CMA Foundation · Fundamentals of Business Economics and Management
Stewardship Theory and Agency Theory of Management
Stewardship theory says managers act as responsible stewards who put the organisation's interests first. Agency theory says managers (agents) may pursue their own interests against owners (principals), creating agency costs. To solve MCQs, identify the assumed manager motive, then match it to trust or control mechanisms.
What this chapter covers
This chapter in Paper 4, Section B (Management), explains two theories about how managers behave when they run a business owned by others. The core question is simple: can you trust managers to act in the owners' interest, or must you watch and control them?
Stewardship theory answers with trust. It assumes managers are motivated by achievement, responsibility and recognition, and that they want the organisation to succeed. Agency theory answers with caution. It treats the owner as the principal and the manager as the agent, and assumes the two have different goals and unequal information. That gap creates agency problems and agency costs.
The chapter links to the rest of the paper through management ideas such as leadership, motivation, control and corporate governance. If you understand how these two theories view human motivation, questions on governance, monitoring and incentives become easier. The chapter is short and conceptual, so it suits quick MCQ revision.
Paper 4 is fully objective, and Section B Management carries 30 of the 100 marks. A short conceptual chapter like this one is good value, because questions are usually direct: a definition, an assumption, a type of agency cost, or a contrast between the two theories. Once you learn the key terms and the contrast table in your head, you can answer such questions in seconds and save time for calculation-heavy papers in the same session. There is no negative marking, so even when unsure, you can eliminate options and still attempt every question.
Stewardship Theory and Agency Theory of Management: topics in the order to study them
- 1Meaning and Concept of Stewardship TheoryStart with the trust-based view, as it is the simpler idea and sets the base for the contrast later.
- 2Assumptions and Features of Stewardship TheoryOnce you know the meaning, learn what it assumes about managers, since MCQs often test these assumptions directly.
- 3Meaning and Concept of Agency TheoryMove to the opposite view, built on the principal-agent relationship and conflict of interest.
- 4Agency Costs and Ways to Reduce Agency ProblemsThis extends agency theory into costs and remedies, which are favourite term-matching questions.
- 5Stewardship Theory vs Agency TheoryFinish with the comparison, which only makes sense after both theories are clear and is the most likely MCQ area.
How to prepare Stewardship Theory and Agency Theory of Management
This chapter is concept-heavy, not calculation-heavy. Aim to understand each theory in one line, then train yourself to spot it from the wording of a question.
- Read the meaning of stewardship theory and write a one-line summary in your own words, such as: managers are trustworthy and act for the organisation.
- List the main assumptions and features of stewardship theory as short keywords, for example intrinsic motivation, collective goals, trust and empowerment.
- Define principal, agent and agency relationship, then note why conflict arises: different goals and unequal information.
- Learn the types of agency costs and the remedies as two separate lists. Match each remedy, such as incentives, monitoring and audit, to the problem it solves.
- Make a two-column contrast of the theories covering view of managers, motivation, control style and governance approach. Revise it daily.
- Practise MCQs by underlining the clue words in each question, such as trust, empowerment, monitoring, conflict or incentives, and linking them to the right theory.
- Before the exam, recite both theories and the contrast from memory without notes.
Common mistakes in Stewardship Theory and Agency Theory of Management
Mixing up which theory assumes self-interested managers.
Fix: Link agency with conflict and control, and stewardship with trust and responsibility. Say it aloud as a pair.
Confusing the principal with the agent.
Fix: Remember that the principal is the owner or shareholder who delegates, and the agent is the manager who acts for them.
Treating agency costs as only the manager's salary.
Fix: Agency costs arise from the conflict itself: monitoring, bonding and residual loss. Salary alone is not the agency cost.
Choosing monitoring as the remedy in a stewardship question.
Fix: Stewardship prefers empowerment and trust. Use monitoring and incentive alignment only for agency theory.
Memorising the theories separately and skipping the comparison.
Fix: Build a short contrast table on rough paper and revise it. Questions often ask for the difference directly.
Reading options too fast when two choices sound similar.
Fix: Underline the clue word in the question, eliminate options that fit the other theory, then choose.
Last-day revision: Stewardship Theory and Agency Theory of Management
- 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.
Stewardship Theory and Agency Theory of Management practice questions
- Under stewardship theory, which board structure is considered most suitable for enabling a manager to act effectively as a steward?
- Which statement about the stewardship theory view of the principal-manager relationship is correct?
- Which measure is most directly aimed at aligning a manager's interests with those of shareholders and so reducing the agency problem?
- Which kind of motivation does stewardship theory emphasise for a manager, as opposed to agency theory?
- Shareholders of Kaveri Ltd. spend ₹4 lakh on auditors and board monitoring, the manager spends ₹1 lakh on bonding (reports and guarantees), …
- Under stewardship theory, which of the following is the most likely source of a steward's motivation?
- Which governance arrangement is most consistent with stewardship theory?
- A promoter-family company is considering two approaches for its professional manager: (I) heavy performance-linked bonuses with strict audit…
Stewardship Theory and Agency Theory of Management in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Stewardship Theory and Agency Theory of Management: frequently asked questions
What is the main difference between stewardship theory and agency theory?
Stewardship theory assumes managers are trustworthy and act in the organisation's interest. Agency theory assumes managers may act in their own interest, so owners need monitoring and incentives. The difference is trust versus control.
What are agency costs in simple words?
Agency costs are the costs that arise because owners and managers have different interests. They include the cost of monitoring the manager, the cost of bonding the manager to act properly, and any loss that remains from decisions that are not ideal for the owner.
How can agency problems be reduced?
Common ways include linking the manager's rewards to the owners' goals, regular monitoring, audits, and an effective board of directors. Better information sharing also reduces the gap between owner and manager.
Is this chapter calculation-based?
No. It is conceptual, and MCQs usually test definitions, assumptions, costs and comparisons. That makes it a good chapter for quick marks if you revise the key terms regularly.