Welcome to Corporate Governance Module Details − Corporate Governance 5fnce002C

Corporate governance theories

Stewardship theory*

*Read details in the articles WEEK 1_Devis et al. (1997) and WEEK 1_Chrisman (2019). Already uploaded in the intranet.

Stewardship theory believes that directors do not inevitably act in a way that maximizes their own personal interests, they can and do act responsibly with independence and integrity. The conflict of interest between stakeholders groups and company should be met by competitive pressures in free markets, backed by legislation and legal controls to protects customers (monopoly and competition law), employee (employment law), consumers (product safety law), suppliers (contract law), society (taxation law, environmental law) (Tricker, 2015, p.66)

Corporate governance theories

Corporate governance theories

Stewardship theory*

*Read details in the articles WEEK 1_Devis et al. (1997) and WEEK 1_Chrisman (2019). Already uploaded in the intranet.

➢In stewardship theory, the model of man is based on a steward whose behavior is ordered such that pro- organizational, collectivistic behaviors have higher utility than individualistic, self-serving behaviors. Given a choice between self-serving behavior and pro-organizational behavior, a steward's behavior will not depart from the interests of his or her organization.

➢A steward protects and maximizes shareholders' wealth through firm performance, because, by so doing, the steward's utility functions are maximized. stewardship theorists have focused on enabling structures for upper managers stewardship theorists focus on structures that facilitate and empower rather than those that monitor and control.

(Devis et al. 1997 see details in p.24-26)

Corporate governance theories

Corporate governance theories

Critiques of Stewardship theory*

*Read details in the articles WEEK 1_Devis et al. (1997) and WEEK 1_Chrisman (2019). Already uploaded in the intranet.

• Stewardship theory does not discuss how bounded rationality and information asymmetry influences the ability of stewards to understand the goals of principals.
• Stewardship theory deals only with the (absence of the) former, implicitly assuming that anyone who enters the organization will be immediately induced to take up the goals of the principal (s) and/or that principals are perfectly capable of deducing the characters, abilities, and fit of potential employees. However, this is an unrealistic assumption.
• firms with stewardship governance may have an even harder time identifying workers who provide substandard output, whether that is a consequence of a want of ability, a want of effort, or both.
• the problems of adverse selection and moral hazard may end up being more troublesome in firms with stewardship governance because they have fewer mechanisms to detect opportunists and poorer workers prior to or after they are employed in the firm (Chrisman, 2019, see details in p.1059-1061)