Please, ask questions to your colleagues using the Figure above and the theory discussed during the lesson and contained in the suggested articles (e.g. what is the difference between this setting and the shareholder theory, stakeholder theory and team production theory).
As far as I understood, the Agency Theory and Stewardship Theories are built on two pivotal assumptions: Agency: the principal does not trust of the agent and so he enacts conjectured systems of controls Stewardship: the principal believes that the agent' s interest are aligned with the entire organization and so he trusts him.
Do you agree? If yes, would you provide more assumptions and /or differences?
Suppose an organization aims to be stakeholders oriented and the BoD decides to form the management. What kind of people may it will looking for? Steward or agent? Explain.
I try. Take for instance the case in which A controls B and C and that that in turn D is controlled by C. There might be the case that the ultimate controlling party of A decides that B will sell a product to C at a lower price than the market price. In this situation cash moves from C to B but the reasons for the lower price may be the following: 1) for the benefit of the group, 2) for extracting private benefit, but this fact has to be demonstrated. In fact, with the excuse of group benefit, cash entered in B may be then transferred to A.
Think of an external analyst that is committed to evaluate company A. This guy owns no stock of company A but the Agency Rating Firm for which he is working for has a deep and enrooted relationship with the company A, being one of the best and profitable client. Is this guy independent?
@alberto I believe that if shareholders decide to create a stakeholder oriented firm , but also for whatever other kind of organization they decide to set up, they should look for people whose interests are in line with theirs. Therefore they should look for stewards because they tend to be more reliable in both administring the resources they are given and working in cooperation to better serve stakeholders needs.
Guys what theory is the best according to you? What theory should the firm pursue? Because I have been reading so many articles and each gives a grant to one of them? I'm a bit lost on which is the best?
That depends on firm's orientation and so firm's strategy. Both theories have pros and cons that must be analyzed. Perhaps, stakeholders theory fits best with the upcoming economic environment which is characterized by the rising of CSR as a pillar of firm orientation. However, the debate on this subject is still in progress.
I agree with you, Alberto, and I would like to add some differences between the two models. In the agency model are used many financial incentives, auditing and evaluations, instead in the Stewardship model not. Moreover, the agency model uses a organizations structure aimed at monitoring and controlling, instead the Stewardship model allows the other actors to be autonomous.
@wissam as stated by IAS24, Related Party Transactions are transactions between the firm and its subsidiaries, parent company, associates, managers, directors, and majority shareholders, as well as ther close relatives. A related party is a person or an entity that is related to the entity that is preparing its financial statement. A related party relationship could affect profit or loss and financial position of an entity.
In your opinion, what is the best option to have an equilibrium between the satisfaction of internal actors and the satisfaction of external actors? How can the firm work in order to satisfy all the actors involved in its environment?
i think that shareholders theory is too much superficial and it is not right to represent as the aim of a firm the one of satifying people who gives you the resources just because without them you cannot run your business. Stakeholder theory maybe is the only one that keep in consideration every kind of actors that you have to satisfy, is important to satisfy the customer because he represent your revenue, the government because it could give you facilities , shareholders obviously because they will be incentivated always more investing in the firm and so on with suppliers and distributors (building strong long term relationship). all these actors are able to bring in the firm higher revenues or less costs, satisfying all of them you'll satisfy internal and external actors maximizing your profits.
I think that all the stakeholders have to be satisfied,as Cristina said, because ALL can contribute to the objective of the business entity and there are several ways in which this balance could be reached. But for sure the first way should be the absence of conflict of interests between parties,otherwise it's obvious that some could gain more benefits than others. Maybe the key could be in the independence of the BoD as suggested by the team production theory.
In my opinion the best tool to satisfy internal and external actors is the "Network-Oriented system" in which the labour unions are part of the supervisory board and they can influence the decision making process of the management. In addition, these unions are closer to the customers than the management in order to make better suggestions in how the needs and wants change in a today turbolent environment. Of course we have to take into consideration that if in one hand we can reduce the conflict of interest, in the other hand we have to consider that the management can give to the labour unions some benefits in returns of something.
I think that the reduction of conflicts of interest and the creation of value for all stakeholders are two important goals that can be reached with the "team production theory" which suggests that the role of corporate directors is to mediate among memebers of the corporate team, making decision in the interest of the "corporate entity" rather than of shareholders.
In my personal opinion, a firm needs to satisfy both shareholders and stakeholders. Shareholders in primis because they invest their money into the firm, so they need a revenue from this operations. Also customers because if they aren't satisfy, probably, they will not buy products or services produced by the firm. etc.
I agree with Morgan, the network oriented system is effective, even though internal dynamics of the firm could bias its actors' behaviour. Anyway, in an idealistic situation it would certainly be the best tool to coordinate internal and external actors' interests.
I agree with both Arianna and Morgan. It is important to create a coordinate and integrate system in which there is collaboration and it is possible to minimize the conflicts between members. If the environment within the firm is stable and cohesive, then every actor involved will do whatever he can to reach the goals of the company, having a great satisfaction.
In your opinion, what is the best option to have an equilibrium between the satisfaction of internal actors and the satisfaction of external actors? How can the firm work in order to satisfy all the actors involved in its environment?
I think that an effective solution to have an equilibrium between the satisfaction of internal actors and external actors could be that of considering the business activities of a company from a stakeholder point of view. In fact, the satisfaction of the internal actors can be really achieved only paying attention to external actors like customers, suppliers, community and so forth.
Look at the German two-tier system. In this model external actors (the employees) and the internal ones (the shareholders) do sit together within the supervisory board. The former hold a long term interest while the latter hold a less much longer term perspective.
In my opinion, the best way to reach the equilibrium between the satisfaction of internal actors and external ones, is based on the stakeholder theory. Indeed, it is on those actors that the existence of the company depends on, and being successfull on satisfying them, consenquently, the company is able to create a strong image, revenues, increasing the value of the shares, and generating a lasting relationship. This will help the reduction of conflicts among internal actors, that may have different interests.
I believe that the firm in order to satisfy both internal and external actors should grant a sufifcient degree of INDIPENDENCE between people who can administer , affect and control the business entity. In particular it is pivotal that the BoD , which has the highest authority in managing the corporation, is granted a sufficient degree of indipendence both from the shareholders who elected it ( though it have to control how capital is invested and employed on their behalf) and from management who implement the stretegy. Only if no "dangerous" identities between these three roles are created the general interest of the firm coudl be achieved.
According to me the stakeholders theory is the best one. It can balance between both the internal actors and the external ones. Since the shareholders theory only gives importance to maximizing the shareholders value and avoids all the other stakeholders. It might even take certain decisions that might be detrimental to the stakeholders just to increase its profit. As for the stakeholders theory it gives attention to all the parties, but consider profit as a result not a driver for success.
There will always be a trade-off between satisfying internal and external actors. The question must be: How can I maximize the utility of both actors under my resources constraints? In this case, there will be one best choice that enables the firm to reach all interests with no complaints.
The survival of a firm strongly depends on the satisfaction of the interests of every type of stakeholder. So, a good option to achieve the equilibrium is to create a corporate governance system in order to guarantee the proper equilibrium among all these different expectations. So, is very important to manage the exchange between the stakeholders' contributions required by the firm and the compensations given to them.
I think that the stakeholders theory is not the best one but better than the rest because it's able to make a compromise between all the stakeholders. The problem with the shareholders theory is that it only tends to maximize the shareholders value and doesn't care about the other stakeholders. And it might even take some decisions on the expense of the other stakeholders,
I agree with Morgan and Alberto. Both the Network Oriented system and the Two tier model are two systems that help to satisfy the needs of internal and external actors. In these two cases different stakeholders have the power to control the activities of the company and so to increase the chance to satisfied their interests. .
According to the Team Production theory the BoD has a mediation role, solving the conflicts among the different team members and being oriented just to the value creation, But how could the BoD be a neutral mediator among the team members since it is elected by the shareholders?
Well this theory underlines the fact that shareholders are just owners of the shares. Thus they do not own the assets of the firm or the output of it. This implies shareholders' interests may be different from firm's interests. The BoD according to the team production theory can be considered neutral since it's decisions are made in the interests of the firm. Pursuing the interest of the firm serves as a proxy for the combined interests of all the actors related with the company
I believe that the point underlined by Serena is the main weakness of the team production theory. Since the BOD is elected by shareholders, it could not be neutral, because it may favour the shareholders' interests and protect them.
It's a good point..I think that actually there are some mechanisms in this theory that could help the BoD to reach a certain level of independence,maybe some corporate laws and so on,otherwise this theory couldn't be valid.
A team production analysis starts with a broader assumption. All the participants hope to have a benefit from their involvement in the corporate enterprise, and all of them have an interest in finding a governance arrangement that is effective at eliciting support and cooperation from all of the participants whose contributions are important to the success of the joint enterprise. The problem that Serena arose could be explained by analyzing the contest in which it has been developed, a rejection of the agency theory in favour of the stewardship theory.
This is a very important point about team production theory. I think we could hardly believe it works because of our cultural background, where personal interests are the main pivotal. Nevertheless, I find this theory very similar to what happens in Japan, where the feeling of "familiarity" among all employees and BoD long-term relationship with the firm, eventually make Directors the ones in charge to balance the relationship between shareholders and employees. Under this perspective, this theory could totally work!
According to the team production theory shareholders are only owners of the shares and the bod should make the interest of the corporate entity and not that of shareholders but this create a "dilemma" because the members of the bod could be olbliged to pursue the interest of major shareolder at first if they want maintain their seat.
In my opinion, when BOD are elected by major shareholders who want to maximize their own value related to the interest of other takeholders, it is necessary to create the environment for the BOD archieve the object of the Business entity. For example, the Regulation factor can put more protection to protect the minority shareholder. The labor union have strong affect to protect employee's right, the suppliers can stop provide input to the firm which is not good in their view...
