Agency Theory Versus Stewardship Theory Accounting Essay

Jensen and Meckling ( 1976 ) defined an bureau correlativity as a contractual set-up under which the concern proprietor or the chief engaged a director or the agent to put to death some service on his behalf and may normally imply some determination doing entirely by the agent. The bureau theory revolves on the basic proposition about worlds, which deals with principals and agents as self-oriented focussing on working their personal advantage ( Corbetta and Salvato, 2004 ; Chua, Steier and Chrisman, 2006 ) . Shleifer and Vishny ( 1986 ) explain the bureau context in which the moneymans needed the agent ‘s specialisation to obtain maximal returns from their financess, meanwhile the directors since they do non hold adequate capital on their ain would use the fundss of its principal. Agency theory described directors as timeserving ( Wasserman, 2006 ) by prehending its optimal advantage for his assignment and function as the mover in the house for its ain benefit, at the disbursal of the principal ( Shulze, Lubatkin & A ; Dino, 2003 ) .

Both parties ‘ end is to derive that personal advantage in every manner possible with the least spending and outgo. These outgos are defined as bureau costs ( Jensen and Meckling, 1976 ) . This is the sum of hard currency escapes made by the principal for its organisation be it in budget proportions, scrutinizing, or employee honorariums ; the disbursals incurred by the agent for income generating undertakings and the fringy loss due to the diminution in the expected income of the principal as caused by the resulted divergence of motivations between the agent ‘s declaration and the chief end of the principal to obtain maximal returns from its investings. Therefore, high conflicting of involvements between the principals and agents that resulted from information dissymmetry is the chief statement in an bureau theory ( Davis, Schoorman and Donaldson, 1997 ) . Asymmetry of information between the two parties is displayed when the director aline his capablenesss with the expected result, consequence and reason of the principal ( non cognizing his ain abilities ) leads to fulfilling decision-making on the portion of the principal while this is an illustration of “ inauspicious choice ” for the agent ( Karra, Tracey and Phillips, 2006 ) . More frequently than non, this leads to a figure of non-satisfactory overall public presentations of the director which will in due clip lead to the devastation of the house and the repute of the agent ( Jensen, 2004 ) . Equally good as for the principals, their incapableness of choosing campaigners that acts suitably in all fortunes are cogent evidence of inauspicious choice. The result ever entails an equivocal occupation description on both parties. However, there are still some factors that the bureau theory fails to indicate out, other than motivational or self-gratitude. These possibly are the intrinsic inability or low ability, hapless cognition on concern and misinformation of agents that resulted in their failure to present high public presentation for their principals ( Davis, Schoorman and Donaldson, 1997 ) .

Moral jeopardy as described by Chrisman, Chua and Litz ( 2004 ) is another bureau job confronted by the corporate administration. It ‘s another sort of self-interest which includes utilizing, prehending and presuming all excess benefits from a delegated authorization to govern in behalf of the principal. Since it is hard for the principal to supervise agents, this authorization is undeniably has a opportunity of being abused or misused by the directors. This job ‘s solution is to accommodate a good monitoring system and internal self-governance by the principal which entails bureau cost ( Eisenhardt, 1989 ) . As discussed by Berle and Means in 1932, a company does non act based with the conventional theoretical account in which the agents must move in the best involvement of the proprietors of the house. Most likely as a effect, the principal so would vouch that the directors would move in their best involvement. The thought of explicating a contract is relied upon by the bureau theory to aline the motivations of both parties concerned. The end is to equilibrate the purpose by apportioning maximized values for stockholders and added inducements and benefits for the directors. Committee audits and public presentation ratings by the board may move as effectual authorization tool for monitoring and size uping potentially timeserving agents ( Mustakallio, Autio and Zahra, 2002 ) . This internal administration system as a solution to guarantee the conformity of the agents bounded by the contract will at the same time be given to a non-executive religious order who will be composed of hearers, supervisors and other structural agreements. This non-executive portion of the ownership construction serves as the in-between adult male complecting the principal and the agent holding a function in monitoring, thereby widening an tremendous consequence in the alteration or fluctuation in control ( Denis, 2001 ) . In relation to corporate administration, legitimate actions against fraudulences and other manners of duplicity may supply some munition on the portion of the principal. Economic analysis suggests that integrating these solutions to the house may well extinguish self-interest. But there are still factors that need to be considered in this particular construction of the house that is created for internal administration of which other signifiers of self-interest may originate in those entrusted with duty to look into on the directors of the house.

