Introduction

When it comes to understanding the dynamics of organizations and the behavior of individuals within them, two
prominent theories have emerged: Agency Theory and Stewardship Theory. Both theories provide valuable insights
into the relationship between principals (owners or shareholders) and agents (managers or employees) in an
organization. While Agency Theory focuses on the potential conflicts of interest between principals and agents,
Stewardship Theory emphasizes the alignment of interests and the positive contributions of agents towards
organizational goals. In this article, we will explore the attributes of both theories and highlight their key differences.

Agency Theory

Agency Theory, developed by Jensen and Meckling in 1976, assumes that individuals act in their own self-interest and
are motivated by maximizing their own utility. According to this theory, conflicts of interest arise between principals
and agents due to information asymmetry, risk aversion, and divergent goals. Principals seek to maximize their
wealth, while agents may prioritize their own job security, career advancement, or personal gain. As a result, Agency
Theory suggests that agents may engage in opportunistic behavior, shirking responsibilities, or pursuing actions that
benefit them at the expense of the organization.

One of the key attributes of Agency Theory is the principal-agent relationship, which is characterized by a contractual
agreement between the two parties. The principal delegates decision-making authority to the agent, who is expected
to act in the best interest of the principal. However, due to the inherent information asymmetry, the principal faces
the challenge of monitoring and controlling the agent's actions effectively. This leads to the introduction of various
mechanisms such as performance-based incentives, monitoring systems, and contracts to align the interests of both
parties and mitigate agency costs.

Another attribute of Agency Theory is the assumption of bounded rationality, which suggests that individuals have
limited cognitive abilities and cannot process all available information. This assumption recognizes that agents may
not always act in a fully rational manner and may make decisions based on incomplete or biased information.
Consequently, principals must design incentive structures and monitoring mechanisms to align the agent's behavior
with organizational goals and reduce the potential for opportunistic actions.

Furthermore, Agency Theory highlights the importance of goal incongruence between principals and agents. While
principals primarily focus on maximizing shareholder wealth, agents may have different objectives such as job
security, career advancement, or personal gain. This misalignment of goals can lead to conflicts and suboptimal
decision-making. Agency Theory suggests that principals should design incentive systems that align the agent's
interests with organizational objectives, ensuring that agents are motivated to act in the best interest of the
organization.

Stewardship Theory

Stewardship Theory, proposed by Davis, Schoorman, and Donaldson in 1997, takes a different perspective on the
relationship between principals and agents. This theory assumes that individuals are intrinsically motivated to act in
the best interest of the organization and its stakeholders. Stewards, as agents, are seen as responsible and
trustworthy individuals who prioritize the long-term success of the organization over their personal interests.

One of the key attributes of Stewardship Theory is the emphasis on trust and mutual cooperation between principals
and agents. Unlike Agency Theory, which assumes conflicts of interest, Stewardship Theory suggests that when
principals trust and empower agents, they are more likely to act as stewards and make decisions that benefit the
organization. This theory argues that by providing agents with autonomy, responsibility, and a sense of ownership,
principals can foster a culture of stewardship and enhance organizational performance.

Stewardship Theory also highlights the importance of shared goals and values between principals and agents. When
both parties have a common understanding of the organization's mission, vision, and values, they are more likely to
work collaboratively towards achieving those goals. This alignment of interests reduces the need for extensive
monitoring and control mechanisms, as agents are intrinsically motivated to act in accordance with the organization's
objectives.
Moreover, Stewardship Theory recognizes the role of leadership in shaping the behavior of agents. Effective leaders
who exhibit stewardship behaviors, such as empowering employees, providing support, and fostering a sense of
ownership, can positively influence the behavior of agents. By creating a supportive and trusting environment,
leaders can encourage agents to take initiative, make decisions, and contribute to the overall success of the
organization.

Additionally, Stewardship Theory emphasizes the importance of organizational culture in promoting stewardship
behavior. When an organization has a strong culture that values trust, collaboration, and long-term orientation,
agents are more likely to act as stewards. This theory suggests that organizations should focus on building a positive
culture that encourages employees to take ownership, act responsibly, and make decisions that benefit the
organization as a whole.

Comparing Agency Theory and Stewardship Theory

While both Agency Theory and Stewardship Theory provide valuable insights into the principal-agent relationship,
they differ in their assumptions, perspectives, and implications for organizational behavior. Agency Theory assumes
self-interest, conflicts of interest, and the need for monitoring and control mechanisms to align the interests of
principals and agents. On the other hand, Stewardship Theory assumes intrinsic motivation, trust, and shared goals,
emphasizing the importance of empowerment, leadership, and organizational culture in fostering stewardship
behavior.

