Stewardship and Agency Theories
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Abstract
Explorations investigating the relationship between agency and stewardship theories apply to all organizations. Both frameworks predict how an organization can enhance its performance. However, both have stark differences, usually noticeable in the managerial behavior, assumptions, and structural prescriptions advanced by each of them. The agency theory promotes the idea of an economic model of man, whereby an agent’s behavior is impacted by their self-interest. This kind of managerial relationship may evoke conflict between the principal and the individual. Hence governance structures that implement monitoring and control of their agents eliminate opportunistic behavior and align the principals and agent’s goals. On the other hand, the stewardship theory takes a humanistic model of man, whereby the steward’s response is influenced by the desire to serve others. Notably, this model best aligns with the principal’s interests. Thus, governance structures that support stewards facilitate continual alignment of company interests. Nonetheless, studies reveal that both frameworks are applicable in unique organization settings, in providing accurate predictions concerning management behavior and performance. This paper investigates the different characteristics of both agency and stewardship theories and contrasts between each. The literature helps understand how one’s mindset could shift from agency to stewardship and how the move would affect their organization.
Definitions
Agency Theory
The agency theory is a management and economic framework that avers that shareholder interests should be protected by separating the role of the CEO and the board. The theory attempts to explain relationships and personal-interests in business. It explains the best organization mix to implement by illustrating how one party (the principal) decides the task, which another party (the agent) executes, as well as deciding for the former. This framework argues that agents are morally responsible for maximizing shareholder utility (Donaldson and Davis, 1991). However, it also notes that upon assumption of authority, many agents proceed to focus on their perceived opportunity to enhance their own utility. Thus the theory suggests that in modern organizations, agents and principals are led by the desire for personal gain.
Stewardship Theory
The Stewardship theory is a management theory that argues for the sharing of roles in governance. This framework avers that individuals are intrinsically motivated to execute work decisions for others or the company to realize the responsibilities entrusted to them (Donaldson, Schoorman, and Davis, 1997). This theory holds that humans are collective minded and support organizational goals rather than individualistic objectives. Therefore, stewards work towards the attainment of company, society, and group goals due to their high level of satisfaction offers (Menyah, 2013). The stewardship theory offers a framework for identifying the motivation behind managerial behavior is different companies.
Introduction
Current thinking regarding strategic management and organizations policy is mostly impacted by the agency and stewardship theories. The former method depicts managers in large corporations as agents whose interests diverge from those of the principals. According to this agency framework, the losses incurred through interest divergence between the principal and the agents could be limited by implementing control structures on the agent. While this theory appears as the more dominant paradigm underlying a lot of governance research, studies suggest the theory’s limitations. For instance, Jensen and Meckling, 1976) hold that managers may not maximize the shareholders’ returns unless these large corporations enact appropriate governance structures, to safeguard the latter’s interests. In such a case, a board of directors hold a vital function, whereby they depict the essentiality of the CEO and chairperson’s relationship. Effectively, under the agency theory, shareholder interests are protected when the board’s chairperson is not also the CEO.
Notably, such a view runs contrary to the stewardship theory, which emphasizes the interests of the group over the individual. This framework holds different strategic management concepts whereby organization structures allows the CEO to implement practical actions. Recently, the stewardship theory has emerged as a viable alternative to organizational research (Pieper, 2010). This framework’s introduction in governance studies offers a means to define relationships according to other behavioral premises. The theory describes occasions whereby managers are not motivated by personal goals, but instead are stewards whose objective align with the company interests, as well as the principals’ goals. Nonetheless, owing to the relative newness of the stewardship theory, its contribution to the governance studies is not explicitly stated. Therefore, this analysis hopes to compare and contrast between the agency and the stewardship theory. The study hopes to understand how the frameworks are similar, different, how one could transform from an agent to a steward, and how this would affect an organization.