The survey made by Yermack in 1999 suggests that the board peculiarly its composing as an authorization to proctor directors has an consequence on the administration mechanism. The survey on the consequence of little board of managers in a company got the important consequence that there is a positive correlativity of this little size to greater market rating of a company. Meanwhile, Hannifa and Hudaib ( 2006 ) stands with the consequence of Yermack demoing consequences based on more than 300 companies listed in Malaysia which proposed that a big board is less efficient in scrutinizing the public presentation of the directors compared to a smaller 1. Furthermore, this immense composing of the board is rather expensive for the companies to keep in footings of honorariums, committees and compensation. But in footings of net income and company growing, the big board may look to be of importance because of the diverseness in experiences, cognition and answerability. Nevertheless, the survey made by Guest in 2009, showed a strong consequence on the non-relation of the big board size to the house public presentation nevertheless they besides robustly imply that they do n’t propose to curtail big boards to obtain a better house public presentation.

All these attempts executed by principals to avoid bureau jobs, minding the fact that there are still directors that wo n’t present precisely what they ‘re expected to, entails bureau costs as discussed. Often, the end of the principal is to minimise bureau costs and concentrate on net income even if non in growing. Here comes the struggle of forming the principal-agent relationship ( Shapiro, 2005 ) wherein the thought is exemplified but the steps are frequently unequal, therefore the alliance of the involvements of the principal and director is barely of all time absolute.

A control-oriented house is so considered necessary under bureau theory which suggests that agents will non move to take full advantage of the returns to the principal if and merely if systematic self-governance mechanisms are implemented in the house to protect the stockholder ‘s involvement ( Jensen and Meckling, 1976 ) .

Stewardship theory

In 1993, Block believes that houses implementing stewardship by front-running service alternatively of self-interest are those that are most effectual in corporate administration. He believes that both the house and single demands will be greatly achieved by set uping trust-relationships and handling subsidiaries as spouses. Preston ( 1998 ) added a definition of Stewardship Theory to represent humanist responsibilities owed to all spouses that recognizes the importance of a systematic tantrum of corporate administration sing the elements of its environment. Hosmer in 1996 identifies the demand to augment the economic and societal duties in administration by acknowledging the moral and ethical issues inherent in the stewardship theory. The director ‘s function in stewardship theory is to maximise the potency of the house and to prosecute long-run wealth acquisition with organisational and single desires best accomplished by measuring corporate terminals ( Hosmer, 1996 ) . The end is on presuming answerability and duty for the organisational community. The theoretical account of a director should be as a steward whose behaviour is ordered and organisational ; whose collectivized behaviour is of higher fear than individualistic, self-seeking behavior ( Albanese, et al 1997 ) . They exemplify that adult male being intelligent makes rational, non irrational determinations, unlike bureau suggesters who dispute stewardship. Stewardship theory position employees as assets of the house as the bureau did but they differ in their intervention of the human nature ‘s motive and ability of control. A true steward is driven by his demand of self-actualization, growing and accomplishment without being timeserving and self-interested in his public presentation ( Mejia et al. , 2001 ) .

Stewardship political orientation proposes that corporate administration constructions should exert advanced authorization and prudence. ( Davis et al, 1997 ) .The advocates discussed that high-level of authorization and discretion is attained when the Chief Executive Officer ( CEO ) besides assume the place of Chairman of the Board. Stewardship rule argues that the issue is whether or non the ownership construction aids and facilitates in the direction accomplishment of high corporate and steadfast public presentation. When the CEO is besides the president of the board, the organisation will be facilitative of this nonsubjective allowing them presume evident, clear and nonsubjective function outlooks and authorise and authorise higher and greater direction. Therefore, stewardship theory is non centralized on self-motivation through ain fiscal addition, but the premise of two functions as the president, at the same clip as the director of the corporation will bring forth superior consequences and maximized returns to the stockholders than separation of the functions of the chair and CEO as exemplified by the bureau theory. Dichotomy of these functions is considered a functional from in stewardship position. Harmonizing to Fama ( 1980 ) , being an effectual steward of their house, CEO ‘s and directors are besides efficaciously pull offing their ain assets and callings.

