Question

Discuss and compare the influence of ‘Agency Theory’ and ‘Stewardship Theory’ in the design of a corporate governance system for a public company with diverse ownership. What other features of the company’s managers should you take into consideration when designing the corporate governance system?

Answer 1

Corporate Governance defines the way through which the businesses are governed and helps in taking effective business decisions. It is a structure of rules, practices, and processes used to direct and manage a company.

There are various theories of corporate governance which describe the relationship between various stakeholders of the business and helps in governance of firms and companies from time to time.

Agency Theory v/s Stewardship Theory

Agency theory defines the relationship between the principals (such as shareholders of company) and agents (such as directors of company). According to this theory, the principals of the company hire and delegate the agents to perform work. The agents are free to act and make decisions accordingly. Agency theory attempts to explain and resolve disputes over priorities between principals and their agents

A steward is defined as someone who protects and works for the benefit of others. Under the stewardship theory, company executives protect the interests of the owners or shareholders and make decisions on their behalf. Their sole objective is to create and maintain employees intrinsically and motivated to work for the organization.

Relationship between Agency Theory and Stewardship Theory in a public company with diverse ownership-

Both theories focus on the relationship between two parties the owner and the executive. These theories have significant characteristics depending on the executive behavior and the expectations of the owner but the ultimate objective is to improve organizational performance.

Difference between Agency Theory and Stewardship Theory in a public company with diverse ownership-

Characteristic	Agency Theory	Stewardship Theory
Model Base	Management and Economic Model	Organizational psychology and sociology
Time Span	Short-term	Long-Term
Objectives	Cost Controlling	Quality Improvement
Approach	Control	Collaboration
Relationship	Shareholders and Agents	Shareholders and Steward
Motivation Type	Extrinsic	Intrinsic
Risk Attitude	Avoiding Risks	Taking Risks
Organizational Level	Low	High
Power	Institutional	Individual

While designing the corporate governance system, the following features should be taken into consideration-

· Line of business of Organization

· Size of the organization

· Availability of resources

· Clear Organizational Strategy

· Shareholder’s expectations

· Legal requirements

· Risk Management

· Accountability and Transparency

· Strong and Qualified Board of Directors