Agency Theory focuses on the potential conflicts and agency costs that arise due to information asymmetry and
divergent goals. It suggests that principals should design incentive systems, monitoring mechanisms, and contracts to
align the agent's behavior with organizational objectives. In contrast, Stewardship Theory emphasizes the positive
contributions of agents and suggests that principals should trust and empower agents to act as stewards. By
providing autonomy, responsibility, and a supportive environment, principals can foster a culture of stewardship and
enhance organizational performance.

While Agency Theory assumes bounded rationality and the need for extensive monitoring, Stewardship Theory
assumes intrinsic motivation and the importance of trust. Agency Theory suggests that principals should design
monitoring systems to reduce opportunistic behavior, while Stewardship Theory argues that excessive monitoring can
undermine trust and intrinsic motivation. Instead, Stewardship Theory suggests that principals should focus on
building trust, providing support, and creating a positive organizational culture that encourages stewardship
behavior.

In conclusion, both Agency Theory and Stewardship Theory offer valuable perspectives on the principal-agent
relationship within organizations. Agency Theory highlights the potential conflicts of interest and the need for
monitoring and control mechanisms, while Stewardship Theory emphasizes trust, shared goals, and the positive
contributions of agents. Understanding the attributes of both theories can help organizations design effective
governance structures, incentive systems, and leadership practices that align the behavior of agents with
organizational objectives.

Agency Theory and Stewardship Theory are two contrasting perspectives on the relationship between principals and
agents in organizations. Agency Theory assumes that agents are self-interested and will act in their own best interest,
potentially leading to conflicts with the principals. It emphasizes the need for monitoring and control mechanisms to
align the interests of agents with those of the principals. On the other hand, Stewardship Theory assumes that agents
are trustworthy and will act in the best interest of the organization. It emphasizes the importance of empowering
agents and fostering a sense of ownership and responsibility. While Agency Theory focuses on minimizing conflicts
and maximizing control, Stewardship Theory emphasizes trust, collaboration, and shared goals.
Agency Theory

An agency correlation as a contractual set-up under which the business owner or the principal engaged a manager or
the agent to execute some service on his behalf and may usually entail some decision making exclusively by the
agent. The agency theory revolves on the basic proposition about humans, which deals with principals and agents as
self-oriented focusing on exploiting their personal advantage. Agency theory described managers as opportunistic by
seizing its optimum advantage for his appointment and role as the mover in the firm for its own benefit, at the
expense of the principal. Both parties’ goal is to gain that personal advantage in every way possible with the least
outlay and expenditure. These expenditures are defined as agency costs. This is the total of cash outflows made by
the principal for its organization be it in budget proportions, auditing, or employee honorariums; the expenses
incurred by the agent for income generating projects and the marginal loss due to the decline in the expected income
of the principal as caused by the resulted deviation of motives between the agent’s resolution and the main goal of
the principal to obtain maximum returns from its investments.

Thus, high conflicting of interests between the principals and agents that resulted from information asymmetry is the
main statement in an agency theory. Asymmetry of information between the two parties is displayed when the
manager align his capabilities with the expected outcome, result and rationality of the principal (not knowing his own
abilities) leads to satisfying decision-making on the part of the principal while this is an example of “adverse
selection” for the agent. More often than not, this leads to a number of non-satisfactory overall performances of the
manager which will in due time lead to the destruction of the firm and the reputation of the agent. As well as for the
principals, their incapability of selecting candidates that acts appropriately in all circumstances are proofs of adverse
selection. The outcome always entails an ambiguous job description on both parties. Nevertheless, there are still
some factors that the agency theory fails to point out, other than motivational or self-gratitude. These maybe are the
intrinsic inability or low ability, poor knowledge on business and misinformation of agents that resulted in their
failure to deliver high performance for their principals.

Moral hazard is another agency problem confronted by the corporate governance. It’s another kind of opportunism
which includes utilizing, seizing and assuming all extra benefits from a delegated authority to rule in behalf of the
principal. Since it is difficult for the principal to monitor agents, this authority is undeniably has a chance of being
abused or misused by the managers. This problem’s solution is to adapt a good monitoring system and internal self-
governance by the principal which entails agency cost. A company does not behave based with the conventional
model in which the agents must act in the best interest of the owners of the firm. Most likely as a consequence, the
principal then would guarantee that the managers would act in their best interest. The idea of formulating a contract
is relied upon by the agency theory to align the motives of both parties concerned. The goal is to balance the
intention by allocating maximized values for shareholders and added incentives and benefits for the managers.
Committee audits and performance evaluations by the board may act as effective authority tool for monitoring and
scrutinizing potentially opportunistic agents. This internal governance system as a solution to ensure the compliance
of the agents bounded by the contract will simultaneously be given to a non-executive sect who will be composed of
auditors, supervisors and other structural arrangements. This non-executive part of the ownership structure serves
as the middle man interconnecting the principal and the agent having a role in monitoring, thereby extending an
enormous effect in the change or variation in control. In relation to corporate governance, legitimate actions against
deceits and other modes of fraudulence may provide some fortification on the part of the principal. Economic
analysis suggests that incorporating these solutions to the firm may considerably eliminate opportunism. But there
are still factors that need to be considered in this special structure of the firm that is created for internal governance
of which other forms of opportunism may arose in those entrusted with responsibility to check on the managers of
the firm.

