Comparison of agency theory and stewardship theory paper phd

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Management

Introduction

The stewardship theory of management and the agency theory are some of the models that can be

used to provide insight on how to increase the efficiency and productivity of an organization.

The agency theory dictates that, in any firm, “There is an agency loss which is the extent to

which returns to the residual claimants fall below what they would be if the principals, the

owners, exercised direct control of the corporation” (Donaldson and Davis 50). Thus, the

shareholders have to find effective means of reducing this loss by offering “incentives to

corporate managers to maximize the profits of their principals” (Kopp n.p.). On the other hand,

the stewardship theory denotes that a company’s leaders are stewards and are obligated to

maximize the “shareholders’ wealth through firm performance” (Davis et al. 25). This paper

illustrates some of the key areas where the theories overlap and where they differ. Additionally,

it sheds light on how an individual can shift their mindset from that of an agent to that of a

steward and the effects such an occurrence can have on the organization.

Where the Theories Overlap

One of the main areas where the theories overlap is the fact that a company’s shareholders do not

have full control of its operations. The determination of how the various production operations

should be carried out is done by the organization’s executives. However, the latter must ensure

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their decisions are based on the essence of “maximising shareholder interests” or “shareholders’

wealth” (Donaldson and Davis 50; Davis et al. 25).

How the Theories Differ

The major area where the theories differ is the illustration of how the executives discharge their

duties. According to the stewardship theory, the executives’ behaviors are dependent on the

shareholders’ interests; hence, they cannot make decisions that might contravene the principals’

wishes. Therefore, even in scenarios where the interests of the principals and the executives

differ, the latter “place higher value on cooperation than defection” (Davis et al. 24). It serves as

the rationale why stewards are deemed to have pro-organizational behaviors, which is one of the

factors depicting their commitment to making sure the principals’ interests are upheld at all

times. On the other hand, the agency theory denotes that the executives’ behaviors are not

influenced by the shareholders’ wishes. It is the main reason why the shareholders feel an agency

loss is likely to occur, which may be evidenced by the fact that the amount of profits they receive

at a respective period might be lower than what they should have gained if they “exercised direct

control of the corporation” (Donaldson and Davis 50). Nevertheless, as mentioned earlier, the

principals may opt to use various ways of reducing the agency loss, such as allowing the

executives to own some of the company’s shares, thus, “optimizing the relationship between

principals and agents” (Kopp n.p.).

How an Individual Can Move from the Mindset of an Agent to That of a Steward

The insight from the agency theory depicts that the best way an individual can shift their mindset

from being an agent to a steward is by developing pro-organizational behaviors. In such a

scenario, one should always make sure their interests are aligned to those of the shareholders,

which implies that they should not engage in any actions contravening the principals’ wishes.

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Surname 1 Student’s Name Professor’s Name Course Date Management Introduction The stewardship theory of management and the agency theory are some of the models that can be used to provide insight on how to increase the efficiency and productivity of an organization. The agency theory dictates that, in any firm, “There is an agency loss which is the extent to which returns to the residual claimants fall below what they would be if the principals, the owners, exercised direct control of the corporation” (Donaldson and Davis 50). Thus, the shareholders have to find effective means of reducing this loss by offering “incentives to corporate managers to maximize the profits of their principals” (Kopp n.p.). On the other hand, the stewardship theory denotes that a company’s leaders are stewards and are obligated to maximize the “shareholders’ wealth through firm performance” (Davis et al. 25). This paper illustrates some of the key areas where the theories overlap and where they differ. Additionally, it sheds light on how an individual can shift their mindset from that of an agent to that of a steward and the effects such an occurrence can have on the organization. Whe ...
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