Agency theory and stewardship theory are two essential fundamental theories of corporate governance describing the interaction between stakeholders and managers. Agency theory argues that managers act in their own self-interest, sometimes at the expense of shareholders’ goals. Under Stewardship Theory, it is assumed that managers behave as responsible stewards of the business, being concerned with the long-term success of the firm. These two theories explain management behavior and how it affects business decision-making and governance. Egency Theory is concerned with self-interest and control systems, Stewardship Theory advocates trust and long-term allegiance.
What is Agency Theory?
Agency theory describes the principal-agent relationship between owners/shareholders and managers in a firm. It presumes that managers might put personal interests ahead of the firm’s interests, resulting in conflicts.
But in some situations, there may be issues and disagreements as a result of the actions of agents. It may be due to misalignment of thoughts, and priorities or preferences between agents and principals. Therefore, this is known as a principal-agent problem. In addition, agency theory explains conflicts that may arise as a result of two primary areas, difference in goals and difference in risk aversion.
For example, company agents would search for fresh markets instead of enhancing the existing market. It will, however, impact short term profitability as there will be a decrease in the anticipated growth in revenue. Principals will, on the other hand, pursue short term growth and stability in the present market.
What is Stewardship Theory?
Stewardship theory supposes that managers are stewards of the firm and are focused on long-term success rather than personal benefits. In contrast to agency theory, it views managers as committed and faithful to the vision of the firm.
Under stewardship theory, top managers of a company guard the interests or wishes of the owners or shareholders and make decisions for them. Their primary goal is to create and maintain a thriving business entity to realize the vision of the shareholders. Consequently, organizations adhering to the Stewardship principle appoints the correct personality as the head of the organization; this necessitates putting the CEO and Chairman roles under a single Executive.
Difference Between Agency Theory and Stewardship Theory
The agency theory and the stewardship theory describe two distinct views on corporate governance. Organization Theory has an assumption that agency theory acts on managers to look for their benefits than that of the company. It implies that close oversight, performance based incentives, and ongoing scrutiny are required to ensure that managers act in alignment with shareholders’ intentions. It is a theory of short-term profit and risk aversion; managers try to extract the maximum reward for themselves with the least accountability.
Stewardship theory, in contrast, asserts that managers function as loyal stewards of the organization. It presupposes that leaders inherently act in the organization’s best interest, making long-term sustainability a focus of their work. In opposite of agency theory, this paradigm encourages devolution of powers, trust, and self-governance rather than control and surveillance.
Stewardship theory makes managers more likely to take well-considered risks to grow the business, as is true of many founder-owned enterprises. Some businesses use a combination of both theories but leadership theory encourages a leadership culture based on responsibility and ethics and shared vision rather than external control.
| Factor | Agency Theory | Stewardship Theory |
| Nature of Managers | Self-interested agents | Loyal stewards |
| Focus | Short-term profits | Long-term sustainability |
| Monitoring Required? | Yes, to prevent opportunistic behavior | No, managers act in the company’s best interest |
| Control Mechanism | Performance incentives and strict supervision | Empowerment and trust-based leadership |
| Risk-Taking Behavior | Risk-averse due to personal gains | Willing to take calculated risks for company growth |
| Decision-Making Autonomy | Limited; requires oversight | High; relies on self-governance |
| Example | CEO increasing stock price for bonuses | Founder-led businesses prioritizing long-term vision |
Relationship Between Agency Theory and Stewardship Theory
Both agency theory and stewardship theory significantly contribute to corporate governance and thus many organisations address a balanced address in order to benefit from both. Empirical evidence of agency theory in practical implementation includes mechanisms of accountability through performance incentives and closed-loop structures that inhibit deviant behavior.
Simultaneously, they embrace stewardship theory, which facilitates leadership based on trust, granting executives greater leeway in decision-making. Public companies often do Agency Theory to address shareholder concerns while family-owned or mission-driven firms do Stewardship Theory to keep a long-term vision and ethical leadership.
