Stewardship theory suggests that directors focus on managing the company's resources. It is in opposition to the agency theory of top management's self-interest. Therefore, agency cost is not necessary. Directors have an intrinsic interest in protecting the business assets.
What's the stewardship theory
This theory holds that top managers will act in the organisation's best interests, driven by personal satisfaction. As stewards, directors want the success of the company. They work as a team to achieve the organisation's goals and objectives.
Usefulness of stewards
Directors' main reason is to build their individual reputation while building the company. Stewards see the organisation’s success as theirs. You may have heard of directors who achieve goals. Anything they put their hands on, works. Therefore, they achieve shareholders' wealth maximisation while building their personal growth.
Stewardship theory shows that directors are responsible and accountable for the company's assets. They provide annual reports to shareholders as proof of their accountability. Unlike agents, stewards are built on mutual trust. Therefore, no agency cost.
Of course, annual reports are audited. It is not for monitoring reasons. But to ensure compliance with policies, standards, and the accuracy of financial records.
In the stewardship theory of corporate governance trust is important. Shareholders trust that top management will be responsible and accountable for the organisation's resources. Directors believed they would be compensated for their efforts.
Directors seem to shift from being stewards to becoming agents. How? At the growth stage, the company's directors are the owners. So, they act as stewards. However, as it grew into a stock market company, the top management changed from steward to agent.
Reward of stewardship
There are Intrinsic and extrinsic rewards of stewardship.
Intrinsic rewards are the rewards for the effort the manager puts into the business growth. They are the directors' personal development, reputation, and achievement of the Company's goal. When executive managers achieve their intrinsic rewards, it means success.
Extrinsic rewards of stewardship theory focus on directors' external rewards. It includes recognition awards, financial compensation, promotions, and job security. Extrinsic rewards help top managers to know that their efforts are not in vain.
In final words, stewardship theory explains how top management directs businesses. They gatekeep the business resources and take responsibility and accountability. These C-suite professionals believe that the company's success is theirs.