All these efforts executed by principals to avoid agency problems, minding the fact that there are still managers that
won’t deliver exactly what they’re expected to, entails agency costs as discussed. Often, the goal of the principal is to
minimize agency costs and focus on profit even if not in growth. Here comes the conflict of organizing the principal-
agent relationship wherein the idea is exemplified but the measures are often inadequate, thus the alignment of the
interests of the principal and manager is hardly ever absolute.

A control-oriented firm is then considered necessary under agency theory which suggests that agents will not act to
take full advantage of the returns to the principal if and only if systematic self-governance mechanisms are
implemented in the firm to protect the shareholder’s interest.

Stewardship Theory

The manager’s role in stewardship theory is to maximize the potential of the firm and to pursue long-term wealth
acquisition with organizational and individual desires best accomplished by assessing collective ends. The goal is on
assuming accountability and responsibility for the organizational community. The model of a manager should be as a
steward whose behavior is ordered and organizational; whose collectivistic behavior is of higher reverence than
individualistic, self-serving conduct. They exemplify that man being intelligent makes rational, not irrational
decisions, unlike agency proposers who dispute stewardship. Stewardship theory view employees as assets of the
firm as the agency did but they differ in their treatment of the human nature’s motivation and ability of control. A
true steward is driven by his need of self-actualization, growth and achievement without being opportunistic and
self-interested in his performance.

Stewardship ideology proposes that corporate governance structures should exercise advanced authority and
prudence. The proponents discussed that high-level of authority and discretion is attained when the Chief Executive
Officer (CEO) also assume the position of Chairman of the Board. Stewardship principle argues that the issue is
whether or not the ownership structure assists and facilitates in the management achievement of high corporate and
firm performance. When the CEO is also the chairman of the board, the organization will be facilitative of this
objective letting them assume apparent, clear and objective role expectations and authorize and empower higher
and greater management. Thus, stewardship theory is not centralized on self-motivation through own financial gain,
but the assumption of two roles as the chairman, at the same time as the manager of the corporation will produce
superior results and maximized returns to the shareholders than separation of the roles of the chair and CEO as
exemplified by the agency theory. Duality of these roles is considered a functional from in stewardship perspective.

Difference Between Agency Theory and Stewardship Theory

Agency theory concentrates primarily on the association between the principal and the agents in corporations,
having a formal and contractual nature of relationship however with the presumed goal indifference and
incongruence of interest. Meanwhile, Stewardship theory is involved mainly in analyzing the importance of the co-
existence of trust-based relationships along with agency relations in firms. The stewardship approach, which
encompasses commitment and trust to shared goals and desires exhibited by the principal and the manager alike,
aligns the interest of the two parties.

There are two key points that differentiated the Agency Theory and Stewardship Theory. These are the motivation
and power comparison. In an agency type, the manager is motivated by personal interests and extrinsic rewards. In
the stewardship, the manager is motivated by the human need for intellectual growth, achievement, and self-
actualization, and by intrinsic rewards. In an agency theory, the power is institutionally directed while in the
stewardship, it is based on personal ability and power to run the particular organization.

Agency Theory and Stewardship Theory are not mutually exclusive but create a link between agency and stewardship
relationships. Clearly, the stewardship theory provided a room for the failures and gaps in the agency theory. A
manager of a firm may choose what type of inclination he is up to particularly in decision making as long as these
three assumptions are supplemented. First the decision must be mutually agreed upon by both the principal and the
agent. Secondly, it will always depend on the situation, and third objective is the expectations of the parties involved.

Agency 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 the agents to perform work.
The principals delegate the work of running the business to the directors or managers, who are agents of
shareholders. The shareholders expect the agents to act and make decisions in the best interest of principal. On the
contrary, it is not necessary that agent make decisions in the best interests of the principals. The agent may be
succumbed to self-interest, opportunistic behavior and fall short of expectations of the principal. The key feature of
agency theory is separation of ownership and control. The theory prescribes that people or employees are held
accountable in their tasks and responsibilities. Rewards and Punishments can be used to correct the priorities of
agents.

Stewardship Theory

The steward theory states that a steward protects and maximises shareholders wealth through firm Performance.
Stewards are company executives and managers working for the shareholders, protects and make profits for the
shareholders. The stewards are satisfied and motivated when organizational success is attained. It stresses on the
position of employees or executives to act more autonomously so that the shareholders’ returns are maximized. The
employees take ownership of their jobs and work at them diligently.