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Stakeholder Perspectives and Limits of Agency Theory

Updated 11 October 2026 · Fact-checked

Agency theory says managers (agents) may act in their own interest rather than the shareholders' (principals), so owners need monitoring and incentives. Its limits: it assumes self-interested managers, ignores wider stakeholders, and overlooks trust. Stewardship theory says managers act for the organisation's good. Stakeholder theory widens the duty beyond shareholders.

Understand Stakeholder Perspectives and Limits of Agency Theory

Agency theory describes a relationship in which owners (principals) hand day-to-day control to managers (agents). The worry is that the agent has different goals, such as pay, status or job security, and knows more than the principal. So the principal spends on monitoring, bonding and incentives to keep the agent aligned.

The theory has limits, and SBL expects you to discuss them. It assumes people are mainly self-interested and driven by money. It assumes the only principal that matters is the shareholder. It treats the relationship as a contract to be policed, not a partnership built on trust. Real managers are often motivated by pride, professional values and loyalty.

Stewardship theory answers the first limit. It says managers want to do a good job and act as stewards of the organisation's assets. They are motivated by achievement, recognition and a sense of duty. If that is true, heavy monitoring is wasteful and can even harm motivation, because it signals distrust. Empowering managers works better. The theories are not rivals in every case. Which one fits depends on the people, the culture and the risk involved.

Stakeholder theory answers the second limit. Employees, customers, suppliers, lenders, government and the community are also affected by management decisions and may rely on them. Managers can be seen as agents of many principals, not only shareholders. This creates conflicts. A decision that boosts shareholder return may harm employees or the environment. Wider stakeholders often have no formal contract, so law, regulation, codes and pressure groups give them protection.

Ethics links the ideas. An agent who acts only for personal gain, or a board that serves shareholders at any cost, can breach ethical duty and the public interest. Good governance therefore combines controls (agency view) with ethical culture and trust (stewardship view) and accountability to stakeholders.

How to solve Stakeholder Perspectives and Limits of Agency Theory questions

Use this method for any question asking you to discuss, critique or compare agency, stewardship and stakeholder views in a scenario.

  1. 1Read the requirement and note the verb (explain, evaluate, advise, compare). Note how many marks, so you know how many points to make.
  2. 2Identify who the principal and agent are in the scenario. Look for other parties affected, such as employees, lenders, community or regulators.
  3. 3State the relevant theory briefly in one or two sentences. Do not spend marks on a textbook definition.
  4. 4Apply it with evidence from the case: pay structures, board behaviour, trust, ownership, culture, scandals.
  5. 5Give the limitation or the alternative view (stewardship or stakeholder) and apply that to the case as well.
  6. 6Weigh the views. Say which fits this organisation better and why, linking to risk, culture and ethics.
  7. 7Conclude with a clear recommendation or judgement, in the format asked (report, memo, briefing). Show professional skills.

Quickest way: Theory, case, limit, verdict

When to use it: Use it when time is short and the question asks for a critique or comparison of agency theory.

  1. Write a heading for each view: agency, stewardship, stakeholder.
  2. Under each, put one point from the case that supports or challenges it.
  3. Add one limit of agency theory: self-interest assumption, shareholder focus, or ignoring trust.
  4. Finish with a one-line verdict and a practical action, such as a mix of monitoring and empowerment.

Common mistakes in Stakeholder Perspectives and Limits of Agency Theory

  • Writing a theory essay with no link to the scenario.

    Students recall notes and write everything they know.

    Fix: Every paragraph must cite a fact from the case. Name the people and decisions involved.

  • Treating stewardship and agency theory as always opposites, with one right and one wrong.

    Textbooks present them side by side.

    Fix: Say that the better fit depends on the people, culture and risk. Often a blend of trust and controls is best.

  • Confusing stakeholder theory with agency theory.

    Both involve a duty owed to someone.

    Fix: Agency theory is about the shareholder-manager contract. Stakeholder theory widens the group to whom managers are accountable.

  • Listing limitations without explaining the consequence.

    Students give short bullet points to save time.

    Fix: Explain the effect. For example, assuming self-interest leads to heavy monitoring, which can reduce trust and motivation.

  • Ignoring the ethical dimension.

    The topic feels like governance only.

