Agency & Stewardship Flashcards
Agency Theory
- Agency theory (born from economics), diffuse into business schools, political science, law, and sociology.
- At this point all economic theories of the firm where really more theories of the market
- no theory which explains how the conflicting objectives of the owner-managers are brought into equilibrium
(Principal-Agent problem)- 6 tenets:
If both parties to the relationship are utility maximizers, there is good reason to believe that the agent will not always act in the best interests of the principal.
.
1) Incongruent goals (Adam Smith 1776-opening quote)
2) Risk Aversion (Arrow ‘65), The theory of risk aversion
3) Information asymmetry “hidden information” (Arrow,1985)
4) moral hazard, or what Arrow (1985) labels “hidden action.”
5) Self-Interest: “pursuing self-interest with “guile” (Williamson 1975). Shirking/Opportunistic
6) Bounded Rationality (Simon ‘45)
Culminates w/ Jensen&Meckling’76:
Agency theory can tell us:
1) why a manager will choose a set of activities for the
firm such that the total value of the firm is less than it would be if he were the sole owner.
2) why his failure to maximize the value of the firm is perfectly consistent with
efficiency.
3) why the sale of common stock is a viable source of capital even though managers do not literally maximize the value of the firm.
Steps taken by Principals: bridge information asymmetries (see Bode’11), monitoring & renegotiating contracts, and reducing agency costs by aligning interests.
Character/Trust in relationship (not part of the economic paradigm but part of the sociological/management “school”)
Jensen & Meckling 1976/83
The organization is a “nexus of contracts” for the individuals involved in the organization.
The foundational work for Agency Theory
Agency theory can tell us:
1) why a manager will choose a set of activities for the
firm such that the total value of the firm is less than it would be if he were the sole owner.
2) why his failure to maximize the value of the firm is perfectly consistent with
efficiency.
3) why the sale of common stock is a viable source of capital even though managers do not literally maximize the value of the firm.
‘83 - Agency costs are the sum of the costs of structuring, bonding, and monitoring contracts.
- The Theory of firm from economics is really a theory of markets…doesn’t consider people/information problems in firms
Arrow (1985)
Information asymmetry “hidden information” (Arrow,1985)
moral hazard, or what Arrow (1985) labels “hidden action.”
Eisenhardt, 1989
- Review the literature (this paper bridges agency theory into MGMT literature).
- Breaks the stream into 2 streams
1) Principal-Agent - general theory (with mathematical proof)
2) Positivist - identify governance that fixes the agency problem.
Jensen (1994)
- There is no such thing as a “perfect agent” even mother Theresa acts out of self-interest (Self-interest theory is consistent with altruistic behavior).
- REMM (Resourceful, Evaluative Maximizers) -normative model of how humans should behave
& PAM models (Pain Avoidance Model), captures nonrational behavior (how humans actually behave)
Agency Costs = The monitoring costs by principal +bonding costs by the agent+residual loss.
*His early work focused on the agency costs arising from lack of strong contracts, whereas this article introduces agency costs arising from non-rational behaviors of agents (bridging in more social-psychology into the agency problem).
**Students and managers are excited by the central ideas of agency theory, including the idea that their are many ways to try to align interests and overcome the agency problem.
Davis et al 1997
Stewardship theory:
REPS
-Rooted in pscyh & soc (think McGregor’60 Theory Y and Maslov’43).
-Economic Man (fully self-serving) Self-actualizing Man.
-PowerFocus(coercive/institutional)(Informal/Personal)
-Stewards value outcomes that benefit the collective.
Albanese (1997)
Critiques Davis/Stewardship theory
- Says Davis mischaracterizes Agents as low order, extrinsicly focused, self-servers.
Davis (1997b), Rebuttal
reply to albanese (1997)
- they say that stewardship should stand alone as its own theory and combining agency and stewardship theory produces a more complete picture.
- My takeaway: “Stewards” are just a specific type of agent that value outcomes that benefit collectives they are a part creating a new theory called stewardship theory adds no value.
Tosi, 2000
Meta that showed little evidence of the agency problem
“that management financial incentives —-> performance”
Nyberg (2010)
- Criticizes Tosi (2000) methods, did not match short/long term incentives (pay) with short/long performance
- Aligned CEO /Shareholder interests —+—-> Performance.
Bouillon et al (2006)
Test agency vs Stewardship (result is both are valid)
METHOD: Hospital Managers - 592 hospitals
- Managers are not motivated by opportunism alone
- Goal congruence is not solely based on selection/contracts
but..
- Goal congruence —> Performance
Bolvie et al (2011)
Highlights the Psychological factors in the minds of agents
1) CEO org identification —-+—-> Performance (reduced agency costs)
2) Board Independence —+—-> Performance
(except when CEO org ID is high, because in that situation the CEO acts as a steward (not using the company jet for personal use).
