3.5.1 Stewardship theory

The motivation of a steward is generated by non-financial motives – not to be confused with non-pecuniary benefits from the agency theory. The need for achievement and recognition, the intrinsic satisfaction of successful performance, respect for authority and the work ethic are examples of a steward’s motives (Muth and Donaldson 1998: 6; Letza et al. 2004: 252). Like an agent in the agency theory, a steward acts rationally by pursuing utility maximisation. However, pro-organisational and collectivistic behaviour generates more utility for the steward than individualistic and self-serving behaviour (Davis et al. 1997: 24). In a situation with distorted principal/steward alignment of interests, the steward will behave in the best interest of the principal even when harming his own interest (Davis et al. 1997: 24). The choice between an option that maximises the principal’s utility and an option that maximises the steward’s utility will by definition result in the first option being chosen. The reason is that serving the principal generates the highest utility; therefore the steward’s behaviour can be considered to be rational.

The stewardship theory originates from the organisational psychology and organisational sociology (Donaldson and Davis 1991: 51). Two assumptions ground the stewardship theory: a manager is naturally trustworthy and agency costs are minimised because of the fear of the manager of ruining his reputation by harming shareholders’ interests (Nicholson and Kiel 2007: 588). This means that there is no conflict of interest between owners and managers of the company (Donaldson 1990: 377). Consequently, bonding, monitoring and performance-based compensation – prescribed by agency theory proponents – are unnecessary in a stewardship theory framework. As managers are principally motivated by achievement and responsibility needs, they can best be facilitated by high levels of manager discretion to act for the benefit of the shareholders and to achieve high performance (Donaldson and Davis 1994: 159). A steward’s autonomy should be extended in order to maximise the interests of the beneficiaries. If the manager really fits the characteristics of a steward with pro-organisational inducements, agency costs are diminished, and control might be counterproductive, because it hinders the pro-organisational behaviour by lowering his motivation (Davis et al. 1997: 25). This view has consequences for the optimal board composition, prescribed by stewardship theory proponents. The next subsection deals with the question regarding how to implement the stewardship theory in the composition of the board.