Agency Theory
This theory focuses on the relationship between company owners (shareholders) and managers. It assumes that managers may not always act in the best interest of owners, so strict monitoring and incentives are used to align their goals.
Transaction Cost Economics
This theory looks at the costs of running a business, especially when dealing with contracts and transactions. It aims to minimize these costs by organizing the company efficiently and using contracts to manage risks.
Stewardship Theory
This theory believes that managers are trustworthy and act in the best interest of the company. It focuses on building trust and collaboration between managers and owners for long-term success.
Difference Between Agency Theory, Transaction Cost Economics, Stewardship Theory
| Aspect | Agency Theory | Transaction Cost Economics | Stewardship Theory |
|---|---|---|---|
| View on Managers | Managers act for their own benefit. | Managers try to reduce business costs. | Managers act for the good of the company. |
| Main Focus | Solving conflicts between owners and managers. | Reducing costs of running the business. | Building trust and teamwork between owners and managers. |
| Relationship Type | Often a formal, distant relationship. | Based on contracts to control costs. | Based on trust and cooperation. |
| Manager’s Motivation | Managers are motivated by personal rewards. | Managers aim to cut costs for the company. | Managers are motivated by the company’s success. |
| Control Methods | Strict monitoring and rewards for good behavior. | Uses contracts to control costs. | Less control; focuses on trust and freedom. |
| Trust | Little trust; needs strict supervision. | Focuses on efficiency, not trust. | High trust in managers to do the right thing. |
| Focus on Costs | Focuses on costs due to conflict between owners and managers. | Focuses on reducing transaction and operating costs. | Less focus on costs, more focus on relationships. |
| How It’s Applied | Uses rules and rewards to control managers. | Uses contracts and systems to manage costs. | Encourages teamwork and shared goals. |
| Type of Governance | Strict rules and controls. | Focused on running efficiently and cutting costs. | Focused on people and trust. |
| Belief About Managers | Believes managers may not act in the company’s best interest. | Believes managers work to reduce costs. | Believes managers naturally act in the company’s best interest. |
Similarities of Agency Theory, Transaction Cost Economics, Stewardship Theory
| Aspect | Explanation |
|---|---|
| 1. Focus on Governance | All three theories focus on improving how companies are managed and decisions are made. |
| 2. Efficiency | They all aim to make the organization more efficient by managing resources better. |
| 3. Accountability | Each theory tries to ensure that managers are responsible for their actions. |
| 4. Role of Leadership | Leadership is important in all three theories for achieving organizational goals. |
| 5. Goal Alignment | All try to align the goals of the company and the people working in it. |
Which Theory is Better?
It depends on the type of company:
Agency Theory is best for big organizations where owners and managers don’t fully trust each other. Strict rules, audits, and rewards work well here.
Transaction Cost Economics is great for companies trying to lower costs and run efficiently.
Stewardship Theory works best when there is trust between owners and managers, like in family-owned businesses or companies with strong teamwork.
If a company values trust, collaboration, and long-term success, Stewardship Theory is the most effective. But for large, complex businesses, Agency Theory may be more practical because it ensures accountability through strict control.