2008, Grundei, Are Managers Agents or Stewards of FF

See discussions, stats, and author profiles for this publication at: https://www.researchgate.
net/publication/263613792
Are managers agents or stewards of their principals?:

Logic, critique, and reconciliation of two conﬂicting
theories of corporate govern....
Article in Journal für Betriebswirtschaft · September 2008

DOI: 10.1007/s11301-008-0038-2
CITATIONS READS
18 1,287
1 author:
Jens Grundei
Quadriga University of Applied Sciences
49 PUBLICATIONS 226 CITATIONS
SEE PROFILE
Some of the authors of this publication are also working on these related projects:
Behavioral Corporate Governance (BCG) View project
HR Governance and Management/Leadership Systems View project
All content following this page was uploaded by Jens Grundei on 23 August 2018.
The user has requested enhancement of the downloaded file.

J Betriebswirtsch (2008) 58: 141–166
DOI 10.1007/s11301-008-0038-2
STATE-OF-THE-ART-ARTIKEL
Are managers agents or stewards of their principals?

Logic, critique, and reconciliation of two conflicting theories
of corporate governance
Jens Grundei
Received: 23 November 2007 / Accepted: 22 July 2008 / Published online: 16 August 2008
© Wirtschaftsuniversität Wien, Austria 2008
Abstract Agency theory has been the dominant framework for a theoretical concep-
tualization of corporate governance. According to this view, the governance problem
of uncertainty about managerial behavior can be solved by assuming opportunistic
behavior and setting up governance mechanisms to curtail opportunism. However, the
adequacy of agency theory has recently been challenged because distrust-based gov-
ernance mechanisms that are in line with the theory’s recommendations have been
ineffective to avoid managerial misconduct. Moreover, agency-based control and in-
centive systems have even been accused of being harmful. Stewardship theory has
been proposed as an alternative approach. Building on a contrasting assumption about
managerial behavior, this approach recommends trust-based governance designs that
may, however, result in a one-sided and potentially disadvantageous system, too. On
the basis of an in-depth analysis and critique of both theories this paper explores
ways to either separate or combine the rival approaches. Due to shortcomings of
these strategies a new perspective for the design of corporate governance systems is
presented that opens the possibility of overcoming the theoretical tension.
Keywords Agency theory · Control · Corporate governance · Stewardship theory ·

Trust
1 Introduction
Corporate governance is commonly understood as the legal and factual system by

which companies are directed and monitored (cf. Hopt and Prigge 1998; Cadbury
2000; v. Werder 2003). Over the last several years, a marked attempt has been made
J. Grundei (u)
Fachhochschule für Oekonomie und Management, Bismarckstraße 107, 10625 Berlin, Germany
e-mail: fom@jensgrundei.de
13
142 J. Grundei
to devise more effective regulatory rules by passing new laws and codes of conduct
in order to solve the problems of corporate governance. The most fundamental gov-
ernance problem is that, under the separation of ownership and management, future
behavior of managers remains uncertain and there is a potential clash of interests
between the organization and its top management. Prominent cases of managerial
misconduct in the recent past have demonstrated the practical relevance of this prob-
lem. Two issues that are currently subject to much debate are excessive remunerations
of top executives and the sub-prime crisis in the banking industry.
The dominant theory which is applied to address the governance problem is
agency theory (e.g., Zajac and Westphal 1998; Daily et al. 2003). However, agency
theory has been subject to a variety of criticism (e.g., Donaldson 1990; Müller
1995), suggesting that agency-based prescriptions for the proper design of gover-
nance mechanisms1 may be ineffective at best and detrimental at worst. Hence, some
writers propose that governance mechanisms that are rooted in agency theory may
not be part of the solution but, rather, be part of the problem. Stewardship theory has
been proposed as an alternative approach, which is, however, also subject to criticism
as it is based on extreme, yet different, assumptions as well. As a consequence, there
are two rival theoretical approaches that make contradictory recommendations for the
design of corporate governance systems (Tosi et al. 2003, p. 2055), each involving ad-
vantages as well as disadvantages. Hence, it seems to be not recommendable to rely
on either one theory alone to tackle issues of corporate governance.
Against this background, this paper makes several contributions. First, I will pro-
vide an in-depth analysis of the two conflicting theories of corporate governance
regarding the design philosophies grounded in each of them as well as the most rele-
vant criticism (Sect. 2). Next I explore two alternative ways to address the theoretical
tension: separation and combination (Sect. 3). Due to the problems these strategies
entail, I will finally present and discuss an alternative approach that has greater po-
tential to overcome the theoretical tension (Sect. 4). The paper ends with concluding
remarks and a consideration of implications for research and practice (Sect. 5).
2 Rival approaches to corporate governance: Agency theory vs. stewardship

theory
2.1 Agency theory
2.1.1 Logic of the theory
Rooted in financial economics, agency theory’s starting point is the phenomenon that
in the modern corporation share ownership is dispersed and separated from manage-
rial control over the corporation (Berle and Means 1968) (see Table 1, based in part
on Sundaramurthy and Lewis 2003). Accordingly, the corporate governance prob-
1The term governance mechanism is used to denote particular instruments such as, e.g., the form
of executive remuneration or board committees, whereas a governance system comprises all relevant
mechanisms.
13
Are managers agents or stewards of their principals? 143
Table 1 Contrasting agency theory and stewardship theory of corporate governance

Agency theory Stewardship theory
Theoretical basis Economics Organizational psychology
and sociology
Performance criterion Shareholder value Interest of the company/
Stakeholder value
Owner–manager-relationship Goal conflict Goal alignment
Model of man Individual opportunism Pro-organizational behavior
Managerial motivation Extrinsic Intrinsic
General approach to uncertainty – Distrust – Trust
about managerial behavior – Avoidance – Acceptance
Representative design – Monitoring as primary – Advice as primary
recommendations board role board role
– Independence of directors – Large discretion for
– Sharing decision rights management decisions
– Incentives – Fixed salary
lem is modeled as one between suppliers of finance to a corporation (the principals)