Stewardship, nevertheless, has its ain set of restrictions and spreads. Since it is trust-based relationships, it assumes underlying informal understandings and non most of the clip, the functional logic or precised duties ( Mejia et al. , 2001 ) . Some writers ( Habbershon, 2006 ; Miller and Miller, 2005 ) argue that selflessness chiefly a compliment of stewardship might be influential in set uping an tremendous web for the house in its early phases, as using a broad web of legal guardians or of relations in instances of a household corporation ( less concerned on their specifications ) minimising bureau costs compared to a non-family member ( Mejia et al. , 2001 ) .However, in the long tally as the house becomes more established, the demand for good expert and professional directors arise to get by up with the competition thereby anticipate an addition in the bureau costs.

In kernel, the organisation ‘s over all environment systems influence the disposition of directors. In an organisation which houses the doctrine for self-actualization and affect employee-owners association, directors are inclined towards the stewardship position. Furthermore, leftist behaviour and non-power distance civilizations encourages stewardship rules ( Davis, Schoorman and Donaldson, 1997 ) .

Agency Theory vs. Stewardship Theory

Agency theory dressed ores chiefly on the association between the principal and the agents in corporations, holding a formal and contractual nature of relationship nevertheless with the presumed end indifference and incongruence of involvement ( Sharma, 1997 ) . Meanwhile, Stewardship theory is involved chiefly in analysing the importance of the co-existence of trust-based relationships along with bureau dealingss in houses ( Corbetta and Salvato, 2004 ) . The stewardship attack, which encompasses committedness and trust to shared ends and desires exhibited by the principal and the director likewise, aligns the involvement of the two parties ( Albanese, Dacin and Harris, 1997 ) .

In 1997 Davis, Shoorman and Donaldson provided two cardinal points that differentiated the Agency and Stewardship theories. These are the motive and power comparing. In an bureau type, the director is motivated by personal involvements and extrinsic wagess. In the stewardship, the director is motivated by the human demand for rational growing, accomplishment, and self-actualization, and by intrinsic wagess. In an bureau theory, the power is institutionally directed while in the stewardship, it is based on personal ability and power to run the peculiar organisation.

Davis, et Al ( 1997 ) argue that the two theories are non reciprocally sole but create a nexus between bureau and stewardship relationships. Clearly, the stewardship theory provided a room for the failures and spreads in the bureau theory. A director of a house may take what type of disposition he is up to peculiarly in determination devising every bit long as these three premises are supplemented. First the determination must be reciprocally agreed upon by both the principal and the agent. Second, it will ever depend on the state of affairs, and 3rd aim is the outlooks of the parties involved. Establishing on the consequence of their survey of 2×2 matrices on the possibilities of the propulsions of the principal and agent, the agent can either choose to execute in an bureau or in a steward manner, and so can the principal. There can be four possibilities of result in the administration utilizing the nexus between bureau and stewardship and depending on the pick of the concerned parties. Two of which are a concrete illustration of the bureau theory where both have selected to elate their opportunisms and a true stewardship rule which maximize organisational public presentation. Other two possibilities of result which will ensue in one party taking advantage over the other and one resort to injustice will ensue to low public presentation on the other party. When the chief Acts of the Apostless as the steward and the director acts as an agent, and on the other manus when the principal becomes timeserving and the director acts as a steward, which could pave the manner for the defeat and declined feelings of dignity to the aggravated party. The survey on the relationship of these theories is really wide, thereby some would n’t hold to the findings of Davis. Harmonizing to Albanese, Dacin, and Harris ( 1997 ) there is a differentiation between bureau theory and the bureau job of divided ego involvement. They discussed that stewardship merely refined and advanced bureau theory, it does non show an option. Eisenhardt ‘s ( 1989 ) reappraisal shows that bureau theory was continually developed and is studied exhaustively with the incongruent opportunisms of the principal-agent as the cardinal guess.

Drumhead

The bureau theoretical account and stewardship theoretical account of the steadfast provide two different angles for understanding the administration of a house, its determination devising, its internal relationships, and its external relationships. This reappraisal advocates that the principal or director playing as a steward, and using people with similar outlooks, is more in line with the traits needed for an organisation to win like proper motive, personal and company growing and self-actualization, therefore increasing the potency for maximising the public presentation of the house. Furthermore, the advantage of the stewardship theoretical account over that of the bureau is that it presents directors an organized different array of motives which could potentially include the involvements of all relevant house movers ( Preston 1998 ) .

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