I think that the team production model also suggests that maximizing shareholder wealth should not be the principal goal of corporate law. For example, directors of public corporations should seek to maximize the joint welfare of all the firm's stakeholders, including shareholders, managers, employees, and possibly other groups such as creditors or the local community, who contribute firm-specific resources to corporate production.
I think that we should take into account the fact that in today public companies most of the board members are outside directors who are also indipendent from the company itself. From this perspective, we can better understand how the directors can mediate and balance the clashing interests of the executives at the top of the various teams.
Managing conflicts within the management team is indeed perfectly aligned to the stakeholder's interests (not only shareholders but all the other stakeholders) because in this way the risk of value destruction is reduced. However I believe that, according to the cognitive conflict theory, that a certain threshold of conflict is to be tolerated because it aims at fostering the decision-making process.
I agree with Federico, this theory can probably work only if a certain degree of indipendence of the BOD is granted, so that to assure that not only shareholders interests are achieved, outside directors can surely help in this.
I agree with nardi, because in this theory the owners are the corporation itself, so the shareholders are merely the owners of their own shares no more, They have nothing to do with governing the corporation, And so the BOD even if it is elected by the shareholders, it can have the role of meditator, because the shareholders have no other job than electing the BOD and maybe half of the board are from the independent outside directors,
The board of directors, according to the team production theory, can be considered neutral since its decisions are made in the interests of the firm. Pursuing the interest of the firm serves as a proxy for the combined interests of all the actors related with the company. However, I believe that this happens only when we have a independent BoD.
In the team production theory the owners are the corporation, and the shareholders are no longer the principals. In this theory, the shareholders don't govern nor control the organization, they just own their shares. As for the BOD it can be the meditator, because the shareholders job is electing them no more, they are not affected by their decisions.
According to me, this is the main limit of this theory. Since the BOD is appointed by the shareholders, there could be a conflict of interest when they act in order to create value for the corporation. By the way since the majority of the BOD's members are supposed to be independents, we have to assume that they will be neutral no matter who has appointed them.
referring to the team production theory, we can observe that now the principal is no more shareholder (as usual) but the corporation itself, what is the reason why it happens?
The team production theory consider the corporation as the principal since the aim of all the parties involed in the firm is to create value for the firm itself( not for shareholders, nor for other stakeholders). As a consequence, the BOD is appointed in order to monitor that each party does it works and to solve the possible conflict that can arise among them. ( the so-called "mediating role").
I agree in T.P.Theory the productive activity requires that all the parties make contributions that are complex in the interest of the whole system (shareholders & stakeholders) where every member's needs have the same importance. This concept can be summarized with corporation as principal.
I'm completely agree with you guys, in the team production theory we satisfy in primis the interest of the firm, in this way both stakeholders and shareholders. Obviously to do this we need a neutral board of directors, but is very difficult to find.
I think that the answer lies in the fact that the Directors of the Board have this "mediating role" of coordinating and balancing the various interests. Doing so, they act like "legal agents" of their own company, not complying with the shareholders' interests.
This happens because the BoD plays a mediation role, solving the conflicts among the different team members. It is oriented more on the value creation for the entire firm and for all the team members than to the satisfaction of only the shareholders'interests.
I agree with you guys and I would like to add that the team production theory is based on the fact that the board is not only a monitoring agent for shareholders, but it replicates team members who add value, take risks and possess strategic information within the company.
It happens because this is a theory which wants to stress the fact that the Bod should not only serve the interests of shareholders who appointed it but creating long term sustaineable value for all its stakeholders.
This happened cristina because this theory emphasises on the idea of maximizing the interest of the corporation and not the interest of the stakeholders and shareholders like the previous theories. This is why the principal now is the corporation and not the shareholders because the shareholders are merely owners of the shares.
Well this theory underscores the idea of maximizing the interest of the corporation. This is why the principal now is the corporation and not the shareholders. Its different than the other theory because this theory is direction primacy model.
It happens because the interests that the Board of Directors is entitled to satisfied, mediating among members of the corporate team, are the ones of the corporate entity and not of the shareholders.
I agree with Federica Brunetti, the team production theory consider the corporation as the principal since the aim of all the parties involed in the firm is to create value for the firm itself. As a consequence, the BOD is appointed in order to monitor that each party does it works and to solve the possible conflict that can arise among them.
Since we are talking about the role of the board, why BoD members are so important in the resource dependence theory and interlocking directorship? Do we know some examples of this theory?
Interlocking directorates is one of the indices of the S&P analysis. This meant that it has been judged very important. Interlocks used to have the strategic purpose of tying corporations together for economic advantage for the owners. I know the example of Citigroup, an american bank, which was linked with 25 other corporations via 13 people.
They are so important because the bod members are links between the firm and the essental resources that are required to maximise the performace.They are boundary spanners, mechanism to form links with external environment and they can be source of timely information for executives. About the interlocking directorship or multiple directorship it can create economic advantages but the question is already controversial.
Resource Dependency Theory and Interlocking Directorship are meant to be considered two faces of the same medal. BoD, is able to exert control over the environment by means of co-opting resources needed to survive. Pfeffer (1972) has made the case in which the BoD is capable of improving the organization by establishing contacts and raising funds so that the cost of financing becomes more sustainable.
The number of contacts of each BoD members can be found for instance on Bloomberg Businessweek.
Members of the board of directors, are considered to be so important, on the base of the resource dependence theory, because of the 'service roles' they run. Basically, some of these service roles, regard improving organization's reputation and giving advice to the company.
BOD members are important because they are a massive source of information useful to help the firm in reaching competitive advantage over competitors and in implementing more efficient practices. The bod interlocks are one of the way drectors can be given the possibility to acquire this information and expertise,because they sit on bod of affiliated companies. An example can be CASIO computer ltd, whose ceo and president also sits in the boards of casio subsidiaries.this phenomenon has pros but also cons, it can be a way for the holding to exploit subholdings for its own interests .
In the resource dependence theory, the BOD are very important because they are considered as a tool for relating the firm and the external environment. They are considered as boundary spanners As for the interlocking or multiple dictatorship, they are known as a person who is affiliated to one organization but sits on the board of the other board. This topic is controversial because some studies show that its fine to do so, others said there is a negative aspect of it and others said there is no direct relationship.
Federica, as the others said, BoD members are very important in this case becuase they can be used as a mechanism to form links with the external environment. So, interorganizational linkages such as appointing outside directors and board interlocks can be used to manage environmental contingecies. An example can be the one of Stanford Weill, CEO of Citigroup that in 2002 sat in the board of AT&T, creating a connection between these two corporations.
Well i agree with all of you guys, the resource dependence theory talks about the BOD and define them as a tool joining the firm and the external environment. The interlocking and multiple dictatorship, are defined as a person who is affiliated to one organization but sits on other boards.
in my view, BoD members are so important in the resource dependence theory and interlocking directorship because the BoD members are links between the firm and the essental resources that are required to maximise the performace. In terms of the interlocking dictatorship, they are known as a person who is affiliated to one organization but sits on the board of the other board.
In your opinion, how can we improve the streamlining in a network oriented system? considering the possible relationship between the management and the labor unions.
why is hostile takeover more frequent in outsider model respect to the insider model? Is it a good way to solve the agency problem between managers and shareholders? Which are the other possible solutions that could result less costly?
The Hostile takeover is more frequent in the outsider systems since these are the system generally adopted by Public Companies. Here, the owership is diffused and the launch of an hostile takeover can be made. I think that there can be other alternatives to reduce agency costs, for example put into the BOD independent members.
The hostile takeover is more likely to happen in a company characterized by an Outsider system simply because this Corporate governance system can be found more often in the anglo-saxon countries, which in turn are characterized by public companies. However, I am not sure that they can be considered a good way to solve the agency problem between managers and shareholders. In fact, especially the hostile takeover are considered as an "option of last resort" because they are a quite expensive way to correct that misallignement. I'm not so sure but I think that a way simpler method could be that the board of Directors directly dismisses the Managers.
Hostile takeovers happen to be more frequent in outsider model amid their large exposure to the capital market and their fragmentated ownership structure (nobody owns more than 20%). Of course the possibility to incur in the risk of an hostile takeover might bring about positive effects upon the behavior of the management as shown by the "Improved Management Hypothesis" (Manne, 1965). Nevertheless I do believe that the other side of the coin might be represented by an excess of short-term visionism in the management team. What I mean? I mean that the actions performed by the management are essentially oriented in the short term in order to satisfy a demanding market and this in turn may compromise the objective of creating sustainable value also in the medium and long term.
It is more frequent having an hostile takeover in the outsider model because of its diffuse ownership. There isn't a dominant shareholder and so it is difficult to find a sufficient number of shareholders that agree with the takeover.
An alternative solution, in my opinion, could be represented by the so called 'bear hug' in which the acquirer prepares an acquisition proposal to the target CEO and Bod. The goal of this solution is of course to move the board to a negotiated settlement, that could be less costly.
Hostile take over is more frequent in the outsider model rather than the insider one because in the outsider model the ownership is dispersed one, so its a public limited company, and hostile takeover are more frequent in it. Here we have type 1 agency problem because there is a conflict of interest between the managers and shareholders, to decrease the agency costs we have internal ways and external ways.
Cristina, hostile takeovers are more frequent in the outsider model than in the insider one, becuase in outsider model the ownership is dispersed. This means that shareholders have only small percentage of the total equity. Instead, the insider model is charactersied by concentrated ownerships and for this reason here is more difficult to launch a hostile takeover.
Because the ownership in the outsider model is widely held then there is more occurrence of the hostile take over than in the insider model. Of course we can decrease the agency costs. We have both internal ways and external ways to do so.
