THEORIES OF GOOD

GOVERNANCE

Agency Theory, Stewardship Theory,

and Resource Dependency Theory
presented by: Ernest Jed Robles
What is Agency Theory?
• Concentrates on the relationship between agent and principal
• Agent as managers, Principal as stakeholders
• Principal appoints agent for agent to make decisions on behalf of the principal
• Agents are expected to protect the interests of the principal and discharge
their duty diligently
• In the principal-agent relationship, agents are responsible for making
decisions on behalf of stakeholders and they must exercise their duty to the
best of their ability in such a way as to maximize the shareholders’ wealth and
fulfill their expectations.

Nooraisah Katmon. (2018, April 21). Theories in Corporate Governance – Chapter 7. [Video].
Youtube. https://m.youtube.com/watch?v=czjNEYWbleA&t=784s.
Agency Theory: Problems
Two Main Problems:
• Conflict of Interest – occurs when agent acts to fulfill their vested interest
when making economic decisions while neglecting or ignoring the
implications for shareholders
• E.g., paying higher bonuses to themselves regardless of company performance,
enjoying paid holidays, etc.
• Information Asymmetry - It refers to the gap of information between
agents and principals. Managers have more information than the
shareholders. With more information in their hands, managers tend to make
decisions that benefit themselves

Reference: Nooraisah Katmon. (2018, April 21). Theories in Corporate Governance – Chapter 7.
[Video]. Youtube. https://m.youtube.com/watch?v=czjNEYWbleA&t=784s.
 Agency Theory: Solutions
• The principal-agent problem occurs when the interests of a principal and agent come into
conflict. Companies should seek to minimize these situations through solid corporate
policy. These conflicts present normally ethical individuals with opportunities for moral
hazard. Incentives may be used to redirect the behavior of the agent to realign these
interests with the principal's concerns.
• Agency theory may be used to design these incentives appropriately by considering what
interests motivate the agent to act. Incentives encouraging the wrong behavior must be
removed, and rules discouraging moral hazard must be in place. Understanding the
mechanisms that create problems helps businesses develop better corporate policy.

Reference: Investopedia. (2020, December 9). What is the Role of Agency Theory in Coroporate Governance?.
Retrieved from https://www.investopedia.com/ask/answers/031815/what-role-agency-theory-corporate-
governance.asp#:~:text=Agency%20theory%20is%20used%20to,without%20regard%20for%20self
%2Dinterest.&text=This%20leads%20to%20the%20principal%2Dagent%20problem.
 Agency Theory: Examples
• One of the most common examples of agency theory can be seen in the
way a government of a country functions. The masses elect political
representatives to run the country in a way that maximizes their interests.
Representatives of different political parties promise the voters to bring
changes in the governing model of the country. However, the electorates of
almost all sovereigns find themselves cheated when their elected candidates
act in an unscrupulous manner after assuming office. Here, the voters act as
principals who elect the government representatives to act as their agents.

Reference: Finance Management. (2018, June 14). Agency Theory in Corporate Governance. Retrieved from
https://efinancemanagement.com/financial-management/agency-theory#:~:text=Another%20common%20example
%20of%20agency,it%20is%20meant%20to%20be.
 Agency Theory: Examples
• Another common example of agency theory is between the employees and
employers of an organization. The employees are hired to work in
accordance with the objectives of the organization. However, the growing
number of corporate scams shows that this relationship is not always taken
in a way it is meant to be. The employees work against the ethics of the
organization causing it huge financial and reputational damage.
Sometimes, the loss caused by such corrupt employees is beyond repair
and an organization has to wind up its business altogether

Reference: Finance Management. (2018, June 14). Agency Theory in Corporate Governance. Retrieved from
https://efinancemanagement.com/financial-management/agency-theory#:~:text=Another%20common%20example%20of
%20agency,it%20is%20meant%20to%20be.
What is Stewardship Theory?
• In Stewardship theory, company executives protect the interests of the
owners or shareholders and make decisions on their behalf. Their sole
objective is to create and maintain a successful organization so the
shareholders prosper. Firms that embrace stewardship place the CEO and
Chairman responsibilities under one executive, with a board comprised
mostly of in-house members.This allows for intimate knowledge of
organizational operation and a deep commitment to success.
• The stewardship theory of governance has a clear objective of shareholder
satisfaction.
• Stewardship governance requires that a CEO be trustworthy and willing to
put personal gains aside for the good of the organization.

Reference: Anita Flynn. (2018, April 5). Stewardship Theory of Corporate Governance. Retrieved from
https://yourbusiness.azcentral.com/stewardship-theory-corporate-governance-29164.html
 What is Stewardship Theory?
• For stewardship theory, managers seek other ends besides financial
ones. These include a sense of worth, altruism, a good reputation, a
job well done, a feeling of satisfaction and a sense of purpose. The
stewardship theory holds that managers inherently seek to do a good
job, maximize company profits and bring good returns to stockholders.
They do not necessarily do this for their own financial interest, but
because they feel a strong duty to the firm.

Reference: Walter Johnson. (2019, January 13). Stewardship Theory of Corporate Governance. Retrieved from
https://bizfluent.com/info-7747808-stewardship-theory-corporate-governance.html
Stewardship Theory

• Stewardship theory holds that individuals in management positions

do not primarily consider themselves as isolated individuals. Instead,
they consider themselves part of the firm. Managers, according to
stewardship theory, merge their ego and sense of worth with the
reputation of the firm.

Reference: Walter Johnson. (2019, January 13). Stewardship Theory of Corporate Governance. Retrieved from
https://bizfluent.com/info-7747808-stewardship-theory-corporate-governance.html
 What is Resource-Dependency Theory?
• The goal of an organization is to minimize its independence on other organizations for
the sup[ply of resources and to find ways to make resources available. This is because
every organization need resources to survive and this leads to the interdependence to
other firms.
• The interdependence leads to uncertainty and this is not good for the future survival
of the business because other firms control the supply of the resources that we need
in running our business.
• Firms need to have pool of resources or to form a coalition to survive in their business
endeavor.

Reference: Nooraisah Katmon. (2018, April 21). Theories in Corporate Governance – Chapter 7. [Video]. Youtube.
https://m.youtube.com/watch?v=czjNEYWbleA&t=784s.
Resource Dependency Theory: Examples
• Mobile phones are a product of an interdependent companies. For example,
another company is supplying the chipsets, while another supplies the camera
lenses, and another provides the operating system. This manifests an
interdependency of the company to the different suppliers because the products
they supply are essential in the completion of a mobile phone. However, to reduce
this, mobile phone companies must devise a way to produce the materials or form
a coalition with the suppliers to ensure the survival of the business.
• This is also where the role of the board is significant because they will help secure
and acquire the crucial resources of the organization by their external linkages to
the environment

Reference: Nooraisah Katmon. (2018, April 21). Theories in Corporate Governance – Chapter 7. [Video]. Youtube.
https://m.youtube.com/watch?v=czjNEYWbleA&t=784s.