What is the Difference Between Agency Theory and Stewardship Theory?
🆚 Go to Comparative Table 🆚Agency theory and stewardship theory are two distinct corporate governance principles that describe the relationship between owners (principals) and executives (agents). Both theories aim to improve organizational performance, but they have different focuses and assumptions.
Agency Theory:
- Focuses on the relationship between the owner and the agent.
- Based on management and economic principles.
- Assumes that the interests of principals and agents diverge, and agents may take advantage of their powerful positions to maximize their personal economic utility.
- Driven by extrinsic motivation.
- Separation of roles is recommended, such as the board chair and CEO, to protect shareholder interests.
Stewardship Theory:
- Focuses on the relationship between the owner and the steward.
- Based on psychology and sociology.
- Offers a more positive perspective on relationships between principals and agents, with the interests of both parties converging.
- Driven by intrinsic motivation.
- Shared incumbency of roles, such as board chair and CEO, is recommended to maximize shareholder interests.
In summary, agency theory emphasizes the potential conflicts of interest between principals and agents and recommends separation of roles to protect shareholder interests. On the other hand, stewardship theory focuses on the collaborative relationship between principals and agents, with the belief that their interests converge and agents will act in the best interests of the company. Both theories aim to improve organizational performance, but they differ in their focus and assumptions.
Comparative Table: Agency Theory vs Stewardship Theory
Here is a table comparing the differences between Agency Theory and Stewardship Theory:
| Feature | Agency Theory | Stewardship Theory |
|---|---|---|
| Focus | Relationship between owner and agent | Relationship between owner and steward |
| Base | Management and economic principles | Psychology and sociology |
| Motivation | Extrinsic motivation | Intrinsic motivation |
| Decision Making | Based on individual self-interest | Based on serving others and aligning with the principal's interest |
| Governance Structures | Prescribed to control and monitor agents | Prescribed to empower stewards |
| Primary Aim | Maximize personal economic utility for the agent | Balance the interests of the principal, steward, and other stakeholders for long-term success |
| Shorter vs Long-term Interests | Tends to prioritize short-term interests | Focuses on long-term interests |
| Role of CEO | Takes advantage of powerful position to maximize personal gain | Acts as a guardian of the organization, protecting shareholder preferences and working towards the organization's vision |
Agency Theory refers to the relationship between business owners and their agents (e.g., CEOs), emphasizing the potential conflicts of interest between the two parties. It is based on management and economic principles and assumes that individuals are self-interested and work to maximize their personal gain. On the other hand, Stewardship Theory focuses on the relationship between owners and stewards, who act as guardians of the organization. It is based on psychology and sociology and assumes that individuals are collective-minded and work proactively towards the organization's success.
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