and the managers who run the corporation as agents of their principals (e.g., Jensen
and Meckling 1976; Fama 1980; Shleifer and Vishny 1997). The principals want to
make sure that they get back their money as well as a return on their investment and
that their funds are not wasted in unattractive projects. However, since future con-
tingencies are hard to foresee, the contract between the investors and the managers
remains incomplete and managers end up with substantial discretion for the alloca-
tion of funds. As a consequence, there is uncertainty about the aptitude and the work
motivation, and, hence, the future behavior of the incumbent executives (see also
Jaffee 2001; McEvily et al. 2003). Importantly, agency theory assumes that princi-
pals and agents pursue conflicting interests and that (some) managers will make use
of the situation and behave opportunistically.2 Therefore, where the management of
the company must be delegated to executives, it is advisable to distrust and control
executives in order to minimize the potential abuse of delegation; governance mech-
anisms, therefore, are conceptualized as deterrents to managerial self-interest (Daily
et al. 2003).
For instance, the board of directors (one-tier system) or the supervisory board
(two-tier system), respectively, plays the key role in internal control. The board may
assess managerial decision making and set up incentives in order to align interests
of executives with those of shareholders; ultimately, the board may dismiss man-
agers who do not perform as expected (Walsh and Seward 1990). Hence, assuming
that managers are extrinsically motivated, agency theorists consider that the problem
of opportunistic behavior on the part of the top-managers can in fact be curbed by
establishing various governance mechanisms (e.g., Pettigrew and McNulty 1995).
Proposition 1. Agency theory suggests a distrust-based approach to the design of
corporate governance.
2 Economic theory usually does not argue that all actors always act opportunistically. Rather, it is costly
(if not impossible) to differentiate ex ante between opportunistic and honest transaction partners. There-
fore, as a precaution, opportunistic behavior is supposed (cf. Williamson 1993b).
13
144 J. Grundei
2.1.2 Criticism
Agency theory has been criticized with regard to both the predictions it makes as well
as the assumptions it builds on. A general criticism pertaining to agency theory based
prescriptions is that there seems to be no systematic improvement of performance in
companies which follow the recommendations for designing control-oriented gover-
nance systems (e.g., Daily et al. 2003; Finkelstein and Mooney 2003; Kaufman and
Englander 2005).3 On the one hand, this effect may be due to an inappropriate im-
plementation of governance mechanisms such as incentives and sanctions (cf. Dutzi
2005, pp. 103–104). In fact, this has been the dominant perspective of board reform
across different countries and governance systems in an attempt to constantly in-
crease the effectiveness of management oversight. However, in this discussion neither
the agency perspective in general nor the usefulness of establishing internal control
mechanisms in particular is questioned. Rather, it challenges specific practices and
makes recommendations for a more effective design of board structures and processes
(e.g., Lipton and Lorsch 1992). Accordingly, the basic assumption of self-seeking
executives who have to be closely monitored is not disputed at all.
On the other hand, even corporations whose governance systems conformed with
several concrete prescriptions rooted in the agency tradition were unable to prevent
inappropriate managerial behavior. A well-known example of substantial manage-
rial misconduct in the U.S., Enron had a majority of independent directors on the
board, its CEO did not also hold the position of board chairman, a leadership form
which is referred to as “CEO duality”, and Enron had a stock option incentive plan
in place (see Finkelstein and Mooney 2003). Even beyond this single case, the use-
fulness of such recommendations as having a majority of independent directors (e.g.,
Dalton et al. 1998; Finkelstein and Mooney 2003), avoiding CEO duality (Dalton
et al. 1998), and establishing stock option programs (see Daily et al. 2003; Harris and
Bromiley 2007; Kaufman and Englander 2005) is subject to debate. The inconclusive
findings suggest that agency theory itself may be flawed and agency-based prescrip-
tions for the proper design of governance mechanisms may in fact be ineffective or
even harmful. These effects essentially seem to be caused by the narrow model of
managerial behavior underlying agency theory which neglects a variety of behavioral
reactions to governance mechanisms and leads to design recommendations which ul-
timately could induce the very behavior they ought to avoid. There is now an evolving
stream of literature which analyzes the implications that (‘effective’) supervision has
on the controllees, i.e., the top-managers. This literature can be subdivided into the
two following lines of reasoning.
Proposition 2. Corporations whose corporate governance corresponds to agency
theory’s prescriptions do not perform better than other firms.
3 The performance implications of corporate governance represent a relatively young field of scholarly
research. Some studies do find positive performance implications. For example, in a laboratory study,
subjects made investment decisions that were more beneficial to the organization under agency compared
to stewardship conditions (Tosi et al. 2003). However, most studies merely show that following the pre-
scriptions of a code of conduct is correlated with higher yields on stock (not corporate performance) (e.g.,
Drobetz et al. 2004). One explanation is that investors believe in the principal-agent model and, therefore,
prefer the stock of those companies that most strictly follow the rules.
13
(1) Ineffectiveness of control systems: The role of managerial entrenchment
Static models examine governance instruments at a given point in time and neglect
behavioral reactions of the controllees. For example, the relative power between top-
managers and the board of directors has traditionally been looked at in static models
(e.g., Pearce and Zahra 1991). However, Pettigrew and McNulty (1995) suggest that
the distribution of power has a dynamic quality, i.e., power sources are used and
mobilized, lead to new rules of the game and context conditions and thus influence
subsequent behavior. More specifically, corporate executives are assumed to not sim-
ply accept limitations of their latitude of action but instead try to maintain or even
increase their discretion and influence (e.g., Herman 1981; Donaldson and Lorsch
1983; Westphal 1998). As a consequence, while the board has a legal mandate to su-
pervise corporate management on behalf of shareholders, the board may be unable
to translate this mandate into effective power over the top managers and, hence, re-
main an ineffective “legal fiction” (Kosnik 1987, p. 166; see also Mace 1971; Herman
1981).
In their seminal article, Walsh and Seward (1990) have explained strategies man-
agers may apply to actively undermine the board’s control role, referred to as (in-
ternal) entrenchment practices (see also, e.g., Wade et al. 1990; Zajac and West-
phal 1996; Shen and Cannella 2002). For instance, managers may use impression
management tactics (e.g., emphasize their positive qualities, employ institutionally
‘correct’ procedures, hide negative attributes) in order to shape person-related as-
sessments. Moreover, scrutiny by the board may be avoided by exerting control
over the board’s agenda, e.g., by packing it with so many issues that little time is
provided for directors to comprehensively discuss initiatives and to critically ques-
tion management (see also Finkelstein and Mooney 2003). In addition managers
may attempt to set a norm that renders asking critical questions inappropriate (see
Mace 1971; Alderfer 1986). Especially during times of poor organizational per-
formance managers may prefer to alter situation assessments, i.e., blame a declining
performance on inevitable environmental forces (cf. Bowman 1976; Bettman and
Weitz 1983).
Moreover, managers can try to neutralize the potential sanctions imposed on them
in case of poor performance such as a decline of income or even their dismissal
(Walsh and Seward 1990). In fact, it has been demonstrated that powerful CEOs are
able to evade the implementation of long term incentive plans or to reprice stock
options and thus reduce their income risk (Westphal and Zajac 1994; Pollock et al.
2002).4 Furthermore, despite bad performance, powerful CEOs can often escape dis-
missal (Allen and Panian 1982; Fredrickson et al. 1988; Boeker 1992; Bebchuk and
Fried 2006).
Proposition 3. Top managers will react to governance mechanisms such that they will
maintain their discretion and avoid personally disadvantageous consequences and
thus reduce the intended effectiveness of corporate governance.
4In fact, other factors such as firm size predict total CEO pay much better than various measures of firm
performance (Tosi et al. 2000).
13
146 J. Grundei
(2) Dysfunctional side-effects of control mechanisms
The actions of managers analyzed so far could be regarded as a psychological reac-

tance reaction (Brehm and Brehm 1981) to the threat of a reduction of their discretion
over important outcomes. As a result, control mechanisms may, at best, be ineffective.
However, a second line of reasoning has stated that governance systems which are
based on the principles of monitoring and sanctioning may even be harmful as they
tend to worsen the very problem they are designed to solve (Osterloh and Frey 2004).
According to this view, applying agency theory does not lead to ineffective, but,
worse, to wrong design prescriptions which – in a self-fulfilling prophecy – seem to
justify its usefulness. The negative side-effects shall be illustrated by three examples.
The first one refers to the problem that “What gets measured is what gets done”
(Kaplan and Atkinson 1998, p. 681). Accordingly, once objectives are specified and
incentives tied to the realization of these objectives, managers are likely to strive
precisely to achieve the specific objectives (and thus enjoy the rewards contingent
upon goal achievement) at the expense of other, maybe equally important but more
vaguely stated objectives (cf. Kerr 1975). Especially when the principal’s objectives
are complex or multifaceted, the agent is unlikely to act in the more general interest
of the principal when incentives are offered for the attainment of a specific objective
(Hendry 2002). Even worse than neglecting other objectives, a manager may become
bent on achieving the specified objective and on avoiding failure at all costs, and may
therefore take any action that seems necessary, even, for instance, financial misreport-
ing in order to pretend goal achievement or avoid losses, e.g., when stock options are
out-of-the-money (cf. Schweitzer et al. 2004; Kaufman and Englander 2005; Harris
and Bromiley 2007; Zhang et al. 2008).
A related problem that has received substantial attention in organization theory is
what has been called a “crowding out effect” (Osterloh and Frey 2004; also Ghoshal
and Moran 1996; Ghoshal 2005). This problem may occur because intrinsic and ex-
trinsic motivation do not simply sum up. According to cognitive evaluation theory
(Deci 1975), monitoring may reduce perceived competence and self-determination,
and thus diminish intrinsic motivation of the monitored individual. As a consequence,
managers may lessen their organizational commitment and isolate themselves from
the board of directors (as the source of their frustrations) (cf. Sundaramurthy and
Lewis 2003). A lack of intrinsic motivation may be especially harmful in the execu-
tive suite since top managers are confronted with complex problems and unpre-
dictable environments which require proactive behavior and high levels of commit-
ment. Therefore, a governance system that encourages actors to do the minimum
necessary to collect rewards and avoid punishments instead of triggering positive
contributions is inadequate (Freeland 2006, pp. 24–25).
Finally, there may be yet another unpredicted and undesirable effect on manage-
rial behavior. While agency theory clearly concentrates on the supervisory function
of the board, there is wide agreement that boards have other important roles as well
(see, e.g., Pearce and Zahra 1991; Johnson et al. 1996). Especially, boards should pro-
vide advice on strategic issues to the top executives. Hence, board effectiveness is not
a one-dimensional construct. As a consequence, board reforms such as increasing di-
rector independence may facilitate effective board control, but at the same time can
13
interfere with advice seeking and giving, as managers may fear to appear weak to
those who also have to evaluate their achievements (see Westphal 1999).
These negative effects must be taken seriously as they illustrate that the applied
behavioral assumption (i.e., opportunism) matters. Concentrating on establishing
mechanisms for worst cases (i.e., opportunistic behavior) disregards that these very
mechanisms may adversely impact on the behavior of those who would have acted
pro-organizationally. In other words, based on inadequate premises, the theory gen-
erates questionable predictions and recommendations.5
Proposition 4. Distrust-based corporate governance mechanisms will have dysfunc-
tional side-effects if managers do not fit the assumption of opportunistic behavior.
In spite of the problems, neither observed inefficiencies of the governance system
nor specific corporate scandals have lead to fundamental changes of the traditional
governance approach (cf. Clarke 2004); rather, attempts were made to even more rig-
orously implement internal control mechanisms which are in accordance with the
general logic of agency theory (cf. Finkelstein and Mooney 2003; Osterloh and Frey
2004; Ghoshal 2005; Kaufman and Englander 2005).6 For instance, despite lacking
empirical support for a performance-enhancing effect of outsider-dominated boards,
special attention has been paid to the independence of the directors serving on the
board in order to increase the board’s oversight efficacy. This is true for the current
discussion in both the United States and Europe. Westphal (1998) has demonstrated,
however, that an increase in board independence not necessarily results in enlarged
board power over management. Rather, managers try to offset the effects of structural
board independence on important organizational outcomes such as corporate strategy
and CEO compensation through interpersonal influence processes in the CEO-board
relationship. Westphal notes that his findings may indicate inherent limitations to the
corporate board as a control mechanism.
2.2 Stewardship theory
2.2.1 Logic of the theory
With regard to the mentioned shortcomings, stewardship theory has been proposed as
an alternative approach. Stewardship theory tackles the problem of uncertainty about
5 See, for instance, Milgrom and Roberts (1992, p. 42), who admit that the assumption of opportunistic
behavior is an “extreme caricature” of human behavior, yet state that it is not of great relevance that
many individuals would act pro-organizationally without incentive systems. From that it is clear that
economists are inclined to follow Friedman’s (1953) view that (in economics) it does not matter whether
the assumptions are descriptively realistic as long as a theory’s predictions are true. On the contrary, it
does make a difference which assumptions a theory is based on (cf. Bunge 1996; see also Müller 1995;
Clarke 2004, p. 19).
6 It is revealing to consider the legislator’s model of man in this context as it is reflected, for example,
in the following citation of the head of department of company law at the German Federal Ministry of
Justice (translation by the author): “There are human beings at all corridors of power of our corporate
governance system. [. . .] Predominantly, they are concerned with their own benefit, the ‘quick mon-
ey’ [. . .]. This is true [. . .] for all of the several players in the complex corporate governance system.”
(Seibert 2002, p. 419).
13
148 J. Grundei
managerial behavior differently (Table 1). Grounded in organizational psychology

