Stewardship theory
Stewardship theory is a business model that positions company executives as responsible guardians of the organizations they lead, with a primary focus on acting in the best interests of shareholders. Unlike agency theory, which emphasizes the need for oversight to align the interests of executives (agents) and shareholders (principals), stewardship theory assumes that executives will prioritize the welfare of the company and its stakeholders without self-serving motives. This perspective fosters an environment where company leaders are viewed as stewards who manage resources diligently and ethically.
In practice, organizations adhering to stewardship theory often have a board of directors comprised of internal members, reflecting the belief that leadership will inherently act in shareholders' interests. Companies employing this model may also embrace purposes beyond mere profit, such as ethical labor practices, environmental sustainability, or social justice, making them attractive to stakeholders who share these values. This alignment can lead to greater loyalty among employees and customers, who may choose to support a company that aligns with their ethical beliefs. However, businesses must maintain transparency and consistency in their actions to bolster credibility, as any disconnect between stated values and practices can erode stakeholder trust.
On this Page
Subject Terms
Stewardship theory
Stewardship theory is a business model that views company executives as responsible stewards of the company or organization they lead. Under this theory, it is assumed the executives will act in the best interest of the company's shareholders and not take actions that benefit themselves personally while hurting the company or its shareholders. It is the primary alternative to the agency theory, which provides additional oversight between company executives and shareholders to help resolve any conflict between their interests.
Background
All companies and organizations need a method of governance and leadership to oversee its activities, monitor the success of those activities, and determine future plans and actions. There are several common models for this governance, including agency theory, stakeholder theory, and stewardship theory.
In agency theory, a person known as an agent makes decisions on behalf of one or more people, known as the principals. In the business world, a company's executives often act as agents, while the shareholders—people who put up the funding for the company through stocks or other means in exchange for a share of the profits in the form of dividends—are the principals. However, in business, there are many times when the goals of these two parties are in conflict. For example, a company president may see it as a good thing to buy another company that is struggling because she sees great potential for future profit and potential bonuses, but this may mean a temporary drop in the dividends received by the shareholders. The agency theory assumes an extra layer of oversight is needed to help resolve these potential conflicts and ensure the agent's goals do not take precedence over those of the shareholders. This oversight frequently comes in the form of a board of directors from outside the corporate structure.
The stakeholder theory also considers the shareholders and their interests to be important. However, this theory recognizes that there are others who also have a stake, or interest, in the company or organization's activities and success. This theory maintains that the interests of all stakeholders should be taken into account. These stakeholders can include management, employees, customers, and even the company's competitors. In the stakeholder theory, the interests of all of these parties are considered equally important. This theory was first widely publicized in the 1984 book Strategic Management: A Stakeholder Approach by R. Edward Freeman.
Overview
The stewardship theory echoes the agency theory in making the shareholders' interests of prime importance. However, this theory also assumes that the people responsible for the company's leadership will act as good stewards. A steward is someone who takes care of something for someone else. This something can be a company, a household, or some other form of property or asset. The steward does not own the asset but treats it as if they do when protecting and caring for it. In the case of a company, this includes making every effort to protect the company's finances and growing its resources as much as possible. A good steward will also act in the interest of others, even if this action goes against their own best interests.
A company operating under the stewardship theory may also have a board of directors. However, unlike a company using the agency theory, these directors are usually from within the company. This is because in the stewardship theory, it is assumed the company or organization's leadership will act in the best interest of the shareholders regardless of how the leadership is affected. Since this theory does not expect there to be conflicts between the needs of the leadership and the shareholders, there is no need for the additional oversight of a board from outside to help resolve conflicts or ensure that the shareholders' interests are given precedence. Instead, the assumption is that the company or organization's leadership will put the needs of shareholders and the company over their own.
In many cases, these companies or organizations are under the governance of a chief executive officer (CEO), who has the final say in decisions and speaks for the company or organization. This model provides some clear advantages. There is one single and authoritative answer when decisions need to be made and no conflicting messages are coming from a board or other company executives. The shareholders also know who to address when they have a question or concern and have the confidence of knowing that the primary goal of the company's executives is protecting the shareholders' interests.
Companies or organizations that employ the stewardship theory often have some purpose beyond profit. Making a profit may be part of its goal, but there is usually another goal that is considered more important than profit. This is usually a cause, such as protecting human rights by not using sweatshop labor and paying a living wage to all employees. Other companies may choose to operate in such a way that they use practices that do not hurt animals, exercise good environmental stewardship, or honor a specific religious or cultural belief.
A company or organization that operates with a focus on a specific ethical concern or holds some other purpose as greater than profit will likely attract like-minded people as shareholders, customers, and employees who also see this goal as more important than any financial gain. As a result, customers will often pay more for goods and services from these companies. Employees may also be more likely to choose to stay with the company even if the pay is lower than they might make elsewhere.
This interest in the company or organization's purpose coming from multiple sources also provides built-in accountability for management. These shareholders, customers, and employees will generally be able to quickly discern if the executives are not upholding appropriate standards. However, this scrutiny can be problematic if there is any perceived gap between what the company states as its purpose and any action it takes. For example, a company that emphasizes environmental concerns and efforts to minimize the use of nonrenewable resources may lose stakeholder trust if management charters a jet to fly to a conference. The company may also need to reevaluate its organizational structure as time goes by and its non-financial purpose changes or becomes less important to its shareholders.
Bibliography
"Agency Theory vs. Stakeholder Theory: What's the Difference?" Investopedia, 23 Aug. 2023, www.investopedia.com/ask/answers/031615/whats-difference-between-agency-theory-and-stakeholder-theory.asp. Accessed 20 Oct. 2024.
Bondigas, Al. "Stewardship Theory of Corporate Governance." Houston Chronicle, smallbusiness.chron.com/stewardship-theory-corporate-governance-74073.html. Accessed 20 Oct. 2024.
Chrisman, James J. “Stewardship Theory: Realism, Relevance, and Family Firm Governance.” Entrepreneurship Theory and Practice, vol. 43, no. 6, 2019, pp. 1051–66, doi.org/10.1177/1042258719838472. Accessed 20 Oct. 2024.
Flynn, Anita. "Stewardship Theory of Corporate Governance." Arizona Republic, yourbusiness.azcentral.com/stewardship-theory-corporate-governance-29164.html. Accessed 13 Nov. 2017.
Ingram, David. "The Agency Theory in Financial Management." Houston Chronicle, smallbusiness.chron.com/agency-theory-financial-management-81899.html. Accessed 13 Nov. 2017.
Johnson, Walter. "Stewardship Theory of Corporate Governance." Bizfluent, 26 Sept. 2017, bizfluent.com/info-7747808-stewardship-theory-corporate-governance.html. Accessed 13 Nov. 2017.
Lawler, Edward E. "Corporate Stewardship." Forbes, 22 Sept. 2015, www.forbes.com/sites/edwardlawler/2015/09/22/corporate-stewardship/#737d4a6bb257. Accessed 13 Nov. 2017.
"Stakeholder Management." R. Edward Freeman, redwardfreeman.com/stakeholder-management. Accessed 20 Oct. 2024.