Hostile takeovers are more likely to occur in an Outsider systems since the owners have just a transitory interests in the company and so the ownership is more dispersed than in the Insider systems ( were the takeovers that may occur are friendly). Hostile takeovers can be use to reduce agency problem but will be a more expensive mechanism with respect to the internal ones. Alternative and less clostly solutions that can be use to minimize agency problem are the executive compensation schemes and the governance structures.
i think that in outsider model, because of more frequent dispersed ownership, one way to avoid the agency problem, in which managers could pursue their own interests, is the hostile takeover, voting to remove managers, but effectively it is a costly way to do it, maybe it could be more effective to try to give them incentives in remuneration, aligning their interests to the ones of the firm.
Agency theory describes the role of BoD as a monitoring part. In fact agency problems can arise because of inefficiencies and incomplete information and managers could try to pursue their own interests instead of the ones of the firm. Stewardship theory describe the role of manager as a steward of the firm, more involved and responsible to achieve firm's objective. the role of the BoD is no more to monitore, in fact there are no problems of ceo duality because could be beneficial if the ceo seat in the board
According to the agency theory, the management has to solve the conflicts between shareholders and implement the strategy chosen by the board. Following the agency theory, that is strictly connected with Adam Smith's theories, the objective of every person is the maximization of his utility function, so there is always a conflict of interest between principal (shareholders) and agent (managament) also because of the information asymmetry (we can not know if the managers are acting for their interest or for that of the firm). Instead, in the stewardship theory managers are seen as trustworthy individuals that understand the business and is motivated to satisfy the goal of the firm, with the maximization of the organizational performance.
The Agency Theorymakes assumptions about individualistic interests of individuals, that results in agency problem since the agents (managers) want to maximize their own interests. The Stewardship theory assumes that the managerial behaviour is based on collectivistic interests, thus the managers are considered as the "stewarts". Furthermore, the role of BOD differs between these two theories: on the one hand, tha agency theory assigns to the BOD a monitoring role, on the other hand, in the stewartship theory we do not have this rule since there is no reason to monitor.
Generally speaking, I think that the main difference between the two theories is the way they look at the "human nature". In my opinion, on the one hand, the Agency Theory is based on the "homo economicus": the man is selfish, narrowly self-interested, and then he cannot help but try to maximize his own interest and utility. On the other hand, the Stewardship theory lays its foundations on the "homo reciprocans": the man is primarly motivated by the desire to be cooperative, therefore he gains an higher value from collectivistic behavior than from individualistic behaviors. Of course, these two different visions imply completely different outcomes if they are considered and applied within the boundaries of a company.
The main difference between Agency theory and Stewardship theory is that while the first one considers negatively the situation in which there is CEO duality, in Stewardship theory CEO duality is seen as a positive attribute. This is due to the different perception the two theories have on CEOs' behavior. In the first theory the CEO maximizes his own benefits at damage of the firm, so concentrating the whole power in his hands would be detrimental to the firm itself. In the second theory, on the other hand, the CEO is perceived as a good steward to the firm, and acts in its interest instead of his own, therefore CEO duality is an efficient tool to the firms effectiveness.
The basic difference between these two theories is how men are seen: according to the agency theory,as stated by Adam Smith we talk about "homo oeconomicus", so self-interested and attempting to maximize his utility (which is not negative because individuals put all their efforts in increasing human wellness through this maximization),deriving a concept of managers who have to be monitored. The stewardship theory instead sees men as good stewards,so managers are trustworthy and CEO duality is considered positively.There is absence of control ,replaced by steward autonomy.
Firstly the role of the manager that in the Stewardship is seen like a Steward that behaves in a pro-organizational and collectivistic way, motivated by principal goals. So there is a deep convergence between the principal and manager's interests and there is a trust relationship between them. We have a structure that facilitate and empower with a psycological and sociological approach to the governance. The owners have the propensity for risk. Instead, according to the Agency theory the manager is an agent who behaves in an individulistic and opportunistic way, motivated by his own goals. So there is a divergence between the principal and manager's interests and there is a relationship of control between them. We have a structure that allows monitoring and controlling with an economic approach to the governance. The owners shows a risk-aversion.
In the Agency theory the managers (agents) are seen as self-interested individuals and therefore there is not alignment between the interest of the company and the interest of the managers. For this reason the main role of the Board of directors is that of monitoring the behaviour of the menagement to prevent opportunistic behaviour. In the Stewardship theory instead, the interest of managers are aligned with that of the company because managers (stewards) are seen as "altruistic" individuals who behave in a pro-organizationale and collectivistic way. Therefore, the Board of directors has to collaborate (insted of controlling with) the managers.
These two theories differ on the following aspects: first of all, agency theory views the board of directors with a monitoring role while in the stewardship theory, managers are much more involved in reaching the objective of the company (managers are the stewarts of the firm). In the agency theory, instead, managers try to maximize their own interest and moreover it considers in a negative way the situation of CEO duality.
In agency theory people act as agents, looking primarily at their own interest; in stewarship theory directors act as "stewards", making the interests of other people
Agency theory mainly says that there is conflict of interest between the principal(shareholders) and the agents(managers). Because Principal delegates the decision making to agents, sometimes agents might do certain work on the expense of the principal. As for the stewardship theory, it says that managers are good stewards for the corporation and they should not be monitored by the BOD.
Lucio, in agency theory the agents have different objectives and are better informed than the principal. The principal tries to satisfy its interests, and after having delegated, he controls in order to avoid opportunistic behaviors. Insted, in the stwardship model, the steward has a behaviour oriented to the promotion of collettivism, he adopts cooperative behaviours rather than individualistic and utilitaristic ones.
Stewardship theory talks about managers and it considers them as good stewards. It adds that they should not be monitored by the BOD and that their interest is aligned with the interest of the owners and it gives more advantage to the inside directors rather than the outside ones. Agency theory says the opposite. It considers a conflict of interest between the principal or the shareholders and the agents or the managers. It says that the managers will work to increase their own interest even if it is on the expense of the shareholders.
There are a lot of differences between these two theories. In the Stewardship theory managers are perceived as stewards that have interests aligned with the ones of the shareholders and behave cooperatively and in a pro organizational way. Moreover the principal can trust on them and giving to stewards higher autonomy and discrection is able to increase their motivation and so their performance. In agency Theory instead, the man is rational and perceive as selfish. The agents behave in an opportunistic and individualistic way, and since cannot be trusted they always have to be monitored and controlled. Their interests indeed diverge from the ones of the shareholders and the risk of expropriations of resources from the principals is high.
In my view, Agency theory argues that shareholder interests require protection by separation of incumbency of roles of board chair and CEO. Stewardship theory argues shareholder interests are maximised by shared incumbency of these roles.
Considering the Stewartship Theory the CEO is motivated to behave in ways that are consistent with the organizational goals. He works to meet organizational needs and his interests are alligned with the corporation and owners' ones. In the situation in which the CEO is chairman too, the high authority and discretion are oriented toward the best for the company. So we could say that the CEO will maximize the fims'utility reaching the organizationals'goals rather than self-serving's ones.
Because, in contrast to agency theory, the stewartship theory states that managers are trustworthy people and therefore they are good stewards of the company. In particular, if the CEOs are good stewards it is very profitable to assign high authority and discretion to them. In fact, stewards maximize their utility achieving organizational rather than private objectives and therefore the ceo duality could be a strategic choice.
I agree with the both of you girls. The CEOs who are stewards are inclined to fulfill organizational objectives rather than their own ones. This means that, having the chairman and the CEO gathered both in a unique persone can only bring positive results if the actions of this person are taken in the pro-organizational way of the stewardship theory.
Unlike Agency Theory, Stewardship Theory highly recommend the presence of the CEO in the BoD sitting in the vest of chairman. What is the reason? Being also a chairman the CEO is thereby facilitated in the difficult commitment to achieve the organizational goals. The basic assumption of the model relies in the fact that the CEO is entrusted by the principals who believe in the truly motivational guiding beliefs of this individual.
Because in the Stewardship theory managers are perceived as good stewards to the firm who act in its interest, therefore when all the power is concentrated on the hands of one CEO. Thank to the greater decision making power, the steward is also able to make decisions without having to confront himself with anyone, being so more efficient.
According to the Stewardship Theory, the goals of the company and the ones of the CEO, tend to be more aligned. Ceo duality, in this situation represents a very good thing, since it improves as much as possible the interest of the ceo and chairman, towards organizational objectives. Therefore, It is absolutely an advantage.
In the Stewardship theory the CEO behaves in a pro-organizational way, his interest is aligned with that of the firm. For this reason,the CEO duality could have a positive effect, by allowing to the CEO to have more power and discretion that he/she will use in favour of the firm. Of course it is based on the assumption that the CEO would never try to extract private benefits!
Because according to the stewardship theory, when the CEO has the highest decision making be will work better because he knows he's responsible for the faith of the organization and if there is an external outsider chairman then the CEO might feel undermined.
As luigi said, since the stewarship theory is based on a organizational structure where the steward is oriented to the promotion of collettivism, in the case of CEO duality the steward is more efficent in adopting cooperative behaviours rather than individualistic and utilitarastic ones, because he has greater decision making power.
CEO Duality is positive in the Stewartship theory because it gives much more discretion and authority to stewards. This is indeed what stweards need to satisfy the interests of shareholders and to maximize their organizational performance.
According to the stewartship Theory, CEO duality has positive effect on performance because they maximize their utility achieving organizational rather than private objectives.
Stewardship theory argues that CEO duality has positive effect on performance of the firm because CEO duality creates strong leadership and a clear sense of strategic decision. Separated roles may create high communication costs and decision making processes can be less effective and less efficient when there are two leaders
In my humble opinion the agency theory is closer to reality, as managers are often more concentrated on their own benefit than on the firm's success. As a consequence of this situation there are several instruments adopted in order to get the managers to align their interests to the firm's, as for example stock payments or bonus on performance. Thus we rarely meet CEO duality in firms.
