Welcome to another video on corporate governance. Hopefully you have watch our previous video on agency theory. It is imperative you watch that video first as it will help you understand the stance of the theoretical perspective discussed in this video. This video will explain stewardship theory. This video will discuss the arguments of the theory, its recommendations on the composition of the board and briefly, how it departs from the arguments of agency theorists.
So, without further ado, let's get into it. Stewardship theory was developed to understand the relationship between the management of a corporation and its shareholders. Agency theory calls this the relationship between the principal and the agent.
However, for stewardship theory, managers are referred to as stewards not agents as they're responsible for the protection of the interests of shareholders. So what then is stewardship theory in corporate governance? Stewardship theory argues against the monitoring role of the board of directors in corporate governance as argued by agency theorist, and bestows this honor onto the management board. Stewardship theorist describes the management as a stewardship team who should be responsible for corporate governance. Unlike agency theorists who argues that the board of directors role is to monitor and control the actions of the management, stewardship theorists argue that the role of the board of directors is to monitor and control the actions of the management.
is to support and assist the management. By the management here, we refer to the CEO and other executive or inside managers of a corporation. Stewardship theory directly challenges the human behavioral assumptions of agency theory.
Considering this, the proponents of stewardship theory propose certain corporate governance assumptions and focuses on the explaining the behavior of the management. Contradicting agency theory and concerning the relationship between shareholders and the management, the assumptions of stewardship theory highlights aspects relating to the psychological factors that motivates and propel management to act in the best interest of shareholders. It also considers how the management identifies with the corporation they manage, and how management use the power bestowed upon them by the shareholders. Let's now consider these assumptions more carefully. Now on the assumptions of stewardship theorists on managerial behavior, the model of man was used to explain psychological factors that propel management to act in the best interest of the principal.
Stewardship theorists use the concept of a self-actualizing man to describe the behavior of management. As humans are naturally compelled to grow, it is argued that the management would naturally want to succeed in their role and ensure that the corporation succeeds as well. Putting structures in place that suppresses this desire, as proposed by agency theorists, would have a negative impact on the corporation and on the management team.
This also links to what motivates management to act in the best interest of the shareholders or the principal. Agency theorists argue that the management is motivated by extrinsic and measurable rewards. Stewardship theoretical view differs from this. Stewardship theorists argue that the management is motivated by intrinsic rewards which is hard to quantify. Examples of such intrinsic rewards may include organizational growth or performance, achievement, and self-actualization.
The management also identifies with the organization, which is an extension of the manager's psychological structure. This means that the managers will take the success and failure of the organization personally. For this reason, Managers vigorously strive for organizational success which in turn creates intrinsic work-related satisfaction as they take the credit for such successes.
Using these assumptions, there are also arguments on how the management uses the power bestowed on them. With more power given to the management, the more it reinforces their role as stewards. The proponents of stewardship theory argue that the more the management is given autonomy, the more likely they are to influence others towards achieving organizational goals and ensuring enhanced organizational performance. As you can see, stewardship theory focuses more on the role of the management in facilitating organizational performance and governance.
In other words, the role of the management is cogent to organizational success and the role of non-executive directors or the board of directors is to support them as one functional team. For this reason, In terms of the structure and composition of the board, stewardship theorists argue that the roles of CEO and chairperson should be bestowed on one person so as to have a clearly defined leadership. This is called CEO duality. Stewardship theorists also argue that there should be higher proportion of inside directors or executive directors. This would facilitate effective and efficient decision-making and strategy development.
However, the issue with these arguments is that the roles of the board of directors and the management board will not be clearly defined. And, if everyone is responsible for everything, accountability goes out the window. Let's stop here for this video.
Having considered agency theory in our previous video and now stewardship theory, you should consider reading more on both theories. Ask yourself. Are there limitations to both theories? Which of these theories best describes the relationships between corporate governance actors? Would you support the arguments of agency theorists or stewardship theorists regarding the behavior of the management?
Well, that will be all for this video. Thanks again for watching. Please, look forward to our other videos on other prominent theories of corporate governance. See you in the next video.