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

The board of Shree Kaveri Textiles believes its CEO will act in the company's long-term interest and therefore gives him wide decision-making freedom with minimal monitoring. Which theory does this approach reflect, and why?

The approach reflects stewardship theory, because the board trusts the CEO and empowers him with autonomy instead of heavy monitoring. Stewardship theory expects such trust to align the manager's goals with those of the owners, whereas agency theory would stress control and monitoring.

  1. AAgency theory, because authority is delegated by owners
  2. BAgency theory, because monitoring costs are avoided
  3. CStewardship theory, because trust and empowerment are expected to align manager and owner interestsCorrect
  4. DStewardship theory, because the CEO is given heavy stock-based penalties

Explanation

Granting autonomy and trusting the manager with little monitoring is the stewardship approach, which favours empowerment and involvement. Agency theory would instead impose monitoring and incentive contracts, and penalties are not a feature of the described case.

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