Agency theory – US Business Here
Friday, October 23

Agency theory

In the past decades, the primary problem of corporate governance has aroused lots of discussion among scholars in economy, management and other fields. The mainstream agency theory deems that the manager will assume opportunism behaviors once there is an opportunity to maximize his or her own interest at the cost of injuring the interest of shareholders. Therefore the corporate governance mainly focus on the control and solve the tendency of opportunism behaviors by mangers. We can’t deny the governance problem is a agency problem. Because the agency problem is a corporate governance problem. However the corporate governance problem is more broad. Recently the Stewardship Theory put forward a totally different theory that the manager is not simply a self-interest party but a reliable and trustworthy steward. Its behaviors mainly motivated by growth, success and responsibilities as well as other social motivations. The object of the managers is to maximize the interest of the mandator. The core issue of corporate governance it the corporation and trust between the owner and managers. The owner should fully authorized to the managers. The behaviors of managers both has features of an agent and a steward. Thus, the problem of the corporate governance should deal with control and corporate with managers.

  The agency theory was put forward by Jensen and Mecking in 1970 to study the information asymmetry and incentive problem within the company. It mainly involves with the contractual relationship between owner and manger. It deems that the interest objects of owner and manager are different with different risk levels. The information of operation and capital usage is asymmetry. The manger was entrusted by the owner to mange the operation of the company and has absolute advantage in information, he or she will maximize his or her own interest at the cost of injuring the interest of the shareholders and any other related parties.( Davis et al , 1997). Therefore, corporate governance should solve the agency problem that raised from the the separation between ownership and managerial authority. The core issue is how the owner use appropriate incentive and control strategy to prevent and reduce the opportunity for resorting to opportunistic behavior by the manager. While in the practice of corporate governance, many solutions were designed and adopted to prevent problems, such as the independent director system, the stock options system and the separation of chairman of board and general manager, the performance of the company does not increase significantly(Finkelstein and Mooney , 2003;Dalt on et al , 1998). Wicked things still happened in the management levels. There are some doubts to the agency theory. Kiser(1999) thinks that the agency theory has ignored the contexts and certain conditions which are very important for the relationship, such conditions and contexts could trigger misconduct of management level.

 Contrary to the hypothesis of agency theory, the stewardship theory deems that the manager is not someone pursuits to maximize one’s own interest but responsible and trustworthy steward of the company. The behaviors of the steward is encouraged by the sense of achievement and the sense of mission. The sense of achievement is achieved by completing challenging work, being responsible, becoming the authority and have the recognition of leaders and colleagues but not only through material payment. The key of corporate governance is not about how to control and monitor managers but through authorize, cooperation and spirit incentives to encourage the managers to be active and creative to generate profit for the owners and company. Obviously, the stewardship theory reveals another kind of relationship between managers and owner. While the hypothesis of the stewardship theory is as unrealistic as the hypothesis of agency theory, or over simplified(Grandori , 2004). The stewardship theory over emphasizing of trust and cooperation will make the management team become a highly cohesion one, the group thinking(Janis , 1972). This will reduce the heterogeneous of the group and affect the efficiency and judgment.

  The agency theory and stewardship theory put forward two different corporate governance strategy base on opposite hypothesis to the manager behaviors. While control and monitor governance or trust governance has serious one-sidedness and oversimplified tendency and will not solve the corporate governance problem effectively. Jensen and Meckling(1994) set up a REMM model. Based on this model, the focus scope and assessment scope of manger includes all items range from fortune, salary, reputation, loyalty, friendship and the sense of achievement. The desire of the manager is limitless and pursue the interest maximization. The core problem is still solve the interest conflicts between manager and ownership and reduce the opportunistic behaviors. The manager is not born agent or steward. It is a choice made by the manager based on the realistic environment, context and individual psychology. The strategy of corporate governance should not be absolute control and monitor or absolute trust.   o

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