I agree. Unfortunately, I believe that the agency theory prevails because it's easier to find a manager who focuses his attention on his private benefits rather than on the company's ones. However, it does not mean that it is not possible to find managers who can be considered as stewart. I believe that this is the case of managers involved in a company from a long time and therefore who are more closely related to it. Anyway, a real "professional" should always behaves as a stewart.
I agree with you both. I think that in practice is more likely to find CEOs that follow the Agency theory. In fact the majority of people, even unvoluntary, let prevail their private interests over the collectivist ones. By the way, there can be also CEOs that act in the interest of the firm, especially when we talk about people that are iinvolved in a long term relationship with the company.
I am inclined to agree with you guys, especially if we look at the practice of business of the previous decades. I mean look at cases like Enron, Parmalat they are vivid examples of how the pursuit of self-interests has damaged entire marketd and communities.However, I think that the modern corporate governance systems are able, via different tools and procedures, to ensure that the interests of the managers are alligned to those of shareholders and so forth. Don't you think ?
Taking into account the past financial scandals, it is more likely that principals have turned their sense of trust into a sense of mistrust. Trust is the key element upon which Stewardship Theory can be based and as a result today control is more preferable compared to a "make-on-your-way" approach. However cultural roots are also to be considered when it takes to look at some companies.
I find the perspective offered by Federico's comment is quite interesting. Indeed, nowadays Corporate responsability is increasing, and hopefully the stewardship theory's approach will become more actual over the years. An encouraging fact emerges from tuesday's presentations: in firms born or grown in the last decade stewardship matters.
I agree with you. The Stewardship theory is too utopian to be always realised. Anyway I think that there are steward managers but that they represent only a minority. Managers usually behave in an opportunistic way.
I agree with my colleagues. I think that there are more examples that prove the agency theory than the stewardship one. But I also think that there are some cases that may represent an execption: let's look all those firms that have been able to create a strong brand, a lifestyle. Let's look at Apple, or earlier Microsoft, or Google: they bring a lot of innovative things, that caused a lot of enthusiasm, which is implemented in the spirit of the company. I think that when there is happiness of doing the job you are perfoming, all the actors involved in the organization will be oriented to the goal of the firm.
I think that the idea of "homo economicus" at the base of Agency Theory is more able to represent today reality rather than stewarship theory. Collectivistic, pro organizational, trustwothy behaviours are rare attributes to find,in today both private and public organizations.
I think that it's true that the "homo oeconomicus style" is much more diffused that the one described in the stewardship theory,but it is also true that it essentially depends on the culture of a country,of the environment in which individuals grow up and so on.. It's obvious that we rembember crisis and scandals examples much more than the good ones,but I think,as Silvia stated,that there is also the proliferation of companies managed by stewards.
I think that the agency theory prevails, it is more common to find a CEO who has personal interests and tries to exert private benefits instead of a CEO who only pursues the interest of the firm. Also for this reason the corporate governance is so important and it represents a tool for monitoring the management. However, of course there are exceptions and I think that the CEO of Starbucks is a good example in this sense.
Living in this economic landscape, I would say that the agency theory is definitely the one which fits best. Nowadays it is absolutely rare to find managers fully committed within the company in which they work. Their interests are usually disaligned with the ones of shareholders and the bonuses they get separate them from the firm dimension. Furthermore, they are becoming "money" and "reputation" oriented, working only on things that can permit them to seat in more and more boards.
I agree with Silvia, till managers work for a company that is enough profitable and also gives them personal satisfaction due to customer awareness of the products realized , as Apple does, they could try to avoid opportunistic behaviour, however as soon as problems arise they are supposed to turn into an opportunistic mood.
In my opinion and this is the sad truth but we are closer to the agency theory. Nowadays, if the owner doesn't follow the work of the managers than he might go bankrupt. Of course this is not always the case but I think most of the times it is.
Yes, agency theory is closer to reality and we have many examples of bad performance due to the problem of misinformation. In addition, fewer and fewer CEO act with the only purpose of the interest of the firm.
In the reality is more frequent to see cases of agency theory, because I think is more likely to have managers tempted to divert valuable resources away from the best interests of the shareholders and use them for their own personal gain.
Accordimg to the discussion in class of last monday, how do you think a board should be composed? How many shall the directors be? Is the ideal number of directors variable in accordance to the size of the firm or shall it remain fixed no matter how big the company is?
I think that the right number of the directors vary by the size of the firm. More directors are needed to govern and adjust to the needs of a bigger firm.
I think that, as pointed out by the Professor the number of Director is an important matter. Generally speaking, I think that the right size for the Board is about 9 Directors, however to better define the right number it is necessary to take into account the size of the company: the bigger the company the higher the number of directors.
That's a very interesting question. In my opinion, it depends on the size of the firm of course! A greater number of directors is required, when we talk about big companies. Moreover, in US several pressures have led to an increase in the number of non-executive directors (especially independent), on the board.
I think that the number of members depends on the size of the firm while the prescriprion on its composition (outsiders/insiders) changes on the base of the theory used to evaluate, Agency or Stewarship Theory.
I strongly agree with Lorenzo Onofri; not always a large firm requires a large BoD, and not always a small firm requires a small BoD; however, I have another question for you: what should be the proportion of dependent/independent directors?
I think that The size of the board should be based on the needs of the organization, not only based on the size of the firm. There is no common optimail size. Many factor can influence the size of the board such as legal mandates, work load, number of subsidiaries, demand for diversification, phase of life cycle...
I agree with you Natalie. It is not only the size of the company that matters. There are many factors, like you said, that need to be considered, and in my opinion this also includes the agency theory or the stewardship theory. More board members have more types of individual interests, but it means more knowledge when it comes to decision-making.
Answering to Giovanni, the ratio between independent directors and dependent ones depends on how the shareholders want to present the board in terms of independence in making decisions. In some cases, the presence of independent directors is legally oblidged ( ex: presence of a lead independent director with CEO duality) whereas in others it is a simple guarantee of board independence from shareholders "advices". For what concerns the minimum number of board members, it is stated in firm's Statuto and can vary from company to company. Of course, following the agency thepry, wide BoDs will seem as a UN General Assembly with more influence groups arising. On the other hand, small BoD will be like UN Committees with the probability of a total consensus and less divergencies.
The average number of the board should be 9 but it depends of course on the type of corporation. Of course the ideal number depends on the type of corporation as I have stated earlier.
As we have seen in class, according to the agency theory, the majority of studies of board and corporate financial perfomance have looked at how the four usual suspects influence varios performance measure. In this sense, we have seen how the ideal board size is of 9 members
An ideal board should have 9 members (independents) and the directors should have different knowledge, skills and experiences. According to me, the numbers should not remain fixed but it should neither be too high since has been proved that boards with to many members have a poorer performance.
As the professor said, the perfect number of indipendent directors should be 9,but this can significantly varies according to the size of the firm.. but it's important not just to keep in consideration this ratio,but also the other ratios or element individuated to evaluate the performance of a firm
I believe that the composition of the BOD, in terms of the proportion of outsiders and insiders, depends on the theory we choose. According to the Agency theory is better to have an high proportion of outsiders, since the role of the BOD is to monitor ( so it is better to have in the board people who have no link with the firm). Accoding to the stewartship theory, an high performance is reached when the BOD is mainly composed of Insiders, since the role of the board is to support the management. In fact, the main advantage of having insiders within the board is to have people with depht knowledge of the firm and technical expertise.
I agree. Inside knowledge and understanding is important. But insiders mean possible conflict of interest. Just like the outsider who is an insider with conflict of interest, but not realized because of a wrong definition of "an outsider" in the firm.
Totally agree with you, Federica. I would like to add that in the case of the agency theory, however, it is possible to monitor management even without having high proportion of outsiders. For example, other possibile solutions in order to monitor manager are: shareholders activism, incentives, dividend policy, and security analysts.
Federica I think that insider directors for some reason are better. There is an involvement + sharing values in running the business that they act as stewards, trying to sustain the continuity of the family firm. But according with Andi, if we have a lot of insider directors we could have possible problems of conflict of interest.
I agree with Federica Brunetti, the proportion of outsiders and insiders, depends on the theory we choose. Agency theory is better to have an high proportion of outsiders but in the stewartship theory, an high performance is reached when the BOD is mainly composed of Insiders
Yes of course, there are different mechanisms that are able to reduce agency costs, and that allow the principal to exert control over the Agents. These mechanisms can be internal, such as to appoint a Board of Directors composed of independent directors, or external, such as the market for corporate control.
Yes it does. It prescribes the incentive alignment mechanisms to the management, in order to make them think as shareholders. Moreover, these incentives are usually linked with firm's performance. Secondly, it considers the share ownership of directors as another tool to link principal's interests with the agent's ones. In addition, it provides separation between directors and firm's management.
I totally agree with Federica. To minimize the agency costs, we also can use some other mechanisms which are related to incentives, financial leverage, dividend policy. The Managerial reputation and legal protection of investors can be used to reach this objective as well
Another mechanism in the Agency theory to align the interests of the agent (manager) with that of the principal (shareholders) is the stock-option compensation for the agent, even though several studies have shown that is not a good tool
Yes of course we have both internal mechanisms and external ones. The internal ones like financial leverage, independent directors, incentives and so on. As for the external mechanisms, well mainly they are the managerial reputation and legal protection of the investors.
We can take into consideration five possible mechanisms: 1. Usual Suspect (The use of outsiders on the board of directors) 2. Debt Financing 3. Insider Shareholdings 4. Istitutional Shareholdings 5. Use of the market for corporate control
Of course, Arianna. The main mechanisms in order to align the interests of principal and agents are: making managers more and more dependent to the organization through stock options and using financial incentives
Yes, of course. We have a lot of mechanism to reduce agency costs. Internal mechanism such as independent director, financial leverage etc. External mechanism like legal protection, managerial reputation, institutional shareholdings.
