Stewardship theory of entrepreneurship

What is the stewardship theory of entrepreneurship?

Stewardship theory was put forward by Lex Donaldson and James Davis in the late 1980s as an alternative to agency theory, which they viewed as having negative assumptions about managers.

Agency theory views agents (managers and entrepreneurs) as self-interested and opportunistic and views the relationship between principals (investors) and agents as necessarily conflicting. Agency theory is the logic behind providing managers and other employees with stock-based compensation to align the interests of the employees with those of the shareholders by making the employees into shareholders.

In contrast to agency theory, stewardship theory posits that managers and entrepreneurs are motivated to act in the interests of their organizations and principals. The core idea is that the rewards from pro-social behavior have greater utility than individualistic or self-serving behaviors. The steward receives greater personal satisfaction when the organization is successful and therefore acts accordingly.

Since stewards can be trusted to act in accordance with the principals’ interests, they should be afforded greater autonomy to act in ways that further the organization’s success. Accordingly, there is little need to waste resources monitoring, bonding, or creating incentives for stewards—such controls may actually reduce the stewards’ pro-social behaviors by reducing motivation (Argyris, 1964).

Mechanisms that give stewards greater autonomy and discretion include making the CEO the chairman of the board of directors (Donaldson and Davis, 1991). Other studies have, however, found that boards with non-executive chairmen have higher corporate financial performance (Rechner and Dalton, 1991). Recently, Elon Musk was fired as chairman of Tesla Motors’ board for tweeting that he planned to take the company private, when he did not have such intentions. This punishment was intended to reduce agency problems.

Sources:

Argryis, C. 1964. Integrating the individual and the organization. New York: Wiley.

Donaldson, L., and Davis, J. H. (1991). Stewardship theory or agency theory: CEO governance and shareholder returns. Australian Journal of management, 16(1), 49-64.

Davis, J. H., Schoorman, F. D., and Donaldson, L. (1997). Toward a stewardship theory of management. Academy of Management Review, 22(1), 20-47.

Rechner, P. L., and Dalton, D. R. (1991). CEO duality and organizational performance: A longitudinal analysis. Strategic Management Journal, 12(2), 155-160.

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