and sociology, this approach builds on the assumption that organizational participants
are intrinsically motivated to achieve their tasks in a pro-organizational manner (cf.
Donaldson and Davis 1991; Davis et al. 1997; Tosi et al. 2003, p. 2055). Accordingly,
there is no apparent need for incentives or sanctions; rather, completing challeng-
ing tasks and exercising responsibility will be satisfactory for its own sake, without
any extrinsic incentive to do so. Potential deficiencies of the manager’s motivation or
capability to successfully perform the task are assumed to be non-existent. Goal con-
flicts, too, will either be absent or shall be overcome by the steward’s proclivity for
cooperative behavior. The steward is conceptualized as an (intendedly) rational actor,
too. However, it is the steward’s main preference to act in the best interest of his or
her organization which is conceived to be in his or her own best interest, too (Davis
et al. 1997, p. 24–25). Based on these premises, stewards can be trusted to behave in
the way that is expected of them.
Trust is a core concept of this approach which can be defined as “the willingness
of a party to be vulnerable to the actions of another party based on the expectation
that the other will perform a particular action important to the trustor, irrespective
of the ability to monitor or control that other party” (Mayer et al. 1995, p. 712, ori-
ginal in italics; see also Rousseau et al. 1998). A trust-based approach to corporate
governance builds on a behavioral assumption which stands in contradiction to the as-
sumption of opportunistic behavior applied by students of organizational economics
such as agency theorists. Accordingly, organizational actors are generally conceived
of as capable and motivated to behave pro-organizationally (cf. Beccerra and Gupta
1999; Mayer et al. 1995; Sitkin 1995).
Proposition 5. Stewardship theory suggests a trust-based approach to the design of
corporate governance.
It must be noted, though, that this is again an assumption about managerial be-
havior, so uncertainty about managerial behavior remains, but – due to the positive
expectation – is accepted. Apparently, building on this assumption leads to assess-
ments regarding the usefulness of alternative designs of corporate governance which
are directly opposed to those of agency theory (see Muth and Donaldson 1998). Two
concrete examples shall illustrate the implications of the two different theoretical ap-
proaches. First, a lively debated question regarding the effective design of the one-tier
governance system is whether or not the CEO should also be chairman of the board
(CEO duality). From an agency perspective, granting discretion entails an agency
problem holding the risk that managers do not behave in the way that is expected
of them (cf. Mills and Ungson 2003). As a consequence, CEO duality should be
avoided in favor of an independent board chairperson. Thus, the board may effec-
tively monitor managerial actions and curtail managerial opportunism. In contrast,
from a stewardship perspective pro-organizational behavior of managers is best fa-
cilitated when they have high authority and discretion. Hence, a leadership model
with the CEO also chairing the board of directors would be favored as it provides the
CEO-chair with the unambiguous responsibility and power to determine the strategic
direction of the corporation (see Donaldson and Davis 1991). Yielding autonomy is
a recognized way of organizing that may lead to higher degrees of intrinsic motivation
13
(e.g., Hackman and Oldham 1980; Osterloh and Frey 2004) and, in effect, to higher
task performance. Consequently, from the point of view of the principal, the trust s/he
has ‘invested’ in the relationship with the steward has been justified. The meaningful-
ness of another mechanism for improving the German corporate governance system
is discussed by Böcking et al. (2004). The authors argue convincingly, that establish-
ing an audit committee in order to strengthen oversight of top management might be
justified from an agency point of view; however, from the stewardship perspective an
advisory body to support the executives might be more desirable.
2.2.2 Criticism
Stewardship theory is relatively young and has not undergone systematic empirical
testing. Extant studies are rare, concentrate on few governance mechanisms and do
not provide a clear picture as to the performance implications of governance designs
that follow stewardship theory (see Dutzi 2005, pp. 156–159). Regardless of that it
can be argued that exceeding levels of (‘blind’) trust may also be a misplaced strategy
for designing corporate governance. In some cases, a trusting person may be actually
cheated (Beccerra and Gupta 1999). As Sundaramurthy and Lewis (2003, p. 400) ex-
plain, “[s]tressing a collaborative approach, directors and executives seek to become
a cohesive ‘governing team.’”. If a relationship is entirely build on trust, goal align-
ment, and cooperation, cohesion may become so strong that it prevents warranted
critique of management’s course of strategy. Information supplied by top manage-
ment to the board will not be challenged (McEvily et al. 2003). In a similar vein, it has
been argued that situations of extreme cohesion combined with high pressure to reach
a decision may lead to the phenomenon of groupthink which has been characterized
as “a mode of thinking that people engage in when they are deeply involved in a co-
hesive in-group, when the members’ strivings for unanimity override their motivation
to realistically appraise alternative courses of action” (Janis 1972, p. 9).
If critical questioning of management is neglected as a result of excessive trust,
directors may not notice erroneous developments. For example, high past organiza-
tional performance may lead decision makers to show marked degrees of strategic
persistence due to a strong belief in the correctness of their strategies (see Ham-
brick et al. 1993; Audia et al. 2000). Correspondingly, in a low performance context,
defensive behavior may serve a ‘face-saving’ purpose and may result in escalating
commitment to a failing course of action if control is suppressed (cf. Staw 1981;
Sundaramurthy and Lewis 2003). Yet, even in the absence of self-interest, monitor-
ing may be a useful element of a governance system. Like all human beings, top
executives are subject to bounded rationality and (therefore) judgmental fallibility.
As a consequence, a board could still be an appropriate governance instrument, for
detecting ‘honest incompetence’ among top managers (cf. Walsh and Seward 1990;
Sapienza and Gupta 1994; Hendry 2002) or for avoiding distorted perceptions (cf.
Hodgson 2004).
Proposition 6. Trust-based corporate governance mechanisms will have dysfunc-
tional side-effects if managers do not fit the assumption of pro-organizational behav-
ior.
13
150 J. Grundei
Table 2 Potential design errors

