Agency theory & Stewardship Theory of Corporate Governance

1. Agency theory &
Stewardship Theory
Presented by
Ambika J. B
I M.COM
Under the guidance of
Sundar B. N.
Asst. Prof. & Course Co-ordinator
GFGCW, PG Studies in Commerce
Holenarasipura

2.  Introduction
 features
 Terminologies
 Objectives
 Effects
 Behavioural differences
 Psychological mechanisms
 Situational mechanisms
 Conclusion
 Bibliography
content

3. Introduction
Agency theory originated in the early 1970’s.
Agency theory having its roots in economic theory was
exposited by Alchian and demsetz(1972) and further
developed by jensen and meckling (1976). The agency
theory shareholders expect the agents to act and make
decisions in the principal’s interest. On the contrary, the
agent may not necessarily make decisions in the best
interests of the principals (padilla, 2000).
Agency Theory

4. Agency theory
A branch of organizational behavior where in the
owners
Of funds(principals) invest their money in a company
that is managed by altogether different group of people
called directors and managers (agents).
This agency relationship between the shareholders and
directors is based on the premises of trust.

5. • Shareholders are the owners (principals) of the
company.
• Shareholders let the objectives and expect the
management to carryout those on behalf of them.
• Management will work as agent.
Features

6.  Agents
 Principals
 Agency cost
 Agency problem
Terminologies

7.  Reduce agency cost.
 Adequate and relevant information.
Objectives

8. Introduction
Stewardship theory has its roots from psychology and sociology
and is defined by Davis, schoorman and Donaldson (1997) as “a
steward protects and maximises shareholder wealth through firm
performance, because by so doing, the steward’s utility functions
are maximised.” In this perspective, stewards are company
exeicutive and managers working for the shareholders, protects
and make profits for the shareholders. Unlike agency theory,
stewardship theory stresses not on the perspective of individualism
(Donaldson and Davis, 1991), but rather on the role of top
management being as stewards, integrating their goals as part of
organization.
Stewardship theory

9. • Theory defines situations which managers are not
motivated by individual goals but rather they are stewards
whose motives are aligned with the objectives of the
organizations principal.
• This theory assumes that managers are basically trust
worthy and attach significant value to their own personal
reputations.
• Given choice between self serving behaviour and pro-
organizational behaviour, a steward behaviour will not
depart from the interest of his /her organization.
Stewardship theory

10.  Effects on business
 Effects on employees
 Effects on clients
 Common pitfalls
Stewardship theory Effects

11. Behavioural Differences
Agency Theory
 Managers act as agents
 Governance approach is materialistic
 Behaviour pattern is
 Individualistic
 Opportunistic
 self-serving
 Managers are motivated by their own
objectives
 Interests of the managers and principals
differ
 The role of the management is to moniter
and control
 Owners attitude is to avoid risks
 Principals-Manager relationship is based
on control
Stewardship Theory
 Managers act as stewards
 Governance approach is sociological
and psychological
 Behaviour pattern is
 Collectivistic
 Pro-organisational
 Trustworthy
 Managers are motivated by the
principal’s objectives
 Interests of the managers and
principals converge
 The role of the management is to
faclitate and empower
 Owners attitude is to take risks
 Principal-Manager relationship is based
on trust

12. Psychological Mechanisms
Agency theory
 Motivation revolves around
• lower order needs
• extrinsic needs
 Social comparison between
compatnots
 There is little attachment to the
company
 Power rests with the institution
Stewardship Theory
 Motivation revolves around
• Higher order needs
• Intrinsic needs
 Social comparison is between
principals
 There is great attachment to
the company
 Power rests with the personnel

13. Situational Mechanisms
Agency Theory
 Management philosophy is control
oriented
 Risk orientation is done through a
system of control
 Time frame is short term
 The objective is cost control
• Cultural differences revolve around
• Individualism
• Large power distance
Stewardship Theory
 Management philosophy is
involvement oriented
 Risk orientation is done through
trust
 Time frame is long term
 The objective is improving
performance
 Cultural differences revolve around
• Collectivism
• Small power distance

14. Agency theory and stewardship theory the for
emphasises control of managerial “opportunism” by
having a board chair independent of CEO and using
incentives to bind CEO interests to those of
shareholders. Stewardship theory stresses the
beneficial consequences on shareholder returns of
facilitative authority structures which unify command
by having roles of CEO and chair held by the same
person.
Conclusion

15. 1. Introduction of agency theory and stewardship
theory http://www.eurojournals.com/MEFE.htm
2. www.todayscience.org/jbm