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CMA Foundation · Fundamentals of Business Economics and Management · Stewardship Theory and Agency Theory of Management

Sundaram Textiles Ltd's promoters trust their CEO, Ms Lakshmi, who has served for 20 years. They give her wide discretion over strategy, spend little on monitoring her, and tie her pay mostly to a fixed salary. Which statement best describes this arrangement?

The arrangement fits stewardship theory. The promoters trust a long-serving CEO, empower her with wide discretion and spend little on monitoring or performance-linked incentives. Agency theory would instead prescribe monitoring, bonding and incentive contracts to control opportunistic behaviour, so those descriptions do not match the case.

  1. AIt is consistent with stewardship theory because it relies on trust, empowerment and low control costsCorrect
  2. BIt is consistent with agency theory because agency costs are being minimised through heavy bonding
  3. CIt is consistent with agency theory because monitoring cost is high
  4. DIt contradicts both theories because the CEO is given discretion

Explanation

Wide discretion, low monitoring and reliance on trust and a long relationship reflect stewardship thinking, which assumes aligned interests and empowers managers. Agency theory would instead stress monitoring, bonding and performance-linked incentives. Hence the heavy-bonding and high-monitoring options do not fit the facts.

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