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

The board of Kaveri Textiles Ltd. gives its managing director wide decision-making freedom, combines the roles of chairman and MD, and relies on trust rather than tight monitoring. Which theoretical view does this governance approach best reflect?

This approach reflects stewardship theory. Giving the managing director wide autonomy, combining chairman and MD roles and relying on trust rather than close monitoring all assume the manager is a trustworthy steward, whereas agency theory would favour separating roles and strengthening control.

  1. AAgency theory, because it reduces agency costs through monitoring
  2. BStewardship theory, because it empowers a trusted manager and reduces controlCorrect
  3. CScientific management theory, because it standardises tasks
  4. DTransaction cost theory, because it outsources decisions

Explanation

Granting autonomy, unifying chairman and MD roles and relying on trust are hallmarks of stewardship theory. Agency theory would instead stress separation of roles and monitoring, so the first option is wrong.

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