(a) Discuss the contrasting views of managerial motivation assumed in Agency Theory versus in Stewardship Theory. Which view do you regard as more realistic and why?
The agency theory assumes that agents that exist in businesses and act on behalf of people do so because they have to represent their clients. The fact is that the time may not be available for the clients who are businesses and individuals, and so they end up hiring the agents to act on their behalf. More so, the clients may not have the expertise or the requisite skills to engage their businesses and run the errands are required (Du Plessis et al., 2018, p. 11). As a result, agents are seen as the best individuals or companies to contract because they have the necessary skills, equipment, facilities and time to use in carrying out the tasks. The authority in making decisions concerning the responsibility under the contract is delegated to the agent, and the principal loses the power to handle the matter directly, letting the agent carry out all the duties. The discretion that the principal gives to the agent is broad, and it, therefore, becomes quite difficult to monitor the latter’s activities. The theory has been exceedingly helpful in organizations especially that have undertaken agency relationships. It has brought out some ease of work and positive results between managers, employees, and boards of management.
`Agency theory has been widely applied for it has brought about great results and allowed managers to achieve things that they would not have even imagined. This has made it more popular, and thus, it has gained more ground because it has improved the way supervisors and managers in organizations are being viewed. Corporate governance has assumed a cornerstone in the theory of agency because it is known that shareholders employ managers and delegate to them the mandate to oversee the investments made. Shareholders are usually more, and therefore they need to have a leader (Tricker, 2015, p. 45). As a result, they may employ one of them to take care of their interests by safeguarding their investment. However, the shareholders may not be having even one among them who can undertake such a job. They, therefore, employ an outsider, who comes in and manages their property because he has the expertise required. More so, the manager who comes in as just an employee is a third party who is neutral and therefore is entrusted to remain neutral, giving all the members equal benefit without any bias. This implies that the shareholders who take charge of all the duties regarding checking the conduct and discipline of the managers. The powers of the shareholders remain over the managers, and they can sack them whenever they feel that their investments are being threatened (Ramírez, and Tejada, 2018, p. 27).
Nevertheless, accountability becomes a problem because the monitoring that is done by shareholders is not economical and maybe at most times inconvenient. They may not have the required time that is necessary for them to do the controlling and therefore they end up not properly fulfilling their task. They find that there are a lot of impracticalities in the undertaking of the function of monitoring. Apart from the lack of time, there are costs associated with this task, and thus, accountability on the part of the managers becomes necessary. To help sort out this possible disadvantage, the shareholders hold a meeting and elect their representatives who are the board of directors. The board acts as the agent of the shareholders and therefore takes over the duty of overseeing and monitoring the executives of the organization (Soltani, and, Maupetit, 2015, p. 276). The main aim of the board is to protect the interest of their colleagues by controlling any possible misuse of the funds and reduce instances of mismanagement.
The view of this theory is that the agency will be in problems if the interests of both the two parties, the agent and the principle do not coincide. Therefore, the agent has to be controlled by the principal so that the interests of both actors match for the overall results to be positive. The concern of the agency theory is on the costs that are involved in the control process which is aimed at making sure that wastefulness is curtailed and the agents do not have the freedom to do the things the way they wish. They then have to adapt to the wishes of the principal and therefore the need for governance structures. Accountability burden is placed on the shoulders of the agents.
On the other hand, the stewardship theory does not dwell much on controlling and defeating the conflict between the agent and the principal. The stewardship theory stresses the importance of collaboration as well as corporation and does not look at the relationship economically. In this theory, the agents are allowed to go out of the way to act in the best interest of the company such that they achieve a collectivist utility. The agents are not expected to serve their benefits although the theory does not mind about them fostering their interests economically. The focus is general n the results, and this is why they are generally entrusted with all the resources needed and given all the freedom and discretion to undertake whatever they would see best in their eyes for the organizational utility.
` The agency theory appears to be narrow pathed because it only allows the managers to work using a specific lane. However, the stewardship theory is broad and allows the managers to go out of their ways in achieving the collectivist results. The agency theory does not give freedom to the managers, and therefore they tend to be bound and prevented from using any methods they would prefer to achieve the results. Some of these methods could be termed as unauthorized by the board and therefore bring some unwanted consequences on the managers (Wong, 2016, p. 277). The cost associated with the agency theory is excellent because of constant supervision and control by the board of directors which is tiresome and may not necessarily bring in the intended results. However, the theory of stewardship only looks at the results and whether they have been achieved and this is the basis on which to access and judge the work of the managers.