Yes, there are internal and external mechanisms that can minimize agency costs and align the interests of both agent and principal. Among the others, in the internal ones we can distinguish the Incentives schemes, the shareholder activism and among the external we can identify the managerial reputation, the legal protection of the investors and the market for corporate control.
I think the Agency Theory prescribe many mechanisms to align agent-principal interest for example: Use of the market for control, Insider Shareholdings, Debt Financing ....
Yes,there are several mechanisms according to this theory,even if the main one is the exert of control of the principals over agents. Other importants tools are divided into internal and external one,such as financial leverage,the presence of independent directors in the board or market protection.
There are different mechanisms to align the agent's interest to their principal's one. As Claudia correctly pointed out, we can observe both internal and external mechanisms. Internal mechanisms can be bonuses on the salary or a partial payment in shares to the managers, in order to align the private interests of the agent to the firm's interests. Among the external machenisms the most effective intruments are a high risk of takeover, that in case actually happened would put in jeopardy the manager, or, alternatively, a high leverage of the firm, due to which also banks would observe more deeply the managerial effectiveness.
Can we find some industries in which the agency theory fit best and industries in which the stweardship theory is dominant? Can you give me some examples?
Of course we can. In the case of agency theory it's quite easy to find examples, as it is the most diffused situation to date. An example is provided by Valero Corporation, in which the separation between ownership and control leads to an agency problem of type I. On the other hand, stewardship theory is evident in the case of Micheal Kors, a company which is effective despite the presence of CEO duality thanks to the steward attributes of its CEO, as we learned from the interesting presentation on Hugo Boss and Micheal Kors.
When we talk about goodness of fit of the agency theory I have in mind the food processing industry, such as Barilla. While I consider the IT industry as a best practice of the stewardship theory.
I don't think that these two theories can be generally connected to specific industries, given that they are developed to describe human traits and managerial behaviors not industries or sectors.
I completely agree with Federico. Firms operating in the same industry can have different managerial approaches as well. So, we should not connect each theory to specific industries.
Can we think about the application of agency theory to non-profit organizations? What could be the main implications and differences with the thoery applied to profit organization?
Agency theory refers to interests misalignment between agent and principal (in our case, shareholders and management). Since we have got used to think on shareholders' main interest as dividends, I find it hard to apply the agency theory on non-profit organizations (dividends are based on firm's profits). Besides, non-profit organizations are usually regulated in a different way with respect of profit ones and the monitoring activity of legal institutions on their interests is very restrictive. Therefore, agents with interests that are far away from the ones of their principals may usually become unfair and lead to legal consequences.
I dont' think we can apply the agency theory on non-profit organizations, because agency theory is based on the "shareholder theory" and refers to the case when managers may behave in a opportunistic manner. Instead, we should apply stakeholder theories on non-profit organizations, since the main insterest can be, for example, to achieve social goals.
I agree with my colleagues, agency theory is not applicable to non-profit organizations due to the difference in regulation and dividends policy they have from common organizations. In fact the main point of conflict between shareholders and CEOs are usually dividends policies, which, on the other hand, aren't a central matter when we talk about non-profit organizations.
I don't think that the mechanism of usual suspect can work to have a better performance within the board of directors. I would rather prefer the stock option tool in order to link better the interest of all the stakeholders. Usual suspects are outside directors, so they should be more vigilant than insiders because they are less dependent on the CEO......but let's consider directors who own stock, so we can say that they have "skin in the game" and have an incentive to pay more attention. Of course we should avoid the CEO duality problem.
I believe that some usual suspects can work under the agency theory to enhance the performance of the firm. For example, in composing the BOD we must add an adequate proportion of outsiders. The outsiders, under the agency theory, will increase the performance of the firm since they are less dependent on the CEO and, thus, they are more objective and vigilant than the insiders. Consequently, they ensure that the firm's goal will be reached.
I agree with Federica, some of the usual suspects can actually work to improve the performance of the directors. For example, the fact that the Directors own, even in a small amount, the shares of the firm can help them to be more involved in the life and in the dynamics of the company, since they are engaged in the monetary risk.
Even if the usual suspect will give the benefits you mentioned, I consider stock options as a better tool to align interests as stated before. Furthermore, stock options work better with an adequate incentive plan to inside directors. Nonetheless, this mix is usually inapplicable to outside directors.
Of course usual suspects can enhance the BoD performance, coming from different studies of board and corporate financial performance. However, as Lorenzo said, I think stock options are a better mechanism and a better incentive solution in order to align interests.
Usual suspects are the number of outsiders on boards, director shareholdings, board size, and whether the CEO also holds the Chair position (CEO duality). So I think that usual suspects do not ensure a truly independent board.
I believe that usual suspects can be good measures to enhance the board of directors performance. However, to archieve the truly independent board, we also need to consider the Board process and actual board behaviour.
I don't think that we have to take this elements as an absolutely efficient way to measure the performance of the firm,but just as a relative one.For example if we think about the number of independent directors,both in presence or absence of CEO duality we cannot state a REAL independence.
I think that "usual suspects" are the result of years of research about the Firm Performance. So they are an useful starting point to consider to improve the performance.
An executive director usally can be applied both to the CEO or to a managing director of the firm,while in order to be independent a director has to respect some criteria which do not allow the director to be a manager of the firm or to receive compensations different from the directorship fees and so on..so I don't think that an executive can be also independent Lucio,and you?
Hi Thuy Le, usual suspects are the number of outsiders in a boards for example, but I think that usual suspects do not ensure a truly independent board, so I think also that usual suspects is not the best way to improve the board of directors performance.
Please, ask questions to your colleagues using the Figure above and the theory discussed during the lesson and contained in the suggested articles (e.g. what is the difference between this setting and the shareholder theory, stakeholder theory and team production theory).
ReplyDeleteAs far as I understood, the Agency Theory and Stewardship Theories are built on two pivotal assumptions:
DeleteAgency: the principal does not trust of the agent and so he enacts conjectured systems of controls
Stewardship: the principal believes that the agent' s interest are aligned with the entire organization and so he trusts him.
Do you agree? If yes, would you provide more assumptions and /or differences?
Suppose an organization aims to be stakeholders oriented and the BoD decides to form the management. What kind of people may it will looking for? Steward or agent? Explain.
Deletehei guys, i would like to understand deeper the topic of related party transactions, could you please explain me its meaning giving me examples?
DeleteI try. Take for instance the case in which A controls B and C and that that in turn D is controlled by C.
DeleteThere might be the case that the ultimate controlling party of A decides that B will sell a product to C at a lower price than the market price. In this situation cash moves from C to B but the reasons for the lower price may be the following: 1) for the benefit of the group, 2) for extracting private benefit, but this fact has to be demonstrated. In fact, with the excuse of group benefit, cash entered in B may be then transferred to A.
Think of an external analyst that is committed to evaluate company A. This guy owns no stock of company A but the Agency Rating Firm for which he is working for has a deep and enrooted relationship with the company A, being one of the best and profitable client. Is this guy independent?
Delete@alberto I don't think he could be considered as fully independent
Delete@alberto I believe that if shareholders decide to create a stakeholder oriented firm , but also for whatever other kind of organization they decide to set up, they should look for people whose interests are in line with theirs. Therefore they should look for stewards because they tend to be more reliable in both administring the resources they are given and working in cooperation to better serve stakeholders needs.
DeleteGuys what theory is the best according to you? What theory should the firm pursue? Because I have been reading so many articles and each gives a grant to one of them? I'm a bit lost on which is the best?
DeleteThat depends on firm's orientation and so firm's strategy. Both theories have pros and cons that must be analyzed.
DeletePerhaps, stakeholders theory fits best with the upcoming economic environment which is characterized by the rising of CSR as a pillar of firm orientation. However, the debate on this subject is still in progress.
I agree with you, Alberto, and I would like to add some differences between the two models.
DeleteIn the agency model are used many financial incentives, auditing and evaluations, instead in the Stewardship model not.
Moreover, the agency model uses a organizations structure aimed at monitoring and controlling, instead the Stewardship model allows the other actors to be autonomous.
Guys can someone explain me the related party transaction? And how is it related to the consolidated financial statement?
Delete@ Alberto, he is absolutely not independent.
Delete@wissam as stated by IAS24, Related Party Transactions are transactions between the firm and its subsidiaries, parent company, associates, managers, directors, and majority shareholders, as well as ther close relatives.
DeleteA related party is a person or an entity that is related to the entity that is preparing its financial statement.
A related party relationship could affect profit or loss and financial position of an entity.
This comment has been removed by the author.
ReplyDeleteIn your opinion, what is the best option to have an equilibrium between the satisfaction of internal actors and the satisfaction of external actors? How can the firm work in order to satisfy all the actors involved in its environment?
ReplyDeletei think that shareholders theory is too much superficial and it is not right to represent as the aim of a firm the one of satifying people who gives you the resources just because without them you cannot run your business. Stakeholder theory maybe is the only one that keep in consideration every kind of actors that you have to satisfy, is important to satisfy the customer because he represent your revenue, the government because it could give you facilities , shareholders obviously because they will be incentivated always more investing in the firm and so on with suppliers and distributors (building strong long term relationship). all these actors are able to bring in the firm higher revenues or less costs, satisfying all of them you'll satisfy internal and external actors maximizing your profits.
DeleteI think that all the stakeholders have to be satisfied,as Cristina said, because ALL can contribute to the objective of the business entity and there are several ways in which this balance could be reached. But for sure the first way should be the absence of conflict of interests between parties,otherwise it's obvious that some could gain more benefits than others. Maybe the key could be in the independence of the BoD as suggested by the team production theory.
DeleteIn my opinion the best tool to satisfy internal and external actors is the "Network-Oriented system" in which the labour unions are part of the supervisory board and they can influence the decision making process of the management. In addition, these unions are closer to the customers than the management in order to make better suggestions in how the needs and wants change in a today turbolent environment.
