Agency Theory vs. Stewardship Theory: Key Differences, Contextual Boundaries, and an Integrated Governance Framework

Abstract

For more than 40 years, corporate governance has been a field of research dominated by agency theory and stewardship theory, which have quite different views on the underlying nature of both human behavior and organizational dynamics. Stewardship theory builds on agency theory, which states that managers are self-interested individuals who require monitoring and incentives to work in the best interests of their shareholders, but also argues that managers are intrinsically motivated to act as trustworthy stewards who put organizational success first. Though both traditions have been studied in detail, there has been no consensus so far on how to resolve the theoretical conflicts between the two traditions, nor on the conditions under which they are most applicable. This paper fills this gap by combining the game-theoretic approach with the social embeddedness approach to explore the major distinctions between the two theories' approaches and boundaries. The analysis shows that the differences in predictions from agency and stewardship theory are, in fact, different Nash equilibria due to different psychological and situational factors. In addition, the applicability of each theory is not uniform, but varies with a complex interaction of the micro-level organizational factors and macro-level institutional environments. Based on these, the paper suggests a dynamic integrated governance model, which merges both governance theories to respond to the changing context. The framework offers practical advice on how to create governance systems that are effective and strike a balance between control and collaboration, while enhancing long-term performance.