Stewardship Theory and Agency Theory of Management: formula sheet

Key formulas

Core idea

Stewardship theory: manager's goals = organisation's goals

The manager is a steward who puts organisational interest ahead of personal interest.

View of human nature

Manager = collective, trustworthy, pro-organisational

Motivated by achievement, responsibility, recognition and belonging, not only by money.

Recommended style

Trust + empowerment + autonomy = better performance

Control and heavy monitoring are seen as less necessary.

Relationship

Owner (principal) trusts manager (steward)

Interests are aligned, so conflict between owner and manager is assumed to be low.

Core view of the manager

Steward = intrinsically motivated + collectivist + pro-organisational

Use this to classify any statement about the manager's nature under stewardship theory.

Control approach

Trust + Empowerment (low monitoring)

Stewardship favours autonomy and involvement. Agency theory favours monitoring and incentives.

Goal alignment

Manager's interest = Owner's interest

The steward sees no basic conflict, so the principal-agent conflict is assumed to be minimal.

Source of motivation

Intrinsic (achievement, responsibility, recognition) > purely financial

Do not say money is irrelevant. It is just not the main driver.

Principal-agent relationship

Principal (owner) → delegates authority → Agent (manager)

The principal hires the agent to act on their behalf and take decisions.

Source of the agency problem

Separation of ownership and control + self-interest + information asymmetry = conflict of interest

All three together create the agency problem. Remember this as the cause chain.

Core assumption

Agent's goals ≠ Principal's goals

Agency theory assumes individuals are self-interested and goals may diverge.

Total agency cost

Agency cost = Monitoring cost + Bonding cost + Residual loss

This is the usual way the three types are grouped. Remember it as a list, not a number to calculate, unless the question gives figures.

Monitoring cost

Borne by the principal

Spent to watch the agent: audits, supervision, reporting systems, independent directors.

Bonding cost

Borne by the agent (often passed on to the owner indirectly)

Spent to assure the principal: guarantees, contracts, reports, restrictions the agent accepts.

Residual loss

Loss that remains after monitoring and bonding

The fall in owner's wealth because the agent's decisions still differ from what the owner would choose.

Agency theory in one line

Self-interested agent + conflict of interest → monitoring, incentives and contracts

Control-based. Cost of control is agency cost.

Stewardship theory in one line

Trustworthy steward + aligned interests → empowerment, autonomy and trust

Trust-based. Motivation is intrinsic.

Comparison pairs to remember

Human nature: self-serving vs collective-minded | Motivation: extrinsic vs intrinsic | Control: tight vs loose | Trust: low vs high | Relationship: principal-agent conflict vs partnership

Always keep agency first and stewardship second so you do not swap them.

Agency problem

Agency problem = divergence between owner's goals and manager's goals

Arises from conflict of interest and information gap.

Quick revision

• Stewardship theory: managers act as responsible stewards of the owners' assets.
• Stewardship view of managers: motivated by responsibility, achievement and recognition, not just money.
• Stewardship favours trust, empowerment and shared goals over tight control.
• Agency theory: a principal hires an agent to act on the principal's behalf.
• Agency problem arises when the agent's interests differ from the principal's.
• Unequal information between owner and manager adds to the agency problem.
• Agency costs are the costs of monitoring the agent, bonding the agent and any residual loss from divergent decisions.
• Ways to reduce agency problems include incentives linked to performance, monitoring, audits and a strong board.
• Agency theory leans on control and monitoring; stewardship leans on trust.
• In agency theory managers are seen as self-interested; in stewardship theory they are seen as collectivist.
• If a question mentions trust and empowerment, think stewardship; if it mentions conflict and monitoring, think agency.

Common mistakes

• Mixing up stewardship theory with agency theory. Fix: Remember: steward means trust and aligned goals; agent means possible conflict and need for control.
• Thinking stewardship managers work only for money. Fix: The theory says non-financial motives such as achievement, recognition and responsibility drive stewards.
• Saying stewardship theory assumes managers are motivated mainly by money. Fix: Remember that stewards are intrinsically motivated. Rewards matter, but achievement and responsibility drive them.
• Thinking stewardship theory supports close monitoring of managers. Fix: Link stewardship with trust and empowerment. Monitoring is the agency theory answer.
• Treating the manager as the principal and the shareholder as the agent. Fix: The principal is whoever delegates authority. Shareholders delegate to managers, so managers are agents.
• Confusing agency theory with stewardship theory. Fix: Agency theory assumes self-interest and conflict. Stewardship theory assumes managers act as responsible custodians.
• Calling an audit a bonding cost. Fix: An audit ordered by the owner to check the agent is a monitoring cost. Bonding is the agent's own commitment to the owner.
• Treating residual loss as an amount spent. Fix: Residual loss is a loss of value that remains even after monitoring and bonding. Nothing is paid out to prevent it.
• Swapping the two theories and saying stewardship theory uses strict monitoring. Fix: Link steward with trust and agent with control. Use the trust or control test every time.
• Saying agency theory assumes managers are always dishonest. Fix: Say agency theory assumes managers may put their own interests first, so safeguards are needed.

Exam tips

• Link the word 'steward' to 'trust' and 'organisational goals first'. Most MCQs test only this link.
• When an option says managers are opportunistic or need monitoring, it is agency theory, so eliminate it for a stewardship question.
• Case-based questions often hide the answer in the manager's motive. Pride, loyalty and responsibility mean stewardship.
• Learn this topic together with agency theory, because questions often offer one as a wrong option for the other.
• There is no negative marking, so always attempt every question after eliminating the obvious wrong options.
• Most questions are statement-matching. Learn the keywords: trust, empowerment, intrinsic motivation, collective goals, pro-organisational.
• Expect 'which is NOT' or 'which differs' questions. Remove the agency-style options first.
• Questions often compare the two theories. Remember the pair: stewardship = trust and empowerment, agency = monitoring and incentives.