DeleteOf course we have to take into consideration that if in one hand we can reduce the conflict of interest, in the other hand we have to consider that the management can give to the labour unions some benefits in returns of something.
I think that the reduction of conflicts of interest and the creation of value for all stakeholders are two important goals that can be reached with the "team production theory" which suggests that the role of corporate directors is to mediate among memebers of the corporate team, making decision in the interest of the "corporate entity" rather than of shareholders.
DeleteIn my personal opinion, a firm needs to satisfy both shareholders and stakeholders. Shareholders in primis because they invest their money into the firm, so they need a revenue from this operations. Also customers because if they aren't satisfy, probably, they will not buy products or services produced by the firm. etc.
DeleteI agree with Morgan, the network oriented system is effective, even though internal dynamics of the firm could bias its actors' behaviour. Anyway, in an idealistic situation it would certainly be the best tool to coordinate internal and external actors' interests.
DeleteI agree with both Arianna and Morgan.
DeleteIt is important to create a coordinate and integrate system in which there is collaboration and it is possible to minimize the conflicts between members.
If the environment within the firm is stable and cohesive, then every actor involved will do whatever he can to reach the goals of the company, having a great satisfaction.
In your opinion, what is the best option to have an equilibrium between the satisfaction of internal actors and the satisfaction of external actors? How can the firm work in order to satisfy all the actors involved in its environment?
DeleteI think that an effective solution to have an equilibrium between the satisfaction of internal actors and external actors could be that of considering the business activities of a company from a stakeholder point of view. In fact, the satisfaction of the internal actors can be really achieved only paying attention to external actors like customers, suppliers, community and so forth.
Look at the German two-tier system. In this model external actors (the employees) and the internal ones (the shareholders) do sit together within the supervisory board. The former hold a long term interest while the latter hold a less much longer term perspective.
DeleteIn my opinion, the best way to reach the equilibrium between the satisfaction of internal actors and external ones, is based on the stakeholder theory. Indeed, it is on those actors that the existence of the company depends on, and being successfull on satisfying them, consenquently, the company is able to create a strong image, revenues, increasing the value of the shares, and generating a lasting relationship. This will help the reduction of conflicts among internal actors, that may have different interests.
DeleteI believe that the firm in order to satisfy both internal and external actors should grant a sufifcient degree of INDIPENDENCE between people who can administer , affect and control the business entity. In particular it is pivotal that the BoD , which has the highest authority in managing the corporation, is granted a sufficient degree of indipendence both from the shareholders who elected it ( though it have to control how capital is invested and employed on their behalf) and from management who implement the stretegy. Only if no "dangerous" identities between these three roles are created the general interest of the firm coudl be achieved.
DeleteAccording to me the stakeholders theory is the best one. It can balance between both the internal actors and the external ones. Since the shareholders theory only gives importance to maximizing the shareholders value and avoids all the other stakeholders. It might even take certain decisions that might be detrimental to the stakeholders just to increase its profit. As for the stakeholders theory it gives attention to all the parties, but consider profit as a result not a driver for success.
DeleteThere will always be a trade-off between satisfying internal and external actors. The question must be: How can I maximize the utility of both actors under my resources constraints? In this case, there will be one best choice that enables the firm to reach all interests with no complaints.
DeleteThe survival of a firm strongly depends on the satisfaction of the interests of every type of stakeholder. So, a good option to achieve the equilibrium is to create a corporate governance system in order to guarantee the proper equilibrium among all these different expectations. So, is very important to manage the exchange between the stakeholders' contributions required by the firm and the compensations given to them.
DeleteI think that the stakeholders theory is not the best one but better than the rest because it's able to make a compromise between all the stakeholders.
DeleteThe problem with the shareholders theory is that it only tends to maximize the shareholders value and doesn't care about the other stakeholders. And it might even take some decisions on the expense of the other stakeholders,
I agree with Morgan and Alberto. Both the Network Oriented system and the Two tier model are two systems that help to satisfy the needs of internal and external actors. In these two cases different stakeholders have the power to control the activities of the company and so to increase the chance to satisfied their interests. .
DeleteAccording to the Team Production theory the BoD has a mediation role, solving the conflicts among the different team members and being oriented just to the value creation, But how could the BoD be a neutral mediator among the team members since it is elected by the shareholders?
ReplyDeleteWell this theory underlines the fact that shareholders are just owners of the shares. Thus they do not own the assets of the firm or the output of it. This implies shareholders' interests may be different from firm's interests. The BoD according to the team production theory can be considered neutral since it's decisions are made in the interests of the firm. Pursuing the interest of the firm serves as a proxy for the combined interests of all the actors related with the company
DeleteI believe that the point underlined by Serena is the main weakness of the team production theory. Since the BOD is elected by shareholders, it could not be neutral, because it may favour the shareholders' interests and protect them.
DeleteIt's a good point..I think that actually there are some mechanisms in this theory that could help the BoD to reach a certain level of independence,maybe some corporate laws and so on,otherwise this theory couldn't be valid.
DeleteA team production analysis starts with a broader assumption. All the participants hope to have a benefit from their involvement in the corporate enterprise, and all of them have an interest in finding a governance arrangement that is effective at eliciting support and cooperation from all of the participants whose contributions are important to the success of the joint enterprise. The problem that Serena arose could be explained by analyzing the contest in which it has been developed, a rejection of the agency theory in favour of the stewardship theory.
DeleteThis is a very important point about team production theory. I think we could hardly believe it works because of our cultural background, where personal interests are the main pivotal. Nevertheless, I find this theory very similar to what happens in Japan, where the feeling of "familiarity" among all employees and BoD long-term relationship with the firm, eventually make Directors the ones in charge to balance the relationship between shareholders and employees.
DeleteUnder this perspective, this theory could totally work!
According to the team production theory shareholders are only owners of the shares and the bod should make the interest of the corporate entity and not that of shareholders but this create a "dilemma" because the members of the bod could be olbliged to pursue the interest of major shareolder at first if they want maintain their seat.
DeleteIn my opinion, when BOD are elected by major shareholders who want to maximize their own value related to the interest of other takeholders, it is necessary to create the environment for the BOD archieve the object of the Business entity. For example, the Regulation factor can put more protection to protect the minority shareholder. The labor union have strong affect to protect employee's right, the suppliers can stop provide input to the firm which is not good in their view...
DeleteI think that the team production model also suggests that maximizing shareholder wealth should not be the principal goal of corporate law. For example, directors of public corporations should seek to maximize the joint welfare of all the firm's stakeholders, including shareholders, managers, employees, and possibly other groups such as creditors or the local community, who contribute firm-specific resources to corporate production.
DeleteI think that we should take into account the fact that in today public companies most of the board members are outside directors who are also indipendent from the company itself. From this perspective, we can better understand how the directors can mediate and balance the clashing interests of the executives at the top of the various teams.
DeleteManaging conflicts within the management team is indeed perfectly aligned to the stakeholder's interests (not only shareholders but all the other stakeholders) because in this way the risk of value destruction is reduced. However I believe that, according to the cognitive conflict theory, that a certain threshold of conflict is to be tolerated because it aims at fostering the decision-making process.
DeleteI agree with Federico, this theory can probably work only if a certain degree of indipendence of the BOD is granted, so that to assure that not only shareholders interests are achieved, outside directors can surely help in this.
DeleteI agree with nardi, because in this theory the owners are the corporation itself, so the shareholders are merely the owners of their own shares no more, They have nothing to do with governing the corporation, And so the BOD even if it is elected by the shareholders, it can have the role of meditator, because the shareholders have no other job than electing the BOD and maybe half of the board are from the independent outside directors,
DeleteThe board of directors, according to the team production theory, can be considered neutral since its decisions are made in the interests of the firm. Pursuing the interest of the firm serves as a proxy for the combined interests of all the actors related with the company. However, I believe that this happens only when we have a independent BoD.
DeleteIn the team production theory the owners are the corporation, and the shareholders are no longer the principals. In this theory, the shareholders don't govern nor control the organization, they just own their shares.
DeleteAs for the BOD it can be the meditator, because the shareholders job is electing them no more, they are not affected by their decisions.
According to me, this is the main limit of this theory. Since the BOD is appointed by the shareholders, there could be a conflict of interest when they act in order to create value for the corporation. By the way since the majority of the BOD's members are supposed to be independents, we have to assume that they will be neutral no matter who has appointed them.
Deletereferring to the team production theory, we can observe that now the principal is no more shareholder (as usual) but the corporation itself, what is the reason why it happens?
ReplyDeleteThe team production theory consider the corporation as the principal since the aim of all the parties involed in the firm is to create value for the firm itself( not for shareholders, nor for other stakeholders). As a consequence, the BOD is appointed in order to monitor that each party does it works and to solve the possible conflict that can arise among them. ( the so-called "mediating role").
DeleteI agree in T.P.Theory the productive activity requires that all the parties make contributions that are complex in the interest of the whole system (shareholders & stakeholders) where every member's needs have the same importance. This concept can be summarized with corporation as principal.
DeleteI'm completely agree with you guys, in the team production theory we satisfy in primis the interest of the firm, in this way both stakeholders and shareholders. Obviously to do this we need a neutral board of directors, but is very difficult to find.
DeleteI think that the answer lies in the fact that the Directors of the Board have this "mediating role" of coordinating and balancing the various interests. Doing so, they act like "legal agents" of their own company, not complying with the shareholders' interests.
DeleteThis happens because the BoD plays a mediation role, solving the conflicts among the different team members. It is oriented more on the value creation for the entire firm and for all the team members than to the satisfaction of only the shareholders'interests.
DeleteI agree with you guys and I would like to add that the team production theory is based on the fact that the board is not only a monitoring agent for shareholders, but it replicates team members who add value, take risks and possess strategic information within the company.
