Difference Between Agency And Agency Theory

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Agency Theory Agency theory is a form of corporate governance where the role of the board of directors is to act as an independent intermediary between two entities. The board of directors is basically the governing body that facilitates the interaction between the principles and the agents. The principles or shareholders, are the entities which bring the resources to the firm from investments. The agents on the other hand are the people who utilize the resources of the principles to conduct their day to day operations to drive growth and value to the shareholders. All of the principles and agents have different expectations, needs and interests so therefore the board of directories acts as the arbitrator between these two entities …show more content…
In agency theory the governing body is the board where in stewardship theory the governing body is the stewardship team which is made up of the board as well as the agents. The next difference is how the two theories sees the agents. In agency theory it is understood that if the agents are left alone they will make decisions based on their own self-interests and not to the principles. This is why agency theory looks to govern the agents and principles from the board. On the other hand, stewardship theory believes that the agents will act in the best interests of the shareholders if given authority and responsibility. Since they are part of the stewardship team with the board they receive large incentives to act in the best interests of the shareholders. Agency theory uses a contract between the principles and the agents where stewardship theory utilizes a stewardship team to ensure parties are acting in the best interest of the shareholders. Agency theory creates much more accountability of the directors since they are solely the decision makers where stewardship theory creates an atmosphere of less accountability of the directors since they are only part of the stewardship team and the decision making is handled by both the board and the agents on the stewardship …show more content…
I do however tend to lean more towards the stewardship theory since the board is nominated and elected by the shareholders and the decision makers are made up of elected officials as well as agents of the firm. This to me seems like it would foster more diverse ideas and thinking since the decision-making is being done collectively. I also like stewardship theory better than agency theory because it utilizes individual responsibility and trust rather than control like in agency theory. I tend to believe agents work better when they are not micromanaged or controlled like a hawk and this gives the agents the freedom and ability to think outside of the box. Lastly, I also weigh long terms goals higher than short term goals because I think if you are too involved in short term goals you can lose out on greater opportunities. An example of this is Kodak since they were a leader in photography products but since they were too narrow minded they never saw the giant opportunity in front of them in digital cameras and sensors until it was too late. All in all, both theories are useful in reducing the agency problem but with anything there is never an absolutely perfect solution to the