So, you can find successful businesses that integrate both theories and have an effective governance structure. For instance, the Tata Group embodies stewardship theory by encouraging principled leadership and collaboration amongst executives. And while it applies agency theory too, in order to secure the financial transparency and the accountability. This combined approach enables firms to strike a balance between risk management and sustainable growth, innovation, and accountability.
Relevance to ACCA Syllabus
Within the ACCA syllabus, Agency Theory and Stewardship Theory are core parts in SBL and AFM. Agency Theory seeks to explain the conflicts and issues that arise between shareholders and managers, while Stewardship Theory posit that managers behave as good stewards of an organization. Familiarity with these theories assists ACCA professionals in evaluating corporate governance, executive compensation, and financial decision-making to promote ethical leadership and strategic alignment.
Agency Theory and Stewardship Theory ACCA Questions
Q1: Describe the difference between Agency Theory and Stewardship Theory.
A) Agency Theory assumes managers act in their interest whereas Stewardship assumes that managers act in the best interest of the company.
B) Agency Theory assumes that managers always act honestly, while Stewardship Theory assumes that they act dishonestly
C) Stewardship Theory emphasizes conflicts between shareholders, where Agency Theory emphasizes ethical leadership
D) Agency Theory promotes financial mismanagement and Stewardship Theory prevents it
Ans: A) In Agency Theory, it is assumed that the managers act in their self-interest while in Stewardship Theory managers act in the best interest of the company
Q2: What is Stewardship Theory and its view on corporate managers?
A) Self-interest first and foremost
B) As trusted leaders with an interest in the organization’s future success
C) Oda kredi girişimci finansmanın dış denetimcisi
D) As compliance-centric legal advisors
Ans: B) as trusted leaders focused on the success of the organization
Q3: A key mechanism to reduce agency problems in corporate governance is:
A) performance-based executive compensation
B) Allowing managers complete autonomy with no oversight
C) Making financial disclosures less transparent
(D) Shareholders become disengaged in governance
Ans: (A) Performance-related executive compensation
Q4: Which answer best supports Stewardship Theory?
A) Should provide incentives for managers to act shareholder to whom.
The second of these is to introduce independent audits to check for fraud.
C) Relying on managers to act in the long-term interests of the company
D) Mandating legal oversight over every corporate choice
Ans: C) Leaving it to managers to do whatever is best for the company in the long term
Q5: What is corporate governance and how is this related to Agency Theory?
A) Through holding accountability measures to minimize conflicts of interest
B) Eliminating financial regulations to further empower management
C) By removing the power of shareholders in decision-making
D) By subordinating board oversight to management power
Ans: A) By ensuring punitive measures that avoid conflicts of interest
Relevance to US CMA Syllabus
Strategic Management and Corporate Governance (Part 2) of the US CMA syllabus would heavily rely upon Agency Theory and Stewardship Theory. To advance the fields of financial planning, budgeting and performance measurement, management accountants need an understanding of how corporate executives reconcile personal incentives with organizational goals.
Agency Theory and Stewardship Theory CMA Questions
Q1: In Agency Theory, what issue is created due to the separation of ownership and management?
A) Managers could pursue their own interests instead of maximizing shareholders’ value
B) Investors always do what is best for managers
C) Corporate governance is where decision-making is controlled by employees
D) Auditors are to be blamed for financial mismanagement
Ans: A) Managers may pursue personal interests over maximizing shareholder value
Q2: What does Stewardship Theory recommend in financial management approaches?
A) Incentivizing managers to take ownership of corporate goals and act in good faith
B) Limit the extent of board oversight, giving managers more freedom
C) Letting shareholders decide everything management does
D) Discarding Financial Reporting Standards
Ans: A) Enabling managers to commit to corporate goals and act in good faith
Question 3: What is Agency Theory, and how does it impact executive pay?
A) It advocates for tying executive compensation to firm performance to align incentives
B) This thwarts all kinds of incentive-based pay
C) It advocates for compensation of executives by a fixed salary without regard to performance
D) It incentivizes bosses to choose their own pay
Ans: A) It advocates for linking executive pay with company performance to align interests
Q4: Which of the following best describes an agency problems solution?