DeleteIt happens because this is a theory which wants to stress the fact that the Bod should not only serve the interests of shareholders who appointed it but creating long term sustaineable value for all its stakeholders.
DeleteThis happened cristina because this theory emphasises on the idea of maximizing the interest of the corporation and not the interest of the stakeholders and shareholders like the previous theories. This is why the principal now is the corporation and not the shareholders because the shareholders are merely owners of the shares.
DeleteCristina, this happens because the corporate entity serves as a proxy for the combined interst of all team members, so the BoD has a mediations role.
DeleteWell this theory underscores the idea of maximizing the interest of the corporation. This is why the principal now is the corporation and not the shareholders. Its different than the other theory because this theory is direction primacy model.
DeleteIt happens because the interests that the Board of Directors is entitled to satisfied, mediating among members of the corporate team, are the ones of the corporate entity and not of the shareholders.
DeleteI agree with Federica Brunetti, the team production theory consider the corporation as the principal since the aim of all the parties involed in the firm is to create value for the firm itself. As a consequence, the BOD is appointed in order to monitor that each party does it works and to solve the possible conflict that can arise among them.
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ReplyDeleteSince we are talking about the role of the board, why BoD members are so important in the resource dependence theory and interlocking directorship? Do we know some examples of this theory?
ReplyDeleteInterlocking directorates is one of the indices of the S&P analysis. This meant that it has been judged very important. Interlocks used to have the strategic purpose of tying corporations together for economic advantage for the owners.
DeleteI know the example of Citigroup, an american bank, which was linked with 25 other corporations via 13 people.
They are so important because the bod members are links between the firm and the essental resources that are required to maximise the performace.They are boundary spanners, mechanism to form links with external environment and they can be source of timely information for executives. About the interlocking directorship or multiple directorship it can create economic advantages but the question is already controversial.
DeleteResource Dependency Theory and Interlocking Directorship are meant to be considered two faces of the same medal. BoD, is able to exert control over the environment by means of co-opting resources needed to survive. Pfeffer (1972) has made the case in which the BoD is capable of improving the organization by establishing contacts and raising funds so that the cost of financing becomes more sustainable.
DeleteThe number of contacts of each BoD members can be found for instance on Bloomberg Businessweek.
Members of the board of directors, are considered to be so important, on the base of the resource dependence theory, because of the 'service roles' they run. Basically, some of these service roles, regard improving organization's reputation and giving advice to the company.
DeleteIn the RD Theory, I think that more than board members it is important their connection with the external environment.
DeleteIn fact, it will provide Horizontal coordination (with a lot of information exchanges), vertical coordination (and so resources availability, in order to survive), expertise (more options to evaluate) and reputation (and so firm's attractiveness too).
One clear example of the importance of network connections of board members ig given by Pirelli. After the company crisis of 2008, there was a huge board members change that took into it a FIA (Féderation Internationale de l'automobile) member. Thanks to his connections with the F1 organizations, Pirelli has been able to become the sole tier supplier of the F1 in 2011 with undoubtful benefits on company's performance.
BOD members are important because they are a massive source of information useful to help the firm in reaching competitive advantage over competitors and in implementing more efficient practices. The bod interlocks are one of the way drectors can be given the possibility to acquire this information and expertise,because they sit on bod of affiliated companies. An example can be CASIO computer ltd, whose ceo and president also sits in the boards of casio subsidiaries.this phenomenon has pros but also cons, it can be a way for the holding to exploit subholdings for its own interests .
DeleteIn the resource dependence theory, the BOD are very important because they are considered as a tool for relating the firm and the external environment. They are considered as boundary spanners
DeleteAs for the interlocking or multiple dictatorship, they are known as a person who is affiliated to one organization but sits on the board of the other board. This topic is controversial because some studies show that its fine to do so, others said there is a negative aspect of it and others said there is no direct relationship.
Federica, as the others said, BoD members are very important in this case becuase they can be used as a mechanism to form links with the external environment. So, interorganizational linkages such as appointing outside directors and board interlocks can be used to manage environmental contingecies.
DeleteAn example can be the one of Stanford Weill, CEO of Citigroup that in 2002 sat in the board of AT&T, creating a connection between these two corporations.
Well i agree with all of you guys, the resource dependence theory talks about the BOD and define them as a tool joining the firm and the external environment. The interlocking and multiple dictatorship, are defined as a person who is affiliated to one organization but sits on other boards.
Deletein my view, BoD members are so important in the resource dependence theory and interlocking directorship because the BoD members are links between the firm and the essental resources that are required to maximise the performace.
DeleteIn terms of the interlocking dictatorship, they are known as a person who is affiliated to one organization but sits on the board of the other board.
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ReplyDeleteIn your opinion, how can we improve the streamlining in a network oriented system? considering the possible relationship between the management and the labor unions.
ReplyDeletewhy is hostile takeover more frequent in outsider model respect to the insider model? Is it a good way to solve the agency problem between managers and shareholders? Which are the other possible solutions that could result less costly?
ReplyDeleteThe Hostile takeover is more frequent in the outsider systems since these are the system generally adopted by Public Companies. Here, the owership is diffused and the launch of an hostile takeover can be made. I think that there can be other alternatives to reduce agency costs, for example put into the BOD independent members.
DeleteThe hostile takeover is more likely to happen in a company characterized by an Outsider system simply because this Corporate governance system can be found more often in the anglo-saxon countries, which in turn are characterized by public companies. However, I am not sure that they can be considered a good way to solve the agency problem between managers and shareholders. In fact, especially the hostile takeover are considered as an "option of last resort" because they are a quite expensive way to correct that misallignement.
DeleteI'm not so sure but I think that a way simpler method could be that the board of Directors directly dismisses the Managers.
Hostile takeovers happen to be more frequent in outsider model amid their large exposure to the capital market and their fragmentated ownership structure (nobody owns more than 20%).
DeleteOf course the possibility to incur in the risk of an hostile takeover might bring about positive effects upon the behavior of the management as shown by the "Improved Management Hypothesis" (Manne, 1965). Nevertheless I do believe that the other side of the coin might be represented by an excess of short-term visionism in the management team. What I mean? I mean that the actions performed by the management are essentially oriented in the short term in order to satisfy a demanding market and this in turn may compromise the objective of creating sustainable value also in the medium and long term.
It is more frequent having an hostile takeover in the outsider model because of its diffuse ownership. There isn't a dominant shareholder and so it is difficult to find a sufficient number of shareholders that agree with the takeover.
DeleteAn alternative solution, in my opinion, could be represented by the so called 'bear hug' in which the acquirer prepares an acquisition proposal to the target CEO and Bod. The goal of this solution is of course to move the board to a negotiated settlement, that could be less costly.
DeleteHostile take over is more frequent in the outsider model rather than the insider one because in the outsider model the ownership is dispersed one, so its a public limited company, and hostile takeover are more frequent in it.
DeleteHere we have type 1 agency problem because there is a conflict of interest between the managers and shareholders, to decrease the agency costs we have internal ways and external ways.
Cristina, hostile takeovers are more frequent in the outsider model than in the insider one, becuase in outsider model the ownership is dispersed. This means that shareholders have only small percentage of the total equity. Instead, the insider model is charactersied by concentrated ownerships and for this reason here is more difficult to launch a hostile takeover.
DeleteBecause the ownership in the outsider model is widely held then there is more occurrence of the hostile take over than in the insider model.
DeleteOf course we can decrease the agency costs. We have both internal ways and external ways to do so.
Hostile takeovers are more likely to occur in an Outsider systems since the owners have just a transitory interests in the company and so the ownership is more dispersed than in the Insider systems ( were the takeovers that may occur are friendly). Hostile takeovers can be use to reduce agency problem but will be a more expensive mechanism with respect to the internal ones. Alternative and less clostly solutions that can be use to minimize agency problem are the executive compensation schemes and the governance structures.
Deletei think that in outsider model, because of more frequent dispersed ownership, one way to avoid the agency problem, in which managers could pursue their own interests, is the hostile takeover, voting to remove managers, but effectively it is a costly way to do it, maybe it could be more effective to try to give them incentives in remuneration, aligning their interests to the ones of the firm.
ReplyDeleteWhat are the main differences between agency theory and stewardship theory?
ReplyDeleteAgency theory describes the role of BoD as a monitoring part. In fact agency problems can arise because of inefficiencies and incomplete information and managers could try to pursue their own interests instead of the ones of the firm. Stewardship theory describe the role of manager as a steward of the firm, more involved and responsible to achieve firm's objective. the role of the BoD is no more to monitore, in fact there are no problems of ceo duality because could be beneficial if the ceo seat in the board
DeleteAccording to the agency theory, the management has to solve the conflicts between shareholders and implement the strategy chosen by the board. Following the agency theory, that is strictly connected with Adam Smith's theories, the objective of every person is the maximization of his utility function, so there is always a conflict of interest between principal (shareholders) and agent (managament) also because of the information asymmetry (we can not know if the managers are acting for their interest or for that of the firm).
DeleteInstead, in the stewardship theory managers are seen as trustworthy individuals that understand the business and is motivated to satisfy the goal of the firm, with the maximization of the organizational performance.
The Agency Theorymakes assumptions about individualistic interests of individuals, that results in agency problem since the agents (managers) want to maximize their own interests. The Stewardship theory assumes that the managerial behaviour is based on collectivistic interests, thus the managers are considered as the "stewarts".
DeleteFurthermore, the role of BOD differs between these two theories: on the one hand, tha agency theory assigns to the BOD a monitoring role, on the other hand, in the stewartship theory we do not have this rule since there is no reason to monitor.
Generally speaking, I think that the main difference between the two theories is the way they look at the "human nature".
DeleteIn my opinion, on the one hand, the Agency Theory is based on the "homo economicus": the man is selfish, narrowly self-interested, and then he cannot help but try to maximize his own interest and utility.
