hoenen and Kostova 2015)

Therefore, the journal article leads to the identification of three social conditions that lead to the proper management of the above listed aspects of an innovation process. These social conditions are:

• Strategic control – The fundamental requirement for the innovation to occur is that the management of an organization should have the optimum skills and capabilities to for allocating the corporate resources in the form of incentives to make the entire process of innovation strategic. The abilities of the managers or the executives depend on the fact that how the technological investments that have been done for supporting the new capabilities can promote and enhance the existing capabilities of the firm (Chrisman caes at al., 2015)
• Integration of the organization – A strategy regards to innovation can only be implemented within an organization when the different sectors of the organization are connected with each other. This means that the integration of the employees or the staff working in an organization into the collective and cumulative learning processes lead to the implementation of a strategized innovation process within the organization. The different components of a reward system like promotion, work satisfaction, benefits and remuneration enhance the work performance by the employees and motivate them to achieve the organizational goals (Chrisman caes at al., 2015)
• Financial Commitment – The flow of optimum capital for the successful implementation of an innovation process within the organization is also necessary. This can be the potential sources like retained earnings, debt capital etc (Madison caes et al., 2016)

The author further states that the agency theory should be replaced by the innovation theory because the proper scrutiny of the operation and performance of the economy can be carried out with the help of the innovation theory. In spite of the existence of the agency theory, instances like the concentration of wealth in the hands of the rich households and the exploitation of the middle class employment opportunities cannot be explained. Thus, it can be evidently deduced that the shareholder maximization theory that is promoted by the agency theorists have worsened the performance by the employees instead of promoting them (Madison caes et al., 2016).

Journal Analysis: Innovative Enterprise Solves Agency Problem

Harvey Norman is a large conglomerate based out of Australia and deals in furniture, bedding, computers and consumer electrical products. Being a multinational and a listed organization, the company will in all probabilities, follow the agency theory that is the management of the organization will be striving towards the maximization of the shareholder value. However, there are certain advantages that the multinational corporation may derive by the implementation of the innovation theory (Abhayawansa and Guthrie 2014). These are as follows:

• The implementation of the innovation theory inside the organization will result in the expansion of the targeted market which will increase the projected revenues of the organization and in turn ensure the maximization of the returns to the shareholders
• The implementation of the innovation theory can also lead to the reduction of the costs in the providence of the goods or services which will further increase the revenues obtained
• However, it should be looked after by the management of the corporation that the implementation of too much technology will shift the entire workforce from labor to a machine dominated workforce which may lead to the employees feel insecure
• The initial capital needed for the implementation of the required innovation in the products is also high

Thus, the management of all these factors will lead to the successful implementation of the innovation theory in the organization of Harvey Norman.

Conclusion

Thus, as it can be concluded from the discussion in the preceding paragraphs, the substitution of the agency theory by the innovation appears to be a beneficial proposal for the big corporate entities. This is because the implementation of the agency theory as the potential accounting theory leads to the firms being more prone to agency costs. This means that the public shareholders never in reality invest in the value creation capabilities of the company. Moreover, the agency theorists lead to the senior executives of the firm gaining a major portion of the revenue that is incurred by the firms. Therefore, in order to resolve such a issue the necessity for an innovative enterprise is inevitable. Nevertheless, the techniques adopted by an innovative enterprise to allocate the resources and returns for the growth of the organization as well as the economy make the particular theory beneficial for the stakeholders of the firms and lead to reduced agency costs.

References

Abhayawansa, S. and Guthrie, J., 2014. Importance of intellectual capital information: a study of Australian analyst reports. Australian Accounting Review, 24(1), pp.66-83.

Bosse, D.A. and Phillips, R.A., 2016. Agency theory and bounded self-interest. Academy of Management Review, 41(2), pp.276-297.

Bruton, G., Khavul, S., Siegel, D. and Wright, M., 2015. New financial alternatives in seeding entrepreneurship: Microfinance, crowdfunding, and peer?to?peer innovations. Entrepreneurship Theory and Practice, 39(1), pp.9-26.

Chrisman, J.J., Chua, J.H., De Massis, A., Frattini, F. and Wright, M., 2015. The ability and willingness paradox in family firm innovation. Journal of Product Innovation Management, 32(3), pp.310-318.

De Massis, A., Frattini, F., Pizzurno, E. and Cassia, L., 2015. Product innovation in family versus nonfamily firms: An exploratory analysis. Journal of Small Business Management, 53(1), pp.1-36.

Hoenen, A.K. and Kostova, T., 2015. Utilizing the broader agency perspective for studying headquarters–subsidiary relations in multinational companies. Journal of International Business Studies, 46(1), pp.104-113.

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.

Oxford, R.L., 2016. Teaching and researching language learning strategies: Self-regulation in context. Taylor & Francis.

Payne, M., 2015. Modern social work theory. Oxford University Press.

Ritzer, G. and Stepnisky, J., 2017. Modern sociological theory. SAGE Publications.