Actual behavior Agent Steward
Presumed behavior
Agent – Distrust – Distrust
– Opportunism will be detected – Intrinsic motivation will
be crowded out
Steward – Trust – Trust
– Opportunism remains undetected – Pro-organizational behavior
is fostered
As an interim result it can be summarized that the assumption that top execu-
tives are honest, dutiful stewards is probably just as unrealistic and oversimplified as
the assumption of opportunistic agents (see also Grundei 1999; Shen 2003; Grandori
2004). Hence, it may just as well lead to undesirable, error-prone forms of gover-
nance. Therefore, both general behavioral assumptions make the mistake to lump
together the complexity and variety of human behavior in a single narrow assumption,
and, for that reason, each theory encompasses a certain potential error for the design
of governance systems (see shaded cells in Table 2). Put differently, core assumptions
of a theory must be realistic in order to meaningfully design corporate governance (cf.
Tsang 2006).
3 Addressing the theoretical tension
Distrust- and trust-based forms of corporate governance are rooted in different the-
oretical approaches which build on opposing behavioral assumptions and thus result
in diverse recommendations for dealing with uncertainty about managerial behavior.
Since neither approach represents a single best way for the proper design of gover-
nance systems, I will next consider strategies for overcoming the theoretical tension.
Building on alternative ways for addressing tensions in organization theory (see Poole
and Van de Ven 1989) I will examine separation and combination as two different
strategies for reconciling the opposing approaches.
3.1 Separation
The idea of separation implies that one approach may operate under certain circum-
stances while the other approach holds under different conditions. With spatial and
temporal separation, two variants can be differentiated.
Spatial separation
Spatial separation clarifies different levels or loci of analysis. If the two theories re-
late to different levels, both may easily be observed at the same time and there might
in fact be no conflict at all. Although in some instances these levels may not have
been sufficiently clarified, in this article I only address the relationship between own-
ers as principals and managers as their agents or stewards, respectively, whereas other
units of analysis that have been studied in the trust literature (see, e.g., Beccerra and
13
Gupta 1999) are not considered. Since the contradiction seems to be pertinent on the
specified level, additional clarification cannot be gained from spatial separation.
However, the idea of spatial separation is closely related to the contingency view
of organization theory (Donaldson 2001) which maintains that the validity of each
model depends on several contextual factors. Since both agency and stewardship the-
ory are most clearly characterized by their divergent behavioral assumptions, each
theory’s applicability hence depends on how accurately the assumption describes ac-
tual managerial behavior. Actual managerial behavior is subject to certain person-
and situation-related circumstances. Taken together, the specific circumstances will
determine which of the two alternative approaches has a higher situational validity.
This basic idea of contingency will be incorporated in the approach developed in
Sect. 4.
Temporal separation
This approach takes time into account. Accordingly, the two contrary assumptions
may hold during different time periods, and each may influence the other through
its prior action. For instance, Wasserman (2006) argues that the context of new ven-
tures is consistent with stewardship theory early, but more consistent with agency
theory later, as ventures mature. Similarly, the idea of temporal separation is reflected
in Shen’s (2003) argument for an evolutionary perspective of the CEO-board rela-
tionship (see Fig. 1, based on Shen 2003, p. 467). This author argues that a newly
appointed CEO has to learn and acquire relevant expertise in order to meet the de-
mands of the CEO’s job. Moreover, at the beginning of the CEO’s tenure, s/he
typically has not enough power for behaving opportunistically. Due to the low dan-
ger of opportunism during the early stages of the job, the CEO does not require much
oversight but, rather, support to quickly learn on the job. In an initial ‘honeymoon pe-
riod’ the development of CEO leadership, therefore, has priority over the control of
managerial opportunism. Over time, however, the CEO will acquire both task-related
knowledge and substantial power which make CEO entrenchment easier. Power may
be obtained over time, e.g., by gaining expertise and prestige, setting up personal re-
lationships, forming coalitions, and staffing key positions with well-disposed mates
Fig. 1 A dynamic perspective of the CEO-board relationship
13
152 J. Grundei
(e.g., Hambrick and Fukutomi 1991; Pettigrew and McNulty 1995; Maitlis 2004).
Consequently, at later stages of the CEO’s tenure, management development will not
be an important issue anymore, whereas control of opportunism gains significance in
the CEO-board relationship.
In sum, the idea of temporally separating the two approaches to governance de-
sign suggests that both trust and distrust are justified, but only during different periods
of time. Remarkably, both Wasserman (2006) and Shen (2003) do not conceive of
control as a prerequisite for developing trust over time, a notion that will be ex-
plained immediately in Sect. 3.2. Conversely, trust precedes control but evades in the
course of time. Moreover, both trust and distrust seem to endure as the basic design
philosophies, since in the end still one of the two ‘extreme’ behavioral assumptions
is chosen, albeit one after another. Unfortunately, it remains unclear how to determine
the point where the board has to shift its focus from CEO leadership development to
the control of managerial opportunism (Shen 2003). Yet another problem is that the
governance instruments themselves have repercussions on the development of man-
agerial behavior. Hence, if early in the CEO’s tenure s/he is not subject to serious
control, it will in fact be easy for her or him to accumulate substantial power up to
the level of unwelcome managerial entrenchment. Finally, some CEOs may already
be quite powerful when they take over their post, depending on the balance of power
that led to this person assuming the office. Hence:
Proposition 7. A temporal separation of an agency/distrust-based and a steward-
ship/trust-based design of corporate governance is not a convincing solution.
3.2 Combination
In view of the problems that are involved with a separation of the two approaches,
I will next consider three alternative ways of combining trust and distrust in corporate
governance.
First, according to Lewicki et al. (1998) trust and distrust are separate dimensions
permitting any combination of high or low, respectively, trust and distrust. However,
if trust and distrust represent functional equivalent ways to cope with uncertainty (cf.
Luhmann 1989), the principal would have to choose between trusting or distrusting
management. Moreover, as the analysis will show, distrust as a general design philos-
ophy finds its expression in a control-oriented design of corporate governance which,
in turn, is not easily combined with a trust-based approach.
If, in contrast, trust and distrust are conceptualized as two ends of one continuum
(Schoorman et al. 2007, pp. 349–350), another way of combining the two approaches
could be called a compromise strategy. Accordingly, instead of combining, e.g., high
trust and high distrust, the solution would be to opt for moderate levels of either
trust or distrust, respectively. While this option seems logically permissible, it implies
to implement compromises for each design component (such as level of managerial
discretion, intensity of control etc.). As a consequence, neither the benefits of the
trust-approach nor those of the distrust approach could be obtained entirely (see also
Gebert 2000).
13
In different but related contexts, i.e., intra- and inter-organizational cooperation,

where comparable problems arise, a third way of combination can be identified. Com-
mensurate with the saying “trust but verify” it has been suggested that a combination
of trust and control would be feasible to foster overall confidence in a relationship.
Accordingly, the psychological state of trust shall be combined with concrete distrust-
based measures, i.e., control. However, the relationship between trust and control is
disputed. Basically, two kinds of relationship between trust and control can be con-
ceived of, which I call synergistic and antagonistic relationship, respectively.
Synergistic relationship: Mutual reinforcement of trust and control
This view starts with the assumption that trust and control are separate concepts that
can be applied in parallel to foster overall confidence and coordination (e.g., Das and
Teng 1998; Adler 2001; Poppo and Zenger 2002). Thus, the positive effects of each
may add up or even enhance one another (synergistic relationship). On the one hand,
trust may support the effectiveness of control systems (cf. Das and Teng 1998). Con-
trol mechanisms may have several dysfunctional side effects such as, e.g., behavioral
displacement, gamesmanship and the like (see Merchant 1985). Therefore, to be re-
ally effective, it seems that control systems require a certain level of (mutual) trust in
order to generate an adequate level of control. However, this line of reasoning seems
to refer to the fact that the supervised party should have some trust in the controlling
party as this would generate understanding for the necessity of being supervised.
On the other hand, control may also be a relevant factor for achieving trust. Es-
sentially, this thought is based on two lines of reasoning. The first one pertains to the
development of trust over time. While people may also have a disposition to trust or
distrust (McKnight et al. 1998), the prevailing view is that trust is based in relation-
ships (Schoorman et al. 2007, pp. 344–345). With regard to a particular relationship
it is likely that specific positive and negative experiences as well as the institutional
environment influence an incremental development of trust. Accordingly, a party may
trust in small ways, observe the consequences, and then trust more or less, depend-
ing on the consequences (Inkpen and Currall 2004). Since controls are evaluations
and may ultimately provide a track record, trust between the parties may eventually
be nurtured and strengthened (Das and Teng 1998). For instance, the owners of Gen-
eral Motors are reported to have developed personal and professional relations of trust
in the CEO Alfred Sloan due to Sloan’s impressive record of success. As a conse-
quence, GM’s owners granted substantial discretion to Sloan (Freeland 2006, p. 299).
The second argument holds that a formal control system may take some of the load
off the actors to verify behavior. Through the protection offered by the control mech-
anism, some energy will be available to turn to the trust-laden approach (cf. Sitkin
1995).
Before I will turn to the contrary viewpoint, maintaining that control mechanisms
will undermine the level of trust in relationships, I want to consider two contra-
arguments which do not necessarily claim that the opposite view is true, but which
question that there is a positive relationship between control and trust. First, both trust
and control could in fact be alternative mechanisms for coordinating relationships
such that one excludes the other. It has been argued that monitoring is only necessary
13
154 J. Grundei
because of a lack of trust (cf. Ouchi 1979; Rousseau et al. 1998). Correspondingly,
in a situation with tight controls, there is neither room nor a necessity for trust. This
view is reflected in the definition of trust adopted here, maintaining that trust is the
willingness of a party to be vulnerable to the actions of another party, irrespective of
the ability to monitor or control that other party (Mayer et al. 1995). Furthermore, it
has been argued that control and trust pertain to different types of relationships where
economic relationships are characterized as rational calculative and trust is reserved
for non-calculative emotional relations (see Williamson 1993a, p. 463: “Calculative
trust is a contradiction in terms.”).
The second point has received only rare attention but nevertheless deserves con-
sideration. Specifically, one must not forget that trust – and also control – in principle
relates to different content domains. For instance, one party may trust another party
to successfully perform task A but not task B (cf. Mayer et al. 1995; Lewicki et al.
1998). Hence, control-generated experiences concerning a specific task-related be-
havior may not necessarily spill over to induce trust in another domain.7 At least
initially, trust seems to be domain-specific; with more and broader experiences it may
become more likely that expectations will apply across domains (cf. Sitkin 1995).
However, experiences could also lead to more and more specific and differentiated
expectations. Even if (general or domain-specific) trust increases due to positive ex-
periences, it may still not result in reduced monitoring because greater trust may
lead the principal to increase his investment and hence his risk which would, in turn,
require to keep effective controls in place (see also Inkpen and Currall 2004).
Antagonistic relationship: control undermines trust
According to the second view, control mechanisms may even be harmful as they
could damage trust in a relationship. This is true at least if control is conceptualized as
behavior or output control but not as a different form of social control such as Ouchi’s
(1979) ‘clan control’ (see also Eberl 2002). To comprehend this problem, it is help-
ful to distinguish between implications for the supervisor and those for the overseen
manager.
There may be two undesirable implications on the supervisor level. The first one
can be derived from an attributional approach, as it has been applied in leadership the-
ory (e.g., Green and Mitchell 1979). Accordingly, a supervising director would try to
explain to himself the causes underlying a manager’s behavior. If a costly control sys-
tem has been implemented (of which the director is a part of), it seems likely that he
will attribute proper conduct of the focal manager primarily to the functioning of the
system rather than to the manager’s integrity (see also Strickland 1958; Sitkin 1995;
Inkpen and Currall 2004; Schoorman et al. 2007). This is due to the fact that in a situ-
ation of uncertainty the overseer cannot be sure whether or not a person’s behavior
has occurred voluntarily. Therefore, a ‘success’ will (also) be attributed to the super-
visor’s attentiveness. If, in contrast, cases of misconduct are attributed to managerial
selfishness (thus avoiding that a share of the responsibility falls on the supervising di-
rector), the necessity of having control mechanisms will be confirmed and existing
7 Likewise, output controls may not reveal much about the behavior and effort of the controllee.
13
controls may even be made more tight. As a result, the supervisor is more likely to
develop ‘trust’ in the institutional context (cf. McKnight et al. 1998) at the expense
of trust in the trustee (crowding out of trust).
The second problem can be referred to as goal displacement, meaning that the
control system may become an end in itself rather than a means to fostering trust
(Sitkin 1995; see also Kerr 1975; Merchant 1985). At least it seems plausible that the
primary purpose of a control system is usually seen in serving as the foundation of
a sanctioning system instead of a means for building trust. As a consequence, control
information may not be used (consciously) to establish trust and no attempt will be
made to substitute trust for control in order to reduce uncertainty.
On the level of the manager, monitoring may also lead to adverse effects that
can be put down to the view that intrinsic and extrinsic motivation may not sim-
ply sum up to an overall level of motivation (cf. Osterloh and Frey 2004). Controls
signal that controllees are not trusted to behave appropriately without them (Pfeffer
1994; Ghoshal and Moran 1996). Therefore, whereas trust and autonomy would prob-
ably enhance perceived competence and self-determination, supervision is likely to
produce the contrary effect. According to cognitive evaluation theory (Deci 1975),
managers’ intrinsic motivation would be crowded out (Osterloh and Frey 2004). Vol-
untary dedication and extra role behavior may shift to compulsory, yet perfunctory
compliance and work-to-rule (Ghoshal and Moran 1996; Ghoshal 2005). Since trust
largely pertains to the (intrinsic) motivation of the trustee, a diminishing motivation –
which was actually caused by the control system – will be observed and will finally
result in a loss of trust and the perception that increased surveillance is required (cf.
Enzle and Anderson 1993). Summarizing, there is a danger of a downward spiral of
control and trust. Hence, the two conflicting approaches cannot be easily combined
either.
Proposition 8. A combination of an agency/distrust-based and a stewardship/trust-
based design of corporate governance is not a convincing solution.
4 Rethinking the design of corporate governance systems: Towards forming