On the other hand, the Stewardship theory lays its foundations on the "homo reciprocans": the man is primarly motivated by the desire to be cooperative, therefore he gains an higher value from collectivistic behavior than from individualistic behaviors.
Of course, these two different visions imply completely different outcomes if they are considered and applied within the boundaries of a company.
The main difference between Agency theory and Stewardship theory is that while the first one considers negatively the situation in which there is CEO duality, in Stewardship theory CEO duality is seen as a positive attribute. This is due to the different perception the two theories have on CEOs' behavior. In the first theory the CEO maximizes his own benefits at damage of the firm, so concentrating the whole power in his hands would be detrimental to the firm itself. In the second theory, on the other hand, the CEO is perceived as a good steward to the firm, and acts in its interest instead of his own, therefore CEO duality is an efficient tool to the firms effectiveness.
DeleteThe basic difference between these two theories is how men are seen: according to the agency theory,as stated by Adam Smith we talk about "homo oeconomicus", so self-interested and attempting to maximize his utility (which is not negative because individuals put all their efforts in increasing human wellness through this maximization),deriving a concept of managers who have to be monitored. The stewardship theory instead sees men as good stewards,so managers are trustworthy and CEO duality is considered positively.There is absence of control ,replaced by steward autonomy.
DeleteFirstly the role of the manager that in the Stewardship is seen like a Steward that behaves in a pro-organizational and collectivistic way, motivated by principal goals. So there is a deep convergence between the principal and manager's interests and there is a trust relationship between them. We have a structure that facilitate and empower with a psycological and sociological approach to the governance. The owners have the propensity for risk.
DeleteInstead, according to the Agency theory the manager is an agent who behaves in an individulistic and opportunistic way, motivated by his own goals. So there is a divergence between the principal and manager's interests and there is a relationship of control between them. We have a structure that allows monitoring and controlling with an economic approach to the governance. The owners shows a risk-aversion.
In the Agency theory the managers (agents) are seen as self-interested individuals and therefore there is not alignment between the interest of the company and the interest of the managers. For this reason the main role of the Board of directors is that of monitoring the behaviour of the menagement to prevent opportunistic behaviour. In the Stewardship theory instead, the interest of managers are aligned with that of the company because managers (stewards) are seen as "altruistic" individuals who behave in a pro-organizationale and collectivistic way. Therefore, the Board of directors has to collaborate (insted of controlling with) the managers.
DeleteThese two theories differ on the following aspects: first of all, agency theory views the board of directors with a monitoring role while in the stewardship theory, managers are much more involved in reaching the objective of the company (managers are the stewarts of the firm). In the agency theory, instead, managers try to maximize their own interest and moreover it considers in a negative way the situation of CEO duality.
DeleteIn agency theory people act as agents, looking primarily at their own interest; in stewarship theory directors act as "stewards", making the interests of other people
DeleteAgency theory mainly says that there is conflict of interest between the principal(shareholders) and the agents(managers). Because Principal delegates the decision making to agents, sometimes agents might do certain work on the expense of the principal.
DeleteAs for the stewardship theory, it says that managers are good stewards for the corporation and they should not be monitored by the BOD.
Lucio, in agency theory the agents have different objectives and are better informed than the principal. The principal tries to satisfy its interests, and after having delegated, he controls in order to avoid opportunistic behaviors.
DeleteInsted, in the stwardship model, the steward has a behaviour oriented to the promotion of collettivism, he adopts cooperative behaviours rather than individualistic and utilitaristic ones.
Stewardship theory talks about managers and it considers them as good stewards. It adds that they should not be monitored by the BOD and that their interest is aligned with the interest of the owners and it gives more advantage to the inside directors rather than the outside ones.
DeleteAgency theory says the opposite. It considers a conflict of interest between the principal or the shareholders and the agents or the managers. It says that the managers will work to increase their own interest even if it is on the expense of the shareholders.
There are a lot of differences between these two theories. In the Stewardship theory managers are perceived as stewards that have interests aligned with the ones of the shareholders and behave cooperatively and in a pro organizational way. Moreover the principal can trust on them and giving to stewards higher autonomy and discrection is able to increase their motivation and so their performance. In agency Theory instead, the man is rational and perceive as selfish. The agents behave in an opportunistic and individualistic way, and since cannot be trusted they always have to be monitored and controlled. Their interests indeed diverge from the ones of the shareholders and the risk of expropriations of resources from the principals is high.
DeleteIn my view, Agency theory argues that shareholder interests require protection by separation of incumbency of roles of board chair and CEO. Stewardship theory argues shareholder interests are maximised by shared incumbency of these roles.
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ReplyDeleteWhy CEO duality has positive effect on performance if we consider the stewartship Theory?
ReplyDeleteConsidering the Stewartship Theory the CEO is motivated to behave in ways that are consistent with the organizational goals. He works to meet organizational needs and his interests are alligned with the corporation and owners' ones. In the situation in which the CEO is chairman too, the high authority and discretion are oriented toward the best for the company. So we could say that the CEO will maximize the fims'utility reaching the organizationals'goals rather than self-serving's ones.
DeleteBecause, in contrast to agency theory, the stewartship theory states that managers are trustworthy people and therefore they are good stewards of the company. In particular, if the CEOs are good stewards it is very profitable to assign high authority and discretion to them. In fact, stewards maximize their utility achieving organizational rather than private objectives and therefore the ceo duality could be a strategic choice.
DeleteI agree with the both of you girls. The CEOs who are stewards are inclined to fulfill organizational objectives rather than their own ones. This means that, having the chairman and the CEO gathered both in a unique persone can only bring positive results if the actions of this person are taken in the pro-organizational way of the stewardship theory.
DeleteUnlike Agency Theory, Stewardship Theory highly recommend the presence of the CEO in the BoD sitting in the vest of chairman. What is the reason? Being also a chairman the CEO is thereby facilitated in the difficult commitment to achieve the organizational goals.
DeleteThe basic assumption of the model relies in the fact that the CEO is entrusted by the principals who believe in the truly motivational guiding beliefs of this individual.
Because in the Stewardship theory managers are perceived as good stewards to the firm who act in its interest, therefore when all the power is concentrated on the hands of one CEO. Thank to the greater decision making power, the steward is also able to make decisions without having to confront himself with anyone, being so more efficient.
DeleteAccording to the Stewardship Theory, the goals of the company and the ones of the CEO, tend to be more aligned. Ceo duality, in this situation represents a very good thing, since it improves as much as possible the interest of the ceo and chairman, towards organizational objectives. Therefore, It is absolutely an advantage.
DeleteBecause no ceo duality would require higher costs of coordination and integration, and would bring less alignment
DeleteIn the Stewardship theory the CEO behaves in a pro-organizational way, his interest is aligned with that of the firm. For this reason,the CEO duality could have a positive effect, by allowing to the CEO to have more power and discretion that he/she will use in favour of the firm. Of course it is based on the assumption that the CEO would never try to extract private benefits!
DeleteBecause according to the stewardship theory, when the CEO has the highest decision making be will work better because he knows he's responsible for the faith of the organization and if there is an external outsider chairman then the CEO might feel undermined.
DeleteAs luigi said, since the stewarship theory is based on a organizational structure where the steward is oriented to the promotion of collettivism, in the case of CEO duality the steward is more efficent in adopting cooperative behaviours rather than individualistic and utilitarastic ones, because he has greater decision making power.
DeleteCEO Duality is positive in the Stewartship theory because it gives much more discretion and authority to stewards. This is indeed what stweards need to satisfy the interests of shareholders and to maximize their organizational performance.
DeleteAccording to the stewartship Theory, CEO duality has positive effect on performance because they maximize their utility achieving organizational rather than private objectives.
DeleteStewardship theory argues that CEO duality has positive effect on performance of the firm because CEO duality creates strong leadership and a clear sense of strategic decision. Separated roles may create high communication costs and decision making processes can be less effective and less efficient when there are two leaders
ReplyDeleteMoving from theory to practice, do you think is more likely to find managers and CEOs who fit the stewardship theory or the agency theory ?
ReplyDeleteIn my humble opinion the agency theory is closer to reality, as managers are often more concentrated on their own benefit than on the firm's success. As a consequence of this situation there are several instruments adopted in order to get the managers to align their interests to the firm's, as for example stock payments or bonus on performance. Thus we rarely meet CEO duality in firms.
DeleteI agree. Unfortunately, I believe that the agency theory prevails because it's easier to find a manager who focuses his attention on his private benefits rather than on the company's ones. However, it does not mean that it is not possible to find managers who can be considered as stewart. I believe that this is the case of managers involved in a company from a long time and therefore who are more closely related to it. Anyway, a real "professional" should always behaves as a stewart.
DeleteI agree with you both. I think that in practice is more likely to find CEOs that follow the Agency theory. In fact the majority of people, even unvoluntary, let prevail their private interests over the collectivist ones. By the way, there can be also CEOs that act in the interest of the firm, especially when we talk about people that are iinvolved in a long term relationship with the company.
DeleteI am inclined to agree with you guys, especially if we look at the practice of business of the previous decades. I mean look at cases like Enron, Parmalat they are vivid examples of how the pursuit of self-interests has damaged entire marketd and communities.However, I think that the modern corporate governance systems are able, via different tools and procedures, to ensure that the interests of the managers are alligned to those of shareholders and so forth.
DeleteDon't you think ?
Taking into account the past financial scandals, it is more likely that principals have turned their sense of trust into a sense of mistrust. Trust is the key element upon which Stewardship Theory can be based and as a result today control is more preferable compared to a "make-on-your-way" approach. However cultural roots are also to be considered when it takes to look at some companies.
DeleteI find the perspective offered by Federico's comment is quite interesting. Indeed, nowadays Corporate responsability is increasing, and hopefully the stewardship theory's approach will become more actual over the years. An encouraging fact emerges from tuesday's presentations: in firms born or grown in the last decade stewardship matters