Comparison between Agency and Stewardship Theory
The central point of overlap between the two theories is that both of them are used to explain organization relationships. Particularly, both frameworks offer a deeper means of understanding of enterprise challenges. Through the arguments, company managements can identify problems within a business and enact the suitable solutions to the clashing of interests. Accordingly, both theories are used to outlines the shareholders, employees, the clients, the vendors, as well as the clients’ interests in business governance. Effectively, many organizational issues that manifest within an enterprise such as lack of information, management conflicts, and miscommunication can be understood using the two frameworks. For instance, both theories concentrate on the link between vital parties of the company: the CEO and the owner. Depending on the managerial behavior and the owner’s objectives, both frameworks offer different characteristics, which can be used to explain the source of various governance issues. Overall, despite their distinct features, both theories’ contribute significantly towards organizational performance improvement by offering an avenue where decision-makers can identify the source of company problems.
Contrasts between Agency and Stewardship Theory
Despite the two theories’ focus on corporate governance to enhance organization growth, both frameworks have significant differences regarding their relationships, foundations, and drive. While the agency theory refers to the owner-agent relationship, the stewardship theory explains the link between owners and stewards. The former framework focuses majorly on the agent-principal association in corporations, whereby there exist formal and contractual associations between the two parties to result in incongruent interests. On the other hand, the stewardship framework primarily analyzes the benefits of co-existence and trust-based associations, together with agency links in corporations.
Notably, while the agency theory is founded on economic and management principles, the stewardship theory is built upon psychological and sociological ideologies. The latter approach encompasses trust, commitment, and shared goals as exhibited by the similar principal and manager goals alignment. On the other hand, the agency theory approach encompasses individuality and emphasizes personal gains through claims of organizational performance. The agency model asserts that enhanced performance results from implemented company governing structures by the owner to limit the agent’s opportunistic behavior. Contrarily, the stewardship approach claims that increased performance results from the principal supporting and encouraging the governance structures to advance the steward’s pro-organization practices.
Furthermore, the two theories differ in their driving factors and source of motivation. For instance, while extrinsic motivation drives the agency theory, the stewardship framework is based on intrinsic motivations. In the agency theory, the manager acts out of individual desires and extrinsic rewards, while the steward draws their motivation from a desire for human intellectual growth, fulfilment, success, self-actualization, as well as intrinsic rewards. In an agency model, authority is institutionally led, while stewardship emphasizes individual ability to manage specific organizations. Significantly, in the agency theory, the managers lowly identify with the enterprise, which enables their self-serving interests to supersede those of the owner or shareholders. Contrarily, in the stewardship theory, managers highly identify with the organization, which promotes their shared objectives and goals. Consequently, the latter approach empowers the stewards to enhance their problem-solving capacities to gain the intrinsic rewards by the owners.
Based on the steward literature, an individual can shift from the agent view to a steward through a rational process. According to Donaldson, Schoorman, and Davis (1997), people are motivated to either assume the agency or stewardship approaches by psychological and situational factors regarding forming enterprise relationships. The authors note that research suggests that many people prefer self-actualization, growth, and responsibility as management philosophies used to deal with risks. Therefore, the decision to become a steward depends on an individual’s beliefs and psychological characteristics. For example, cultural backgrounds between each approach may affect the type of choices an individual makes. For example, a person who believes in collectivism may feel challenged by individualistic approaches. An agent can become a steward by choosing to get involved in the company’s activities to create an environment that is empowering and involvement oriented (Wesley, 2010), which results in mutual gaining. Arguably, one can shift their mindset to that of a steward by emphasizing virtuousness to complement their rationality by controlling the intrinsic motivations as opposed to extrinsic ones. Therefore, the decision to change from agency to stewardship results mainly from psychological motivations as well as the perceptions of a situation.
References
Davis, J. H., Schoorman, F. D., & Donaldson, L. (1997). Toward a stewardship theory of management. Academy of Management review, 22(1), 20-47.
Donaldson, L., & Davis, J. H. (1991). Stewardship theory or agency theory: CEO governance and shareholder returns. Australian Journal of management, 16(1), 49-64.
Menyah, K. (2013). Stewardship theory. Encyclopedia of corporate social responsibility. Springer Verlag, Berlin, Germany. http://dx. doi. org/10.1007/978-3-642-28036-8_107, 2322-2329.
Pieper, T. M. (2010). Non solus: Toward a psychology of family business. Journal of Family
Business Strategy, 1, 26-39.
Wesley, C. L. (2010). The impact of stewardship on firm performance: A family ownership and internal governance pespective. Texas A&M University.