Agency & Stewardship Theory Flashcards
Agency Theory: Key Assumptions
Traced back to Simon & homo-economicus
The goal is shareholder (i.e., principal) wealth maximization through efficiency
Goal conflict (agent self-interest/principal wealth maximizing)
Information is a purchasable commodity & there is information asymmetry
Moral Hazard: agent may shirk and principal may not know
Adverse Selection: agent misrepresents his/her skills/expertise
Risk preferences may diverge between principal and agent
Bounded rationality: agents sometimes don’t act in their own interests
Agency Theory: Key Propositions
Agent is more likely to behave in the interest of the principal when:
- contract is outcome based (i.e., firm performance)
- principal has more info to verify agent behavior
As information systems go up…so do behavior based contracts (not empirically supported (e.g., CEO contracts are nearly all outcome based)
Outcome uncertainty = behavior based contract
Agent risk adverse = behavior based contract
Principal risk adverse = outcome based
As goal conflict increases so does outcome based contract
Tenure in relationship leads to behavior based contracts
Jensen & Meckling (1976)
seminal cite for agency theory…assumes that human behavior and motivations are relevant in organizing
Jensen (1983)
Theory of firm from economics is really a theory of markets…doesn’t consider people/information problems in firms
Agency costs are the sum of the costs of structuring, bonding, and monitoring contracts
Jensen (1994)
Reply to an article by Michael Brennan (1994)
money incentives are required BECAUSE we are motivated by things other than money (e.g., we need money for other resources)
people can be altruistic and self-interested—altruism does not mean you become a “perfect” agent for others
Whereas the 1976 article focused on agency costs from conflicts of interest, this paper suggests there are also costs from agents’ self-control problems
Eisenhardt (1989)
The review that spawned the majority of agency research
• Problem domain: relationships in which the principal and agent have partly differing goals and risk preferences (e.g., compensation, , regulation, leadership, impression management, whistle-blowing, vertical integration, transfer pricing)
Positivist Research Stream (Jensen & Meckling, 1976)
• Focused largely on the relationship between shareholders and management and how to govern the relationship
Principal-Agent Stream (Perrow, 1986)
• Focused more generally on agency theory and principal-agent relationships of many types (e.g., lawyer-client, buyer-supplier, employer-employee, etc.)
Made clear similarities and differences between AT and other theories
How are conflicts resolved in political models of orgs vs. agency models?
• In political models of orgs, conflicts are resolved through power (e.g., negotiations, coalitions, bargaining)…in agency they are resolved through alignment of incentives
(Eisenhardt, 1989)
What is the difference in focus between contingency theorists and agency theorists?
• Contingency theorists are concerned with reporting relationships/decision-making authority and agency theorists are concerned with how management is compensated (although both assume information asymmetry and bounded rationality)
(Eisenhardt, 1989)
What did Ouchi’s (1979) clan control have to say about goal congruence? What did Agency say?
- Ouchi’s clan control is similar to agency’s proposition that as goal congruence disappears monitoring becomes less important…so motivation issues are less apparent
- Agency added risk aversion which is above and beyond what the control literature discussed (e.g., Thompson (1967) and Ouchi (1979))
(Eisenhardt, 1989)
Compare TCE & Agency (i.e., DVs, level of analysis, IVs)
- Transaction cost and agency assume information asymmetry and bounded rationality…they also have similar DVs (hierarchies/behavior based contracts; markets/outcome-based contracts)
- TCE is concerned with organizational boundaries but agency spans boundaries (unit is the contract)
- IVs are different: TCE its asset specificity and small numbers bargaining…agency it’s risk attitudes, outcome uncertainty, and information systems
(Eisenhardt, 1989)
What’s the empirical support for agency? Where has a majority of research been applied?
- There is support for linking agency variables to contract form (e.g., salary vs. commission; golden parachutes, etc.)
- Been applied most to corporate governance, but it has been employed to look at investor activism, M&A activity, executive compensation, board of directors composition and processes, decision making
Why has AT been criticized?
Ignores trust & interdependence that develop over time in principal/agent relationships
Drove the increase in outlandish executive compensation
Ignores that agents exist within an environment of obligations/social norms
Stewardship Theory
What are the key assumptions?
The self-actualizing model of man
A fundamental belief of stewardship theory is that, given a choice, stewards will choose to pursue pro-organizational, collectivist behaviors over individualistic, self-serving behaviors because of the greater utility they will receive from the former, making stewardship behavior a completely rational choice.
Psychological
- Intrinsic motivation (in contrast to agency theory, which assumes extrinsic motivation)
- Identification with organization (in contrast to agency where there is assumed incongruence of agent/principal goals)
- Use of power (stewards prefer personal power (e.g., expert, relational, liking) that encourages long-term relationships, as opposed to the coercive, legitimate, and rewards powers central to agency theory)
Situational
- Involvement orientation (as opposed to agency’s control oriented) (i.e., self-management, self-control work climates) - Extent to which org values individualism vs. collectivism - Power distance accepted within the ranks of the organization
Davis, Schoorman, & Donaldson (2007)
Man is motivated by needs; higher order needs (Maslow, 1970), growth needs (Alderfer, 1972), and achievement/affiliation needs (McClelland, 1975; McGregor, 1966)
Increasing the internal motivation leads to greater job sat and perf (hackman & oldham, 1980)
Identification predicts pro-organizational behavior (aligns interest between steward and principal)
Stewards use personal/referent power, power does not come from role
Key Propositions:
o ↑ higher order needs, ↑ become stewards
o ↑intrinsic motivation, ↑become steward
o ↑org identification, ↑become steward
o ↑high value commitment, ↑become steward
o ↑use of personal power, ↑become steward
o ↑involvement climate, ↑become steward
o ↑collectivist culture, ↑become steward
o ↑low power distance, ↑become steward
o ↑mutual stewardship, ↑firm performance
o ↑mutual agency, ↓agency costs
If divergent motives exist, the part choosing stewardship feels betrayed and the party choosing agency is opportunistic
Albanaes et al. 1997
• Suggest that stewardship is covered by agency theory…say that principals and agents are self-interested and that agency would allow for goal congruence