Justice, fairness, as well as the considerations of others, are the general principles that push up managers in the stewardship theories to do their work ethically and professionally (Lys et al., 2015, p. 60). They consider the three factors before embarking on their job because they know what they have been tasked with. They are, as a result, connected with the aims of the company and thus the goals of the organization are at the center, taking precedence above the self-interest of the managers. In comparison, the agency theory makes sure that the manager is strictly directed and works under the voice of the board such that there is no liberty to make decisions.
In my view, I think that the stewardship theory is more realistic than agency. This is because the aims of an organization shall always remain to be the same regardless of the route taken. However, the results are the substance that matters, and thus the path that meets the aims without much strain should be adopted. The agency theory has a lot of complications due to the role played by the board of directors while in the stewardship theory, things are a bit relaxed. The manager in the stewardship theory is thus advantaged and is likely to give better results for the benefit of the organization.
(b) In view of your discussion above, what governance mechanisms do these theories advise to optimize shareholder returns and organizational performance?
The governance mechanisms in the agency theory are that a committee must be in place to oversee the work of the executives. This is because the shareholders are always seen as the actual owners of any organization; thus they are given the priority of voicing their concerns. The governance process in the agency theory is ensured to be as accountable as possible for the sake of safeguarding the investments of the shareholders. The relationship between the shareholder and the manager is therefore guaranteed to be as smooth as possible. The board and the individuals who sit in it are checked to make sure that there is integrity. This is meant to prevent any member of the board from taking advantage of their position. The boards, on the other hand, are accountable to the people who elected them. The ones who do the election are the shareholders who do so during a general meeting when each one is present. Supervisory boards are also set up in some other cases because they have to get the board of directors on the right path.
On the contrary, the stewardship theory assumes that the managers and other executives are fully aware of their duties and they would not make any deliberate mistake to take the company down. The directors and other executives are regarded as legal representatives and heads of the corporations that they work for. The corporate world knows that such leaders are the face of the company and that the shareholders have no place in the leadership of the company. Although there may be a board of directors, it is constituted to make some decisions that are crucial concerning other pertinent issues but not on the running of the business (Grossi et al., 2015, p. 277). The boards of governors rather known as the governing council is mandated to pick the top executives that are entrusted with the managerial duties and then given all the work to carry on in the best interest of the organization. The primary task of the board after appointing the top executive is to wait and see the results and analyze whether they match the aims and objectives of the firm. If they do match, then the executive is recommended for good work done, but if not, investigations are launched. The examinations may be done by a committee formed by the board to find out the root cause of the problem so that the board may be made aware of the failures of the executives. The findings are then taken to the general meeting of the shareholders and the appropriate and recommended action taken. The shareholders may give the management time through the bard so that the results can be seen, but in the failure of the management to achieve the targeted objectives, then they may be sacked.
The stewardship theory does give authority and the discretion to the management to do all the necessary changes and make any alterations that deem necessary to align the company with the expected results. The managers could, therefore, be taken to court and legal action was taken against them because they are liable for their actions and the shareholders are waiting on the results after delegating all the authority to the management through the board. The board and the administration create a relationship that is meant to bring about the success of the firm. The presence of a problem can be easily traced and addressed according to because the board and the management handle separate tasks.
Additionally, in the stewardship structure, the shareholders allow the board members to carry out the decisions that effect the company without restriction (Giannakopoulou et al., 2016, p. 22). The shareholders are therefore required to be the auditors of the board because the members do not have anyone that is above them. They seem to have absolute power, but the shareholders take on them during the general meeting for the sake of retaining the integrity of the company.
In a bid to optimize the returns of the shareholders as well as the organizational performance, the theory of agency seems to have the shareholders take too much care in seeing that their money is invested wisely. This is done by monitoring the running of the company carefully. However, the stewardship theory does not see the need for close monitoring and believes that the managers are in the best position to promote the interest of the company when they are not strictly monitored. Nonetheless, all these mechanisms are meant to bring out the best of the firms’ ability to make profits.
(c) Finally, do you regard Stewardship Theory as a strict alternative to Agency Theory or as being complementary to it, and why?