goal-oriented governance configurations
It has been demonstrated that the design of corporate governance systems may induce
unwelcome side-effects if it follows either agency or stewardship theory (Sect. 2).
Moreover, neither a separation nor a combination constitutes a promising way for
a reconciliation of the two approaches (Sect. 3). Therefore, in conclusion I will out-
line a new perspective for the formation of corporate governance which helps to
overcome the controversy.
4.1 Concept
As its starting point the new perspective takes up a basic idea from the concepts of
spatial and temporal separation. Accordingly, there is not a universal ‘best’ strategy
for designing corporate governance systems. Rather, it is mandatory to take relevant
13
156 J. Grundei
contingencies into account (see also Dutzi 2005; Freeland 2006). However, unlike
classical contingency theory would suggest, the contingencies do not determine a par-
ticular structure at the level of the company. Rather, following more recent develop-
ments in the organization design literature that build on concepts of equifinality and
configuration (Gresov and Drazin 1997), contingencies (e.g., the environment) de-
termine the function(s) an organization must perform, but not its specific structures.
Hence, certain functional demands are placed on an organization in a particular situ-
ation (e.g., an information processing demand) and these demands must be met by the
organization (e.g., by providing a certain information processing capacity). As this
capacity is a function of the organization as a whole and is generated by any number
of information processing structures (here: combination of governance mechanisms),
several structural combinations are conceivable that possess the overall required func-
tional capacity (equifinality).
Allowing for (different) functional demands is an important step in corporate gov-
ernance design when universal behavioral assumptions – notably the opportunism
assumption – are set aside, as has been argued for above. The aim of corporate
governance measures, then, is not confined to preventing opportunistic managerial
behavior anymore. Rather, it becomes necessary to concretize the desired behav-
ior that is to be facilitated by the governance system. In other words, it is essential
to develop a more precise picture of the kind of stewardship that is deemed neces-
sary to achieve the overall company goals. The desired form of managerial behavior
can be called critical behavior because this behavior is critical for a corporation’s
performance. At least in general it is possible to specify critical behaviors for top
managers. For example, v. Werder and Grundei (2001) have made an attempt to estab-
lish a system of “generally accepted management principles” that could be used for
this purpose. Which concrete form of managerial behavior is critical must be deter-
mined by considering the functional demands that are imposed on an organization by
its relevant contingencies (cf. Gresov and Drazin 1997). For instance, different envi-
ronments may require different levels of comprehensiveness when preparing strategic
decisions (Fredrickson and Mitchell 1984).
Applying the idea of critical behaviors has two advantages. First, it will allow
for a more precise estimation of potential behavioral deficiencies. As a result, an in-
formed behavioral assumption can be applied instead of a fixed one. This informed
assumption captures the possible tension between actual and critical behavior. This is
an important step to reduce uncertainty about executive behavior. Second, the critical
behaviors help to focus the required effects of the governance mechanisms. Hence, in
light of actual and critical behaviors the specific governance mechanisms can be tai-
lored. For example, a particular form of leadership development (Shen 2003) should
be developed if and only if the manager is unable but willing to live up to certain
expectations.
Developing more complex and, thus, more accurate behavioral assumptions than
the fixed a priori ones applied in standard agency or stewardship theory, respectively,
requires to incorporate managerial behavior into models of corporate governance as
a variable rather than a constant (see also Ghoshal and Moran 1996; Grandori 2004;
Ghoshal 2005; Tsang 2006) and thus to develop a more precise idea of the situation-
specific degree of uncertainty about actual managerial behavior. Hence, the second
13
necessity for taking contingencies into account is to ask, which managerial behavior
can be expected in a certain situation, instead of merely assuming one or the other ex-
treme form of behavior. Since the behavior of a manager might well be somewhere
‘between’ the extremes of opportunism and stewardship (see also Donaldson 1990;
Grundei 1999; v. Werder 1999; Böcking et al. 2004), the question is not which one of
the two extreme alternative assumptions is true, but which behavior can be expected
in a particular context. In general, each behavior depends on person- and situation-
specific factors (e.g., Davis and Luthans 1980; Chatman 1989). Therefore, Davis
et al. (1997) ask which psychological and situational factors make it more likely
that people become either stewards or agents in a relationship. For instance, these
authors propose that people who are motivated by higher order (rather than lower
level) needs, who are motivated by intrinsic (rather than extrinsic) factors, who have
a high (rather than a low) identification with the organization, and those who operate
in a collectivistic (rather than an individualistic) culture8 are more likely to become
stewards (rather than agents). In addition, several internal and external situational
factors will either foster (or restrict) pro-organizational or rather opportunistic behav-
ior. Importantly, the system of corporate governance is a main part of a manager’s
relevant environment. For instance, short-term first time appointments of executives
as well as the political configuration may rather reduce a manager’s commitment to
achieve long-term company goals.
It is vital to note that opportunism is not a necessary condition for governance
instruments to exist, nor will governance modes that deal with opportunism be nec-
essarily effective in dealing with other sources of imperfect managerial conduct (cf.
Hodgson 2004). Rather, the appropriate design of governance mechanisms depends
on whatever seems necessary to facilitate critical behaviors given the expected behav-
ior. Hence, neither distrust nor trust should guide the design of a governance system
as a general principle anymore. Particular governance mechanisms that are consistent
with the distrust- or trust-oriented approach outlined above may, of course, still be
implemented, but not because either opportunistic or pro-organizational behavior is
merely assumed.
Proposition 9. Corporate governance design would benefit from applying informed
behavioral assumptions instead of fixed and narrow ones such as, e.g., opportunism.
Proposition 10. The effectiveness of corporate governance design is not confined to
curbing opportunism. Rather, it will be necessary to identify the functional demands
placed on an organization and to specify the critical behaviors top management has
to perform.
Following Gebert’s (2000, 2004) suggestions in a different but comparable con-
text, specific forms of design elements that correspond to either the distrust or the
trust approach could be jointly implemented as long as they pertain to different design
dimensions (e.g., high managerial discretion and independent directors). As illus-
trated in Fig. 2 which features some prominent mechanisms of corporate governance
8A cultural perspective specifying how an opportunistic propensity is affected by cultural conditioning