    Fix: Link to ethical behaviour, the public interest and culture. Show the professional skills mark by taking a clear, balanced view.

  • Claiming agency theory is wrong or useless.

    Critique is mistaken for rejection.

    Fix: Acknowledge it explains real problems, such as excessive pay and short-term focus, while stating where it falls short.

Worked examples

Example 1

Tarang Ltd, a family-founded manufacturer, has a CEO who has worked there for twenty years and refuses bonuses. The new investor group wants to add tight monitoring and share-option incentives. Evaluate whether agency theory is the right basis for governance at Tarang. (10 marks)

Show the solution
  1. Agency view: investors are principals and the CEO is the agent. They fear he may act against their interests, so they propose monitoring and options to align goals.
  2. Apply to the case: the CEO refuses bonuses and has long service. This suggests he is not driven mainly by financial reward, which weakens the agency assumption of self-interest.
  3. Stewardship view: he looks like a steward who values the company's success and legacy. Tight monitoring may signal distrust and reduce his motivation or lead him to leave.
  4. Limit of agency theory: it ignores intrinsic motives, trust and loyalty, and it treats only investors as the principals.
  5. Stakeholder point: employees, customers and suppliers of a family firm may rely on long-term stability, which shareholder-focused incentives like options could undermine by encouraging short-termism.
  6. Judgement: agency theory is only a partial basis. Investors still need reasonable controls, such as an independent board and reporting, because trust alone does not guarantee good decisions.

Answer: Agency theory explains the investors' concern but fits Tarang poorly because the CEO shows stewardship behaviour and wider stakeholders matter. Recommend a balanced approach: sensible oversight through independent non-executives and clear reporting, with empowerment of the CEO and no heavy reliance on share options.

Example 2

Explain how stakeholder theory challenges the shareholder-centred view of agency theory, and give two ethical risks of focusing only on shareholders. (8 marks)

Show the solution
  1. State the agency view: managers are agents of shareholders and should maximise shareholder wealth, with monitoring and incentives to ensure it.
  2. Stakeholder challenge: other groups, such as employees, customers, suppliers, lenders and the community, are affected by decisions and have legitimate claims. Managers owe them consideration, not only shareholders.
  3. Practical challenge: stakeholders often lack contracts, so their interests can be overlooked unless law, regulation or pressure protects them.
  4. Ethical risk 1: incentives tied only to share price can encourage short-term decisions, such as cutting safety or training spend, which harm staff and customers.
  5. Ethical risk 2: ignoring environmental and community impact can damage the public interest and, in time, the company's reputation and licence to operate.
  6. Conclude that a wider view supports long-term value, though managers must prioritise between conflicting stakeholder claims.

Answer: Stakeholder theory widens managers' accountability beyond shareholders. Focusing only on shareholders risks short-term, harmful decisions and neglect of environmental and community impact, both of which are ethical failings and can harm long-term value.

Exam tips

  • Always name the principal, agent and affected stakeholders from the case before using any theory.
  • Use stewardship theory as a tool to critique agency theory, not as a separate list of facts.
  • Reach a verdict. Examiners reward a reasoned judgement, not just a description of each theory.
  • Link to ethics and the public interest when the case shows pressure for results or poor behaviour.
  • Match the format asked (report, briefing note) and keep points short, as professional skills marks are awarded for clear communication.

Practice questions from Agency

Stakeholder Perspectives and Limits of Agency Theory in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Stakeholder Perspectives and Limits of Agency Theory: frequently asked questions

What is the main difference between agency theory and stewardship theory?

Agency theory assumes managers are self-interested and need monitoring and incentives. Stewardship theory assumes managers want to act for the organisation and work best when trusted and empowered.

What are the main limitations of agency theory?

It assumes people are mainly motivated by self-interest and money. It focuses only on shareholders as principals and ignores other stakeholders. It also overlooks trust, professional values and the cost of heavy monitoring.

How does stakeholder theory differ from agency theory?

Agency theory concerns the contract between shareholders and managers. Stakeholder theory says managers are accountable to a wider group, such as employees, customers and the community, whose interests may conflict with shareholders'.

Does stewardship theory mean no controls are needed?

No. It suggests controls should be lighter where trust is justified. Many organisations still keep independent oversight because trust alone cannot be guaranteed.