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

Which of the following would a stewardship theorist, rather than an agency theorist, most likely recommend to reduce agency costs in a company?

A stewardship theorist would recommend giving managers more autonomy and trust, because stewards are assumed to be motivated by organisational goals. This reduces the need for costly control. Audits, penalties and role separation come from agency theory, which assumes opportunistic managers.

  1. AHeavy monitoring through frequent external audits
  2. BStrict performance-linked penalties for managers
  3. CGiving managers greater autonomy and trust, since they act in the organisation's interestCorrect
  4. DSeparating the roles of chairman and chief executive to curb opportunism

Explanation

Stewardship theory assumes managers are collectivist and motivated to serve the organisation, so it favours empowerment and trust, which lowers control costs. The other options reflect agency theory's assumption of self-interested agents needing monitoring and incentives.

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