The key difference between agency theory and stewardship theory is that agency theory is an economic model which describes the relationship between principal and agent, whereas stewardship theory is a human model which describes the relationship between principal and steward.
Both agency theory and stewardship theory are corporate governance principals in the modern business world. Although both theories have distinct features, the ultimate objective is to improve organizational performance. Identifying the type of corporate governance is the foundation of a successful business.
CONTENTS
1. Overview and Key Difference
2. What is Agency Theory
3. What is Stewardship Theory
4. Relationship Between Agency Theory and Stewardship Theory
5. Side by Side Comparison – Agency Theory vs Stewardship Theory in Tabular Form
6. Summary
What is Agency Theory?
Agency theory refers to the relationship between business principals and their agent. It is a management and economic theory. Basically, the principal is the stakeholders or the owners of the organization while the agent is the company executives hired on behalf of the principal. Principals delegate power to agents to make decisions. It is to reduce the complexity of work and to streamline the business operation. However, in case of a loss or risk, the principal has to bear it.
However, in certain cases, there can be problems and conflicts due to the decisions made by agents. It can be due to mismatch of ideas, and preferences or priorities between principals and agents. So, this is referred to as a principal-agent problem. Further, agency theory describes disputes that might occur due to two main areas: difference in objectives and difference in risk aversion.
For instance, company agents may look for new markets rather than improving the existing market. However, this will affect the short term profitability, causing a decline in the expected revenue growth. On the contrary, principals may seek short term growth and stability in the existing market.
What is Stewardship Theory?
Stewardship theory is a theory that states employees are intrinsically motivated to work for others or for organizations to complete the tasks and responsibilities with which they have been assigned. It also states that people are employees are collective minded and work proactively toward the attainment of the organizational goals as gives them a sense of satisfaction.
According to stewardship theory, company executives protect the preferences of the shareholders or owners and make decisions on their behalf. Their main aim is to form and maintain a successful organization to achieve the shareholders’ vision. As a result, organizations which follow the Stewardship principle selects the right personality to lead the organization; this requires to place the CEO and Chairman responsibilities under one Executive.
What is the Relationship Between Agency Theory and Stewardship Theory?
Both theories focus on the relationship between two parties: the owner and the executive. Depending on the executive behaviour and the expectations of the owner, these theories have significant characteristics. Although these theories have distinct features, the ultimate objective is to improve organizational performance.
What is the Difference Between Agency Theory and Stewardship Theory?
Even though these two theories focus on corporate governance and business growth, there is a significant difference between agency theory and stewardship theory. Agency theory refers to the relationship between the owner and the agent, while stewardship theory refers to the relationship between the owner and the steward. Moreover, the agency theory is based on management and economic principles, whereas Stewardship theory is based on psychology and sociology. Agency theory claims that improved performance is due to the implemented governance structures by the principal to limit the opportunistic behaviour of the agent. However, stewardship theory claims that the improved performance is due to the principal encouraging governance structure that motivates pro-organizational behaviour of the steward.
Furthermore, agency theory is driven by extrinsic motivation, whereas the stewardship theory is driven by intrinsic motivation. Therefore, this is also a significant difference between agency theory and stewardship theory. According to agency theory, managers have a low level of identification with the organization, thus allowing self serving-interests to be chosen over owners’interests. In contrast, according to stewardship theory, managers have a high level of identification with the organization. Therefore, high-level identification empowers executives or stewards to work hard, sorting out problems and finally gaining intrinsic rewards by principals.
Summary – Agency Theory vs Stewardship Theory
In summary, both agency theory and stewardship theory are corporate governance principals in the modern business world. However, the key difference between agency theory and stewardship theory is that agency theory is an economic model, whereas the stewardship theory is a psychological model.
Reference:
1. Johnson, Walter. “Stewardship Theory of Corporate Governance.” Bizfluent, 11 Feb. 2019, Available here.
2. Kopp, Carol. “Understanding Agency Theory.” Investopedia, Investopedia, 18 Apr. 2019, Available here.
3. Madison, Kristen Joie. “Agency Theory and Stewardship Theory Integrated, Expanded, and Bounded by Context: An Empirical Investigation of Structure, Behavior, and Performance within Family Firms.” University of Tennessee, 2014.