A) Performance based compensation and Corporate governance policies
B) Less financial disclosures means less investor focus
C) Urging managers to avoid board scrutiny
D) The end of ethics in decision making
Ans: A) Introduce performance-based compensation and corporate governance policies
Q5: Stewardship Theory as a relationship model
A) It promotes long-term decision-making in line with organizational success
B) It focuses financial planning on only short-term goals
C) It enhances moral hazard in financial governance
D) It eliminates accountability for financial decision making
Ans: A) It promotes long term mindset on how to act for organizational success
Relevance to US CPA Syllabus
Agency Theory is covered on the Auditing & Attestation (AUD) and Business Environment & Concepts (BEC) sections of the US CPA syllabus, while Stewardship Theory is only included in AUD. Assessing corporate governance risks Assess corporate governance risks, regulatory compliance, and officers’ roles in financial decision-making.
Agency Theory and Stewardship Theory CPA Questions
Q1 : What is the role of Agency Theory in a financial auditing?
A) It lays out the case for independent audits for reducing management bias
B) It creates no need for external audits
C) You trust all financial reporting is accurate without the need for verification
D) It is limited to corporate social responsibility
Ans: A) Describes the requirement of independent audits to minimize management bias
Q2: How does Stewardship Theory affect corporate governance?
(A) It presupposes that managers will work best for the company with no outside constraints.
B) It deters corporate transparency
C) It places a cap on ethical responsibilities in financial reporting
D) It focuses on short-term profit and not sustainable
Ans: A) It believes that managers will do what is best for the company without any outside controls
Q3: What does executive accountability mean in Agency Theory and why is it so important?
A) It presents short-term incentives to managers to act in the interest of shareholders
B) It lets executives make financial decisions without oversight
C) It goes easier on corporate governance policies
D) It extinguishes shareholder rights in corporate decisions
Ans: A) To ensure that managers can be forced to act in shareholders best interests
Q4: What is one thing to decrease agency costs?
A) Fortifying internal controls and external oversight
B) Destroying independence in financial audits
C) Giving managers unlimited authority to make decisions
D) Less transparency in financial filings
Q: A) Stablishing internal controls and external oversight
Q5: What are the practical implications of Stewardship Theory for corporate governance?
A) Promoting culture of accountability and long-term value
B) As a result of narrowly emphasizing short-term financial performance
C) By constraining corporate board oversight
D) Eliminating compliance requirements
Ans: A) By encouraging efficient use of resources and idea generation and sharing
Relevance to CFA Syllabus
In the CFA syllabus, Agency Theory and Stewardship Theory are crucial topics in the Ethics and Professional Standards section and the Corporate Finance section. Corporate governance, risk management, and managerial behavior on investment decisions need to be evaluated by the CFA candidates.
Agency Theory and Stewardship Theory CFA Questions
Q1: In what way is Agency Theory important to investment management?
A) It is a reminder of conflicting interests between fund managers and investors
B) It removes the need for financial reporting in investment firms
C) It assumes ethical decisions are always made when investing
D) It alleviates financial advisers of accountability
Ans: A) It indicates conflicts of interest between fund managers and investors
Q2. How does Stewardship Theory help in responsible investments?
A) Because they are ensuring that executives focus on long-term financial health and ethics
B) What If everyone cared only about maximizing short-term stock performance
C) By incentivizing highly leveraged risk-taking in asset management
D) By stripping investor rights in corporate governance
Q: How are you trained to be a protector of consumers? A) By making sure executives make long-term financial stability and ethical choices.
Q3: What is the significance of corporate governance in Agency Theory?
The correct answer is A) It provides clear and complete information in financial decisions and investor protection
B) It gives executives free range, free rein
C) It avoids the need for compliance with regulations
D) It limits shareholder input into corporate strategy
Ans: A) It selects who gets to judge who gets what in the world.
