Difference Between Agency Theory and Stewardship Theory

According to agency theory, shareholder interests are best protected by separating the roles of board chair and CEO. According to stewardship theory, sharing these roles maximizes shareholder interests. The findings of an empirical test contradict agency theory while supporting stewardship theory.

Difference Between Agency Theory and Stewardship Theory

Agency theory is a philosophy that helps to explain and address problems in the interaction between business owners and their agents. The most frequent relationship is one between shareholders as principals and corporate executives as agents. Agency theory seeks to understand and resolve disagreements between principals and their agents on their relative priorities. Principals rely on agents to complete specific transactions, resulting in disagreements about priorities and techniques.

Agency Theory

An agency, broadly defined, is any relationship between two parties in which one, the agent, represents the other, the principal, in day-to-day transactions. The principal or principals have engaged the agent to conduct a service on their behalf. Principals entrust decision-making authority to their agents. Because the agent makes numerous financial decisions for the principal, disagreements, and even divisions in priorities and interests, might occur. Agency theory assumes that a principal's and an agent's interests are not necessarily the same. This is sometimes known as the principal-agent issue.An agent, by definition, is someone who uses a principal's resources. The principal has given money but has little or no day-to-day involvement.

Difference Between Agency Theory and Stewardship Theory

The agent makes the choice but takes little or no risk because any losses are paid by the principal. Financial planners and portfolio managers act on behalf of their principals and are responsible for their assets. A lessee may be responsible for securing and safeguarding assets that are not theirs. Even though the lessee is responsible for the assets, the lessee is less interested in protecting them than the current owners. Agency theory focuses on two types of disputes those are differences in aims and risk aversion.

For example, firm executives may want to extend a business into new, high-risk markets in order to increase their short-term profitability and reward. However, this may offer an unreasonable risk to shareholders, who are primarily concerned with long-term earnings growth and share price appreciation. Another common difficulty raised by agency theory is incompatible levels of risk tolerance between a principal and an agent. Shareholders at a bank, for example, may argue that management has set the bar too low for loan approvals, exposing the bank to an unacceptable risk of failure.

Reducing Agency Loss

Various proponents of agency theory have provided methods for resolving conflicts between agents and principles. This is known as "reducing agency loss." Agency loss is the amount that the principal claims to have lost as a result of the agent working against the principle's interests. One of the most important of these tactics is to offer incentives to company managers in order for them to enhance their principals' earnings. The stock options granted to firm executives are based on agency theory. These incentives aim to optimize the interaction between principals and agents. Other tactics include linking executive pay in part to shareholder profits. These are some examples of how agency theory is applied in corporate governance.

These methods have raised fears that management will jeopardize long-term firm growth in order to increase short-term profitability and their personal compensation. This is typically seen in budget planning, as management reduces estimates in annual budgets to ensure that performance goals are met. These concerns have resulted in yet another compensation structure in which CEO pay is partially postponed and set based on long-term objectives. These solutions have analogies with other agency partnerships. Performance-based pay is one example. Another option is to post a bond to ensure that the intended outcome is achieved. Finally, there is the option of firing the agent outright. In this theory the management may want to extend a business into new areas, focusing on short-term profitability and higher pay.

Stewardship Theory

Stewardship theory holds that managers, when left to their own devices, will serve as responsible stewards of the assets and resources under their control. Stewardship theorists believe that given the choice between self-serving and pro-organizational behavior, a steward will prefer cooperation to defection. Stewards are expected to be collectivist, pro-organizational, and trustworthy. In American politics, an example of stewardship theory is when a president governs based on the notion that they have a duty to do whatever is necessary in the national interest, unless disallowed by the Constitution. The Stewardship method is frequently connected with Theodore Roosevelt, who saw the Presidency as a "Bully pulpit" of moral and political leadership. Stewardship theory is a hypothesis that managers, left to their own.

Difference Between Agency Theory and Stewardship Theory

The stewardship theory is a normative substitute for agency theory and a component of corporate governance. In short, the stewardship theory explains the high correlation between organizational success and employee satisfaction and postulates that managers, given the freedom to handle their resources responsibly, will do so. Donaldson and Davis introduced this hypothesis in 1989. As opposed to agents who follow agency theory, good stewards are not instrumentally motivated and operate in groups rather than alone. According to stewardship theory, a steward will be able to achieve individualistic, opportunistic, and self-serving goals if they work toward the organization's overall success. Trust, reputational enhancement, reciprocity, discretion and autonomy, degree of responsibility, job satisfaction, stability and tenure, and goal alignment are examples of intrinsic benefits that drive stewards. Stewardship theory is essentially predicated on the initial trust disposition of the principal and steward. Stewardship conduct is favorably correlated with motivational support. Through relational leadership actions, the interpersonal relationship under the stewardship idea fosters reciprocal trust between the leader and the follower. Apart from that, contextual assistance has been positively associated with stewardship behavior, motivational support, and inventiveness. To safeguard and optimize shareholder money, stewards require both internal and external incentives, which together can strengthen trust. Alternatively, the company's performance might improve due to the managers' strong sense of loyalty and trust towards the company's commitments.

Stewardship in Accounting

The fundamental tenet of the stewardship perspective on accounting is that the issue that accounting attempts to resolve is an organizational one. Stewardship accounting originated in antiquity to manage the accounts of merchants or landed gentry who hired stewards to manage their estates, as well as temples and sovereigns. Multiple people's behaviors, ideas, information, and motivations are all a part of an organization. Stewardship accounting developed to support hierarchical companies as labor markets, particularly managerial labor markets, grew and proved to be an effective structure. The evolution of financial capital markets has resulted in the separation of simple bookkeeping and stewardship accounting for privately held businesses from publicly traded enterprises and the financial reporting model of accounting. At the start of the twenty-first century, stewardship made up the majority of the lessons we teach under the heading of managerial controls. Problems brought on by the existence of the labor market for managers. The issue of control in hierarchical organizations is addressed by planning and budgeting, capital budgeting, transfer pricing, decentralization, variable and absorption costing, including activity-based costing, and divisional and managerial performance evaluation and compensation.

Difference Between Agency Theory and Stewardship Theory

The basis of stewardship, or managerial accounting, is bookkeeping. However, Paciolo's description of the accounting techniques prevalent in fifteenth-century Europe does not include the extra aspects necessary for hierarchical organizations' accounting needs. Stewardship accounting developed to support hierarchical companies as labor markets, particularly managerial labor markets, grew and proved to be an effective structure.

Difference Between Agency Theory and Stewardship Theory

Agency TheoryStewardship Theory
Agency theory is an economic concept that describes the connection between the principal and the agents.Stewardship theory is a human paradigm that describes the interaction between principals and stewards.
The relationship involves owner/shareholder and agentRelationship involves owner/shareholder and steward
It is related to management and economicsIt is related to psychology and sociology
Motivation is extrinsicMotivation is intrinsic
It has a low level of Organizational identificationIt has a high level of Organizational identification
Human Behaviour will be individualisticHuman behaviour will be collectivist
The Governance Mechanism is Monitoring and incentivesThe Governance Mechanism is empowering structures.

Conclusion

Agency theory and stewardship theory present opposing viewpoints on the interaction between principals and agents/stewards in companies. Agency theory is based on economic concepts, stressing monitoring and incentives to match agent conduct with principal interests. Stewardship theory, on the other hand, is based on human psychology and sociology, emphasizing intrinsic motivation and empowering frameworks to encourage stewards' collective responsibility and organizational identification. While agency theory focuses on control mechanisms, stewardship theory emphasizes trust and cooperation, highlighting the various approaches to organizational governance and management.






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