has been proposed by Chen et al. (2002).
13
158 J. Grundei
Fig. 2 Developing balanced governance systems
(see center column), trust and distrust should usually not be used as general principles
for the design of governance systems. As the individual elements of the governance
system are not derived from an overarching design philosophy but are tailored to
the specific demands of a company, the resulting governance form will not be ex-
tremely one-sided but will rather show some balance. A particular advantage of such
a balanced system is that it will be more stable than a one-sided form. One-sided sys-
tems, in which, for example, all design elements foster tight control, breed instability
because of the disadvantageous side-effects explained above. In a similar vein, Van
den Berghe and Baelden (2005) have suggested to tailor the scope and intensity of
board monitoring to what would be an appropriate level of monitoring for a particular
company.
Moreover, it must be taken into account that all design elements together influ-
ence managerial behavior. Thus, they may combine or substitute for each other and,
in effect, determine the degree to which the desired form of stewardship can be ac-
complished (cf. Rediker and Seth 1995). For instance, a recent study conducted by
O’Connor et al. (2006) showed that CEO stock options are associated with fraudulent
financial reporting only under certain (combinations of) circumstances, including the
13
value of the stock options, whether CEO duality was present and whether directors
also held stock options.
Therefore, multiple arrangements of governance mechanisms may yield an overall
capacity to meet the demand, i.e., more than one (combination of) design option(s)
may be available and appropriate (equifinality, cf. Gresov and Drazin 1997; Rediker
and Seth 1995). Hence, the various governance mechanisms should be assessed in
connection. This may have far-reaching consequences as it suggests that it is prob-
lematic to generally condemn one isolated governance aspect as ‘bad governance’.
For instance, one feature of the two-tier system of corporate governance which cur-
rently receives substantial consideration is the question whether or not it should be
permissible to allow the retiring chairman of the management board to immediately
become chairman of the supervisory board in that same company. The former CEO
may be quite familiar with the industry and might therefore (in his/her role as the new
chairperson of the supervisory board) allow for a smooth and efficient cooperation be-
tween management board and supervisory board. However, this form of interaction
could become overly one-sided if the two chairmen – both long-tenured industry ex-
perts – do not challenge commonly accepted industry ‘truths’. Yet a balance could
be achieved if the directors have sufficiently diverse backgrounds, because this in-
creases the likelihood of posing critical questions and engaging in cognitive conflict
(e.g., Forbes and Milliken 1999; Simons et al. 1999). Thus the advantages of having
an ‘insider’ acting as chairman of the supervisory board could still be realized. This
advantage would be lost if instead a strict legal ban was enacted that is now called for
by some writers (e.g., Rode 2006).
Following configuration theory (e.g., Miller and Mintzberg 1983), a constellation
of functional demands, actual behavior, critical behavior and a governance system
that is consistent at a given point in time can be called a governance configura-
tion. Thereby, consistency is regarded as a static criterion for design that requires
a fit between these elements.9 Accordingly, a consistent governance configuration
requires fit between contingencies/demands, expected managerial behavior, critical
behaviors as well as the implemented governance mechanisms. Misfits may appear
within as well as between any of these components of a configuration. For instance,
the functional demands may require high information processing capacities and in-
novativeness, but the governance system may be designed for curbing managerial
opportunism and may rather restrict than facilitate information flow at the top. A dis-
crepancy between the assumed and the desired behavior would constitute a misfit be-
cause the manager is not behaving as it is expected of him/her. A misfit between the
behavioral assumption and the corporate governance elements may exist if the gov-
ernance mechanisms are basically suitable for facilitating the desired behavior (e.g.,
providing wide discretion in order to foster innovation), but not under the circum-
stances of the particular (behavioral) situation (e.g., danger of opportunism). Finally,
the selected governance measures may be unsuitable for supporting the preferred be-
havior (e.g., inappropriate incentive system, see Kerr 1975). To ensure consistency
9 See Drazin and Van de Ven (1985) for a discussion of alternative conceptualizations of “fit” in or-
ganization theory. Identifying the relevant contingencies and developing an internally consistent set of
structures and processes that matches the contingencies corresponds with the systems approach of fit.
13
160 J. Grundei
over time, it will be necessary to review and adapt assumptions, contingencies and the
effectiveness of the applied governance mechanisms.
Proposition 11. The notion of equifinality suggests that different combinations of
governance mechanisms will be effective in order to meet the functional demands.
Proposition 12. Combinations of more trust or distrust-oriented governance mech-
anisms will be possible on different dimensions of governance design.
4.2 Discussion
In this section I want to briefly consider two issues that might question the value of
the presented concept. First, new models of man applied in agency theory could raise
the question whether the strong opportunism premise is still used at all and if revised
models would yield different conclusions. Second, some questions of implementing
the concept are addressed.
More recent developments in the agency literature comprise modifications of the
economic model of man (see Jensen 1994; Jensen and Meckling 1994). These authors
suggest that a resourceful, evaluative, maximizing model (REMM) of human agency
should be applied. According to this model, actors are characterized as follows (ex-
tract):
– They care about almost everything (not only money)
– They are ready to substitute some goods for others
– Each individual’s wants are unlimited (“more is better”)
– Each individual is a maximizer
– The individual is resourceful.
At the same time Jensen and Meckling (1994) criticize sociological and psy-
chological models of man. Jensen (1994) points out that there is no inconsistency
between self-interested and altruistic behavior and that altruism is not at all equal
to being a perfect agent. Rather, conflicts of interest remain a core problem that is
addressed by agency theory. Hence, altruism is possible if it furthers the utility of
the acting person. However, since preferences cannot be specified in advance, all ac-
tion can be reinterpreted as rational maximization of some preference – the theory
is preserved, but it is devoid of predictive specificity (Freeland 2006, p. 317). Hence,
REMM does not present a significant departure from the original agency premise and
moral hazard remains a problem.
Implementing the proposed concept raises some additional questions. One is
which entity is to decide about the actual behavior of top executives and how this de-
cision can be achieved. In general, this question has to be tackled by both research
(see also Sect. 5) and non-executive or supervisory, respectively, directors. Criteria
that could be used in practice are, for instance, whether or not actions taken (or
planned) are in the best interest of the company and whether or not conflicts of in-
terest exist. The potential for opportunistic behavior could also be judged in terms of
factors that make such behavior more likely, e.g., the actual (not: legally intended)
extent of power of a top manager or the specific structure of the incentive system in
13
place. If a board sees a high risk with a manager, this may, of course, have detrimental
effects on the relationship between executive and non-executive directors. A dynamic
view has to take such implications into account. In principle, those consequences
have to be accepted as it is the very task of the (supervisory) board to evaluate top
managers. Probably such effects could be alleviated if an evaluation is conducted on
a regular and rather formal basis (Hoffmann-Becking 1995, pp. 237–238), so that it
becomes a usual part of corporate governance.
5 Summary and implications
Whereas the development of corporate governance practice clearly follows an agency

