STEWARDSHIP THEORY

Wright, Mukherji and Kroll (2001) argue that two main paradigms could be employed in order to understand the agents’ behaviour in reality; which are the economic and the managerial perspectives. The economic perspective underscores the rationality and utility maximization of both agency relation parties; while the managerial perspective is interested in understanding the manager’s behaviour and the motives behind these behaviours (Wright, Mukherji and Kroll, 2001). Both perspectives consider the rationality of the manager and his intention to maximize his utility, but applying different perspectives.

The stewardship theory was first introduced by Donaldson and Davis during the meeting of the Academy of Management 19893 (Donaldson, 1990), they propose it as a counterweight to the agency theory as it deals with some of the reductionist assumptions of the agency theory (Pastoriza and Ariño, 2008). Many researchers and practitioners as well view the agency perspective as being completely biased against managers, assuming that money is the only incentive for managers (Nordberg, 2010) and they call for applying a more positive view towards managers and what motivates them. For instance, Donaldson (2005) and Ghoshal (2005) argue that agency theory, as economic based theory, proposes managers from a self-interested view, which is a negative view, thus they call for more positive theories that view managers as positive contributors to the firm. Stewardship theory provides this view, as it considers managers as good stewards rather than opportunistic agents (Donaldson, 1990).

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Recalling from the agency theory, managers are agents who have their own interests that might deviate from the interests of shareholders, managers with deviated interests will seek their personal goals at the expense of shareholders, and hence, there is a need for tools that could align their interests and control management’s behaviour as well.

Stewardship theory has psychological and sociological roots and provides an opposite view compared to the economic model of man that underpins the agency theory. Stewardship is grounded in managers’ benign intentions and incentives (Donaldson, 2005). It provides a behavioural perspective of how managers’ interests can be aligned with shareholders’ interests and the reasons behind this alignment. The central thesis of this theory is that managers are not opportunistic as they are described by the agency perspective. Managers are inspired to be good stewards and responsibly utilise firm’s assets for the best interest of shareholders (Donaldson and Davis, 1991). Managers and shareholders share the same goal which is to efficiently utilise the firm resources to achieve the highest possible performance which should be reflected positively in shareholders’ wealth. Consequently, stewardship theory assumes that there is no conflict of interests between managers and shareholders (Muth and Donaldson, 1998). Moreover, stewardship theory views governance structures as empowering mechanisms rather than controlling mechanisms (Davis, Schoorman and Donaldson, 1997).

Stewardship theory assumes that managers are not self-interested agents motivated by financial motives only; there are other motives (intrinsic motives) that influence, direct and control managers’ behaviours. Intrinsic motives like responsibility, need for achievement, satisfaction of successful performance, recognition, following the business ethics and getting the respect of others (Donaldson, 1990; Muth and Donaldson, 1998; Van den Berghe and Levrau, 2004) influence managers’ behaviours. Considering these motives instead of the self- interested goals, make the conflict of interest results from the separation of ownership and control is invalid or at least not applicable for all managers (Muth and Donaldson, 1998). Managers may exert more than the required effort and enjoy performing responsibly for the sake of personal need of achievement and self- actualization; this kind of agents over evaluate the utility of their achievement than

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the exerted efforts, and it is noteworthy that this kind of agents may not consume prerequisite in their employment (Wright, Mukherji and Kroll, 2001).

Such assumptions, clearly contradict with the self-serving motives and behaviour proposed by the agency scholars, this contradiction in assumptions results from the roots of each theory; the economic roots of the agency theory and the psychological and sociological roots of stewardship theory. Davis, Schoorman and Donaldson (1997) claim that stewardship theory explains the behavioural causes that lead to the alignment of interests between managers and owners. They argue that there are limitations – physiological limitations- to the managerial opportunism assumption of the agency theory, so this assumption of the divergence of interests is not applicable for all managers. Besides, the variation of the executive managers’ performance can be referred to whether the organisational structure facilitates and allows executive managers to take the proper and effective actions or not (Donaldson and Davis, 1991; Davis, Schoorman and Donaldson, 1997). Daily, Dalton and Cannella (2003) support this argument, they consider stewardship theory as a complement and contrast at the same time to agency theory; they indicate that, in many situations, there is a convergence of interests between managers and shareholders’ interests, for instance, prospered financial performance matches with shareholders’ interests and enhances the managers' high reputations in the labour market as professional managers.

Thus, it can be concluded that stewardship theory is based on rationality but from an entirely different perspective; managers, as stewards for the principals, find their utility in achieving the performance goals set for them, and by improving this performance they are serving most of the stakeholders. Consistent with this, Davis, Schoorman and Donaldson (1997) state that stewards perceive more utility from cooperative behaviour rather than self-dealing behaviour, so they choose the alternative that maximizes their utility, which can be considered rationality but from a different perspective.

Agency theory assumes that shareholders lost their control over their firms by hiring a professional management (Muth and Donaldson, 1998). However, stewardship theory argues that the transfer of control from the shareholders to professional managers benefits rather than harming shareholders’ wealth and required for the development of large and complex firms. Managers who are

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identified with the firm and its values, involved in its daily activities and more attached to its success are more likely to act as stewards rather than agents (Muth and Donaldson, 1998; Nordberg, 2010).

Nordberg (2010) mentions that the stewardship theory does not ignore the possibility that managers could be opportunistic and seek their own interests rather than shareholders' interests. Thus, Davis, Schoorman and Donaldson (1997) recommend that both perspectives (the economic agency and the psychological stewardship) should be utilised according to each case and firm circumstances, as it is a principal-manager choice. The perceptions and attitudes of both parties shape the principal-agent relationship and direct it to be either agency or stewardship relationship. Davis, Schoorman and Donaldson (1997) argue that managers’ choice is contingent to their psychological motivation and the way they perceive the situation, likewise the principal. However, Nordberg (2010) mentions that poor results could happen if the shareholders wrongly identify and treat stewards as agents and establish strict control mechanisms, or the shareholders assume that their managers are stewards while they are unfettered agents seeking their own goals; thus, there is a need for governance mechanism that differentiates between stewards and agents.

To summarize, according to stewardship theory, managers are expected to be stewards rather than opportunistic agents, they have that same interests and goals as the shareholders. Thus, the call for monitoring and controlling managers’ behaviour is not totally correct; firms should recognise the suitable monitoring scheme based on whether the manager is an agent or a steward. The application of this theory could have a number of implications for the design of the corporate governance mechanisms and the corporate governance research as well. This stewardship view calls for employing a different view towards managers and appreciate them as experts and consider their specific firm knowledge about the firm, generally apply a positive view towards managers. Also, this theory calls for more executive presentation on the board of directors; the combination of the CEO and chairman post is not detrimental as proposed by the agency theory, and finally, the increase on the managerial ownership will lead to more convergence of interests rather than managerial entrenchment.

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