Stewardship theory can be seen by many to be an alternative to the agency theory. This is because it seems to address the shortcomings of the agency theory. The structures and mechanisms of the stewardship theory irons out the mistakes that lead to failures in the agency theory. Therefore, many regard the Stewardship theory as an alternative to agency theory.
However, the process of accountability and how it is implemented is the only difference that is seen in the two theories. Accountability is a necessary factor in both theories, and they all strive to get the best results using different mechanisms (Keay, and Loughrey, 2015, p. 258). In the search for the attainment of accountability, the Stewardship theory does establish a board which is less concerned about the activities of the management. On the other side, the agency theory creates a board that acts as the controller of the administration. Thus, it can be logically seen that the two approaches are similar such that they converge at the point of accountability. For example, in both theories, annual general meetings of the shareholders must be held and resolutions adopted. All these AGMs are meant to bring about the achievement of accountability in the organization. The issue of the thought of the competence of the directors in both theories remains to be the same (Coule, 2015, p. 80).
Nonetheless, the Stewardship theory assumes that the directors will shirk. In the Stewardship theory, accountability is assured by the application of internal mechanisms that see the directors elected by trust and professionalism. This makes the difference that accountability is assumed from different perspectives such that the strength of the devices employed varies. The Stewardship theory expects the directors to be quick in justifying their actions to the shareholders that give the latter assurance about the former’s professionalism.
The expectations of the shareholders and the company on the work of the board are much appreciated when applying the Stewardship theory rather than the agency theory. Different mechanisms are used, but they are introduced depending on the nature of the organization involved (Keay, 2015, p. 15). Some use peer reviews so that the members of the board get to enrich each other and make sure that every member is checked in a friendly manner by their counterparts. In Stewardship theory, the employment of focus groups is not new whereby one, some or even all the members of the board decide to take a step further and address the concerns of the shareholders (Donaldson, and Davis, 1991, p. 54). They go to the prominent or the majority shareholders and explain to them the actions that the board has had to take in safeguarding the interests of the company.
In some cases, this is done to the majority stakeholders whereby they are told what steps the board has taken towards addressing a particular issue and why such a specific approach has been undertaken. The main point here is that the company (the shareholders) get to know what the board is doing and why it is doing so. The meetings with these shareholders are meant to justify to the shareholders that the board is doing a lot concerning the company and that it deserves their trust. More so, the meetings are intended to demonstrate the professionalism of the board and their commitment to the company. The shareholders are then in a position to ascertain the capability of the board in running the company by gauging the approaches undertaken (Keay, 2017, p. 1302).
In other cases, there is the two-tier system whereby the management and the supervisory board work hand in hand in running the affairs of the company. The administration is held responsible by the supervisory board and the latter to the shareholder. However, it sometimes becomes necessary that the management explains their actions to the shareholders because some of the steps they take may be a bit complicated and therefore they would be required to appear in the general meetings. This is because the supervisory boards are mandated with the responsibility of representing the shareholders and may not entirely understand some of the things and explain them directly as they should be discussed to the shareholder by the management. This also proves to the shareholders that the management and the supervisory board can handle the issues and concerns of the shareholders (Christensen et al., 2015, p. 140).
The agency theory emphasizes that only the directors are accountable to the shareholders. In contrast, Stewardship theory does not constrain the directors to be responsible to the stakeholders. Agency theory sees the directors as people who are being concerned about being self-maximizers rather than working for the interest of the firm. Stewardship theory, on the other hand, seems to be a bit relaxed on accountability when compared to the agency theory. This is because it relies heavily on the trust as well as the professionalism of the supervisory board.
Nevertheless, all humans are likely to have flaws in their conduct and work and therefore should not be fully trusted (Davies, 2016, p. 5). It is a fact that each human being would in the matter of the course seem to act selfishly to profit themselves. The base point should be that although accountability is needed, there should not be strict measures as seen in the agency theory. On the other side, there should be some measures meant to get the directors to act to the best interest of the firm and not to fulfill their self-interests (Admati, 2017 p. 135).
The significant difference between the two theories seems to be the modes of addressing the relationship between the board, management and the shareholders. The board is at the center of the structure, and an agency, it is mandated to do both upward and downward communication. It is strictly the board that has this power. In stewardship, the board could do both upward and downward communication, but at the same time, the management may communicate with the stakeholders. These two theories could be collapsed and applied as one superior theory, making accountability better.
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