perspective, stewardship theory presents a contrary view which challenges the con-
ventional wisdom of agency theory. Based on opposing models of man both theories
recommend divergent forms of corporate governance as useful ways for addressing
the problem of uncertainty about the future behavior of executives. Traditional agency
and legal perspectives on corporate governance do not address how actors respond
to governance mechanisms such as (an increase of) board monitoring (cf. West-
phal 1998). As a consequence, the proposed distrust-oriented governance forms may
render ineffective or even harmful. In contrast, following stewardship theory’s trust-
based prescriptions may result in overly cohesive governance models and, hence,
suppress required critique of managerial conduct. An analysis of alternative strategies
for separating or combining the two approaches yields no convincing way to resolve
the tension. At least, spatial and temporal separation share the idea that each of the
two conflicting models may not claim universal applicability but is restricted to cer-
tain situations. Hence, it is important to determine which behavioral assumption will
be valid (cf. Tsang 2006).
The notion of an ‘informed behavioral assumption’ is suggested as the starting
point for designing effective governance systems. The diagnosis of managerial be-
havior is facilitated by introducing behaviors that are critical for meeting the relevant
functional demands. As a consequence, instead of taking it as axiomatic that man-
agers are opportunists, the extent of (actual and potential) opportunism becomes
a matter of investigation and analysis (see also Hodgson 2004). Based on the iden-
tified behavioral deficiencies a goal-oriented design of corporate governance can be
tackled. In consequence, one-sided forms of governance that completely follow ei-
ther a distrust or a trust philosophy of governance design would be the exception
rather than the rule. Forming governance systems that rigorously combine distrust-
and trust-corresponding forms of governance on different design dimensions and thus
reaching an inter-dimensional balance seems to have the greatest, yet not exhausted
potential for achieving more efficient forms of corporate governance.
This approach should be regarded as a framework which will hopefully stimulate
future research in this area. Understanding and designing corporate governance sys-
tems would benefit from integrating insights from behavioral science research (Zajac
and Westphal 1998). These insights would be valuable in order to assess the im-
pact that governance instruments, and especially combinations of several governance
mechanisms (Rediker and Seth 1995), might have on managerial behavior. Research
13
162 J. Grundei
that merely considers one out of the multitude of governance mechanisms is most
likely of limited value. Moreover, to assess the effectiveness of (combinations of)
governance mechanisms, it is essential to specify the behaviors that appear critical in
light of relevant demands, because curbing out opportunism is not the (only) goal of
corporate governance. Hence, further research is needed that investigates under which
circumstances opportunism will be more likely to occur (e.g., Chen et al. 2002; Davis
1997) and how to determine the critical behaviors.
The model presented in this paper has practical implications, too. In its current
stage of development, the model presents a general prescriptive approach for design-
ing corporate governance configurations. From a descriptive point of view, however,
other factors will likely influence design decisions as well. For instance, the zeit-
geist or the risk propensity of the principal may suggest a higher level of control than
may objectively be justified in a particular situation. Moreover, company law usually
entails several restrictions that seem to hamper the flexibility of governance design
(e.g., Grundei and Talaulicar 2002). Of course, any restrictions arising from legal
and code provisions must be observed. However, even within the current legal sys-
tems, there is usually substantial leeway for company-specific forms of governance
and this latitude should in fact be capitalized purposely (see also Van den Berghe and
Baelden 2005; and the survey of empirical supervisory board research in Dutzi 2005).
Over and above that, policy-makers might be asked to allow for more optional alter-
natives in the future. Thus, there would be more freedom to implement only those
governance mechanisms that are deemed necessary instead of being forced to have
mandatory controls in place even though trust is sufficiently developed. Such freedom
of scope may sound undue while witnessing a severe banking crisis. However, part of
the problem seems to be that the ever increasing demand for high short-term profits
(i.e., incentive system) added to managers’ lack of diligence. Hence, reacting with in-
creased monitoring and incentives is not necessarily the right answer as it may result
in even more side-effects.
In general, the approach would ask designers of corporate governance for more
sensitivity for specific situations and the appropriate design of governance mechan-
isms. It must be recognized in this context, that conditions, demands and behaviors
may change over time. Therefore, the suitability of a governance configuration must
be regularly reviewed. More precisely, the appropriateness of the applied behavioral
assumption as well as the effectiveness of the governance mechanisms that were set
up have to be assessed in light of the relevant contingencies. Thus, the model also ac-
commodates for the evolving rather than static nature of trust (see also Inkpen and
Currall 2004).
It is well understood that especially the idea of an ongoing process of reviewing
and adapting corporate governance requires some effort. However, if ‘wrong’ forms
of (supposedly ‘good’) corporate governance could be avoided and thus corporate
demise be circumvented, the effort appears as a valuable investment.
Acknowledgement I owe thanks to two anonymous reviewers as well as the journal editor for their very
helpful comments which allowed me to improve the paper.
13
References
Adler PS (2001) Market, hierarchy, and trust: The knowledge economy and the future of capitalism.
Organ Sci 12:215–234
Alderfer CP (1986) The invisible director on corporate boards. Harv Bus Rev 64(6):38–52
Allen MP, Panian SK (1982) Power, performance, and succession in the large corporation. Adm Sci Q
27:538–547
Audia PG, Locke EA, Smith KG (2000) The paradox of success: An archival and a laboratory study of
strategic persistence following radical environmental change. Acad Manag J 43:837–853
Bebchuk LA, Fried JM (2006) Pay without performance: overview of the issues. Acad Manag Perspect
20(1):5–24
Beccerra M, Gupta AK (1999) Trust within the organization: integrating the trust literature with agency
theory and transaction costs economics. Public Adm Q 23:177–203
Berle AA, Means GC (1968) The modern corporation and private property, 2nd edn. Harcourt, Brace and
World, New York
Bettman JR, Weitz BA (1983) Attributions in the board room: causal reasoning in corporate annual
reports. Adm Sci Q 28:165–183
Boeker W (1992) Power and managerial dismissal: scapegoating at the top. Adm Sci Q 37:400–421
Böcking H-J, Dutzi A, Müßig A (2004) Ökonomische Funktion des Prüfungsausschusses im deutschen
Corporate Governance-System. Betriebswirtsch Forsch Prax 5:417–440
Bowman EH (1976) Strategy and the weather. Sloan Manag Rev 17(2):49–62
Brehm SS, Brehm JW (1981) Psychological reactance. A theory of freedom and control. Academic Press,
New York
Bunge M (1996) Finding philosophy in social science. Yale University Press, New Haven
Cadbury A (2000) The corporate governance agenda. Corp Gov Int Rev 8:7–15
Chatman JA (1989) Improving interactional organizational research: a model of person-organization fit.
Acad Manag Rev 14:333–349
Chen CC, Peng MW, Saparito PA (2002) Individualism, collectivism, and opportunism: a cultural per-
spective on transaction cost economics. J Manag 28:567–583
Clarke T (2004) Introduction: Theories of governance – reconceptualizing corporate governance theory
after the Enron experience. In: Clarke T (ed) Theories of corporate governance. The philosophical
foundations of corporate governance. Routledge, New York, pp 1–30
Daily CM, Dalton DR, Cannella AA Jr (2003) Corporate governance: decades of dialogue and data. Acad
Manag Rev 28:371–382
Dalton DR, Daily CM, Ellstrand AE, Johnson JL (1998) Meta-analytic reviews of board composition,
leadership structure, and financial performance. Strateg Manag J 19:269–290
Das TK, Teng B-S (1998) Between trust and control: developing confidence in partner cooperation in
alliances. Acad Manag Rev 23:491–512
Davis JH, Schoorman FD, Donaldson L (1997) Toward a stewardship theory of management. Acad
Davis TRV, Luthans F (1980) A social learning approach to organizational behavior. Acad Manag Rev
5:281–290
Deci EL (1975) Intrinsic motivation. Plenum, New York London
Donaldson G, Lorsch JW (1983) Decision making at the top. The shaping of strategic direction. Basic
Books
Donaldson L (1990) The ethereal hand: organizational economics and management theory. Acad Manag
Rev 15:369–381
Donaldson L (2001) The contingency theory of organizations. Sage, Thousand Oaks
Donaldson L, Davis JH (1991) Stewardship theory or agency theory: CEO governance and shareholder
returns. Aust J Manag 16:49–64
Drazin R, Van de Ven AH (1985) Alternative forms of fit in contingency theory. Adm Sci Q 30:514–539
Drobetz W, Schillhofer A, Zimmermann H (2004) Ein Corporate Governance Rating für deutsche Pub-
likumsgesellschaften. Z Betriebswirtsch. 74:5–25
Dutzi A (2005) Der Aufsichtsrat als Instrument der Corporate Governance. DUV, Wiesbaden
Eberl P (2002) Vertrauen oder Kontrolle im Unternehmen? In: Kahle E (ed) Organisatorische
Veränderung und Corporate Governance. DUV, Wiesbaden, pp 193–224
Enzle ME, Anderson SC (1993) Surveillant intentions and intrinsic motivation. J Personal Soc Psychol
64:257–266
13
164 J. Grundei
Fama EF (1980) Agency problems and the theory of the firm. J Political Econ 88:288–307
Finkelstein S, Mooney A (2003) Not the usual suspects: How to use board process to make boards better.
Acad Manag Exec 17(2):101–113
Forbes DP, Milliken FJ (1999) Cognition and corporate governance: understanding boards of directors as
strategic decision-making groups. Acad Manag Rev 24:489–505
Fredrickson JW, Hambrick DC, Baumrin S (1988) A Model of CEO Dismissal. Acad Manag Rev
13:255–270
Fredrickson JW, and Mitchell TR (1984) Strategic decision processes: comprehensiveness and perform-
ance in an industry with an unstable environment. Acad Manag J 27:399–423
Freeland RF (2006) The struggle for control of the modern corporation: organizational change at General
Motors 1924–1970. Cambridge University Press, Cambridge
Friedman M (1953) Essays in positive economics. The University of Chicago Press, Chicago
Gebert D (2000) Zwischen Freiheit und Reglementierung. Widersprüchlichkeiten als Motor inkremen-
talen und transformationalen Wandels in Organisationen – eine Kritik des punctuated equilibrium-
Modells. In: Schreyögg G, Conrad P (eds) Organisatorischer Wandel und Transformation. Manage-
mentforschung, vol 10. Gabler, Wiesbaden, pp 1–32
Gebert D (2004) Dilemma-Management. In: Schreyögg G, v Werder A (eds) Handwörterbuch Un-
ternehmensführung und Organisation, 4th edn. Schäffer-Poeschel, Stuttgart, pp 195–204
Ghoshal S (2005) Bad management theories are destroying good management practices. Acad Manag
Learn Educ 4:75–91
Ghoshal S, Moran P (1996) Bad for practice: a critique of the transaction cost theory. Acad Manag Rev
21:13–47
Grandori A (2004) Reframing corporate governance: behavioral assumptions, governance mechanisms,
and institutional dynamics. In: Grandori A (ed) Corporate governance and firm organization: mi-
crofoundations and structural forms. Oxford University Press, Oxford, pp 1–27
Green SG, Mitchell TR (1979) Attributional processes of leaders in leader-member interaction. Organ
Behav Hum Perform 23:429–458
Gresov C, Drazin R (1997) Equifinality: functional equivalence in organization design. Acad Manag Rev
22:403–428
Grundei J (1999) Effizienzbewertung von Organisationsstrukturen. Gabler, Wiesbaden
Grundei J, Talaulicar T (2002) Company law and corporate governance of start-ups in Germany: legal
stipulations, managerial requirements, and modification strategies. J Manag Gov 6:1–27
Hackman JR, Oldham GR (1980) Work redesign. Addison-Wesley, Reading, MA
Hambrick DC, Fukutomi GDS (1991) The seasons of a CEO’s tenure. Acad Manag Rev 16:719–742
Hambrick DC, Geletkanycz MA, Fredrickson JW (1993) Top executive commitment to the status quo:
some tests of its determinants. Strateg Manag J 14:401–418
Harris J, Bromiley P (2007) Incentives to cheat: the influence of executive compensation and firm
performance on financial misrepresentation. Organ Sci 18:350–367
Hendry J (2002) The principal’s other problems: honest incompetence and the specification of objectives.
Herman ES (1981) Corporate control, corporate power. Cambridge University Press, Cambridge
Hodgson GM (2004) Opportunism is not the only reason why firms exist: why an explanatory emphasis
on opportunism may mislead management strategy. Ind Corp Change 13:401–418
Hopt KJ, Prigge S (1998) Preface. In: Hopt KJ, Kanda H, Roe MJ, Wymeersch E, Prigge S (eds) Com-
parative corporate governance: the state of the art and emerging research. Clarendon Press, Oxford,
pp v–x
Hoffmann-Becking M (1995) Rechtliche Möglichkeiten und Grenzen einer Verbesserung der Arbeit
des Aufsichtsrats. In: Lanfermann J (ed) Internationale Wirtschaftsprüfung. Festschrift für Hans
Havermann. IDW-Verlag, Düsseldorf, pp 231–246
Jaffee D (2001) Organization theory: tension and change. McGraw-Hill, Boston
Inkpen AC, Currall SC (2004) The coevolution of trust, control, and learning in joint ventures. Organ Sci
15:586–599
Janis IL (1972) Victims of groupthink: a psychological study of foreign policy decisions and fiascos.
Houghton Mifflin, Boston
Jensen MC (1994) Self-interest, altruism, incentives, and agency theory. J Appl Corp Finance 7:40–45
Jensen MC, Meckling WH (1976) Theory of the firm: managerial behavior, agency costs and ownership
structure. J Financial Econ 3:305–360
Jensen MC, Meckling WH (1994) The nature of man. J Appl Corp Finance 7:4–19
13
Johnson JL, Daily CM, Ellstrand AE (1996) Board of directors: A review and research agenda. J Manag
22:409–438
Kaplan RS, Atkinson AA (1998) Advanced management accounting, 3rd edn. Prentice-Hall, Upper
Saddle River, NJ
Kaufman A, Englander E (2005) A team production model of corporate governance. Acad Manag Exec
19(3):9–22
Kerr S (1975) On the folly of rewarding A while hoping for B. Acad Manag J 18:769–783
Kosnik RD (1987) Greenmail: a study of board performance in corporate governance. Adm Sci Q
32:163–185
Lewicki RJ, McAllister DJ, Bies RJ (1998) Trust and distrust: new relationships and realities. Acad
Lipton M, Lorsch JW (1992) A modest proposal for improved corporate governance. Bus Lawyer 48:59–77
Luhmann N (1989) Vertrauen. Ein Mechanismus der Reduktion sozialer Komplexität, 3rd edn. Enke,
Stuttgart
Mace ML (1971) Directors: myth and reality. Harvard Business School Press, Boston
Maitlis S (2004) Taking it from the top: how CEOs influence (and fail to influence) their boards. Organ
Stud 25:1275–1311
Mayer RC, Davis JH, Schoorman FD (1995) An integrative model of organizational trust. Acad Manag
Rev 20:709–734
McEvily B, Perrone V, Zaheer A (2003) Trust as an organizing principle. Organ Sci 14:91–103
McKnight DH, Cummings LL, Chervany NL (1998) Initial trust formation in new organizational rela-
tionships. Acad Manag Rev 23:473–490
Merchant KA (1985) Control in business organizations. Pitman, Boston
Milgrom P, Roberts J (1992) Economics, organization and management. Prentice-Hall, Englewood Cliffs,
NJ
Miller D, Mintzberg H (1983) The case for configuration. In: Morgan G (ed) Beyond method – strategies
for social research. Sage, Beverly Hills, pp 57–73
Mills PK, Ungson GR (2003) Reassessing the limits of structural empowerment: organizational consti-
tution and trust as controls. Acad Manag Rev 28:143–153
Müller C (1995) Agency-Theorie und Informationsgehalt. Betriebswirtschaft 55:61–76
Muth MM, Donaldson L (1998) Stewardship theory and board structure: a contingency approach. Corp
Gov Int Rev 6:5–28
O’Connor J, Priem RL, Coombs JE, Gilley KM (2006) Do CEO stock options prevent or promote
fraudulent financial reporting? Acad Manag J 49:483–500
Osterloh M, Frey BS (2004) Corporate governance for crooks? The case for corporate virtue. In:
Grandori A (ed) Corporate governance and firm organization: microfoundations and structural
forms. Oxford University Press, Oxford, pp 191–211
Ouchi WG (1979) A conceptual framework for the design of organizational control mechanisms. Manag
Sci 25:833–848
Pearce JA II, Zahra SA (1991) The relative power of CEOs and boards of directors: associations with
corporate performance. Strateg Manag J 12:135–153
Pettigrew A, McNulty T (1995) Power and influence in and around the boardroom. Hum Relat 48:845–
873
Pfeffer J (1994) Competitive advantage through people. Harvard Business School Press, Boston
Pollock TG, Fischer HM, Wade JB (2002) The role of power and politics in the repricing of executive
options. Acad Manag J 45:1172–1182
Poole MS, Van de Ven AH (1989) Using paradox to build management and organization theories. Acad
Poppo L, Zenger T (2002) Do formal contracts and relational governance function as substitutes or
complements? Strateg Manag J 23:707–725
Rediker KJ, Seth A (1995) Boards of directors and substitution effects of alternative governance mech-
anisms. Strateg Manag J 16:85–99
Rode O (2006) Der Wechsel eines Vorstandsmitglieds in den Aufsichtsrat – eine gute Corporate Gover-
nance? Betriebs-Berater 61:341–344
Rousseau DM, Sitkin SB, Burt RS, Camerer C (1998) Not so different after all: a cross-discipline view
of trust. Acad Manag Rev 23:393–404
Sapienza HJ, Gupta AK (1994) Impact of agency risks and task uncertainty on venture capitalist-CEO
interaction. Acad Manag J 37:1618–1632
13
166 J. Grundei
Schoorman FD, Mayer RC, Davis JH (2007) An integrative model of organizational trust: past, present,
and future. Acad Manag Rev 32:344–354
Schweitzer ME, Ordóñez L, Douma B (2004) Goal setting as a motivator of unethical behavior. Acad
Manag J 47:422–432
Seibert U (2002) Aktienrechtsreform in Permanenz? Aktiengesellschaft 47:417–420
Shen W (2003) The dynamics of the CEO-Board relationship: an evolutionary perspective. Acad Manag
Rev 28:466–476
Shen W, Cannella AA Jr (2002) Power dynamics within top management and their impacts on CEO
dismissal followed by inside succession. Acad Manag J 45:1195–1206
Shleifer A, Vishny RW (1997) A survey of corporate governance. J Finance 52:737–783
Simons T, Pelled LH, Smith KA (1999) Making use of difference: diversity, debate, and decision com-
prehensiveness in top management teams. Acad Manag J 42:662–673
Sitkin SB (1995) On the positive effect of legalization on trust. Res Negot Organ 5:185–217
Staw BM (1981) The escalation of commitment to a course of action. Acad Manag Rev 6:577–587
Strickland LH (1958) Surveillance and trust. J Personal 26:200–215
Sundaramurthy C, Lewis M (2003) Control and collaboration: paradoxes of governance. Acad Manag
Rev 28:397–415
Tosi HL, Brownlee AL, Silva P, Katz JP (2003) An empirical exploration of decision-making under
agency controls and stewardship structure. J Manag Stud 40:2053–2071
Tosi HL, Werner S, Katz JP, Gomez-Mejia LR (2000) How much does performance matter? A meta-
analysis of CEO pay studies. J Manag 26:301–339
Tsang EWK (2006) Behavioral assumptions and theory development: the case of transaction cost eco-
nomics. Strateg Manag J 27:999–1011
v Werder A (1999) Effizienzbewertung organisatorischer Strukturen. Wirtschaftswiss Stud 28:412–417
v Werder A (2003) Ökonomische Grundfragen der Corporate Governance. In: Hommelhoff P, Hopt KJ,
v Werder A (eds) Handbuch Corporate Governance. Dr Otto Schmidt and Schäffer-Poeschel, Köln–
Stuttgart, pp 3–27
v Werder A, Grundei J (2001) Generally Accepted Management Principles (GAMP) – functions, first
proposals, and acceptance among German top managers. Corp Gov Int Rev 9:101–109
Van den Berghe LAA, Baelden T (2005) The monitoring role of the board: one approach does not fit all.
Corp Gov Int Rev 13:680–690
Wade J, O’Reilly CA, Chandratat I (1990) Golden parachutes: CEOs and the exercise of social influence.
Adm Sci Q 35:587–603
Walsh JP, Seward JK (1990) On the efficiency of internal and external corporate control mechanisms.
Wasserman N (2006) Stewards, agents, and the founder discount: executive compensation in new ven-
tures. Acad Manag J 49:960–976
Westphal JD (1998) Board games: how CEOs adapt to increases in structural board independence from
management. Adm Sci Q 43:511–537
Westphal JD (1999) Collaboration in the boardroom: behavioral and performance consequences of CEO-
board social ties. Acad Manag J 42:7–24
Westphal JD, Zajac EJ (1994) Substance and symbolism in CEO’s long-term incentive plans. Adm Sci
Q 39:367–390
Williamson OE (1993a) Calculativeness, trust and economic organization. J Law Econ 36:453–486
Williamson OE (1993b) Opportunism and its critics. Manag Decis Econ 14:97–107
Zajac EJ, Westphal JD (1996) Director reputation, CEO-board-power, and the dynamics of board inter-
locks. Adm Sci Q 41:507–529
Zajac EJ, Westphal JD (1998) Toward a behavioral theory of the CEO-board relationship. How research
can enhance our understanding of corporate governance practices. In: Hambrick DC, Nadler DA,
Tushman ML (eds) Navigating change. How CEOs, top teams, and boards steer transformation.
Harvard Business School Press, Boston, MA, pp 256–277
Zhang X et al (2008) CEOs on the edge: earnings manipulation and stock-based incentive misalignment.
Acad Manag J 51:241–258
13
View publication stats

2008, Grundei, Are Managers Agents or Stewards of FF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

2008, Grundei, Are Managers Agents or Stewards of FF

Uploaded by

Copyright:

Available Formats

See discussions, stats, and author profiles for this publication at: https://www.researchgate.

Are managers agents or stewards of their principals?:

Article in Journal für Betriebswirtschaft · September 2008

Behavioral Corporate Governance (BCG) View project

HR Governance and Management/Leadership Systems View project

The user has requested enhancement of the downloaded file.

Are managers agents or stewards of their principals?

Keywords Agency theory · Control · Corporate governance · Stewardship theory ·

Corporate governance is commonly understood as the legal and factual system by

2 Rival approaches to corporate governance: Agency theory vs. stewardship

2.1 Agency theory

2.1.1 Logic of the theory

Table 1 Contrasting agency theory and stewardship theory of corporate governance

lem is modeled as one between suppliers of finance to a corporation (the principals)

(1) Ineffectiveness of control systems: The role of managerial entrenchment

(2) Dysfunctional side-effects of control mechanisms

The actions of managers analyzed so far could be regarded as a psychological reac-

2.2 Stewardship theory

2.2.1 Logic of the theory

managerial behavior differently (Table 1). Grounded in organizational psychology

Table 2 Potential design errors

3 Addressing the theoretical tension

Fig. 1 A dynamic perspective of the CEO-board relationship

In different but related contexts, i.e., intra- and inter-organizational cooperation,

Synergistic relationship: Mutual reinforcement of trust and control

Antagonistic relationship: control undermines trust

4 Rethinking the design of corporate governance systems: Towards forming

8A cultural perspective specifying how an opportunistic propensity is affected by cultural conditioning

Fig. 2 Developing balanced governance systems

5 Summary and implications

Whereas the development of corporate governance practice clearly follows an agency

You might also like