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

The board of Sundaram Textiles Ltd. is deciding the governance approach for its managing director. Under stewardship theory, which approach is most consistent with the theory?

Stewardship theory favours trusting and empowering the manager, so combining the chairman and CEO roles and granting more autonomy fits it. Separating roles, heavy outside monitoring, option-based pay and tight audits are agency-theory control mechanisms meant to curb self-interested behaviour.

  1. ACombine the roles of chairman and CEO and give the MD greater autonomy and empowermentCorrect
  2. BSeparate the roles of chairman and CEO and appoint a majority of outside monitors
  3. CTie the MD's pay entirely to share-price options to curb opportunism
  4. DInstall frequent audits to prevent the MD from diverting funds

Explanation

Stewardship theory trusts managers and recommends empowering structures, such as CEO duality and greater autonomy, to enable quick, unified leadership. The other three are control-oriented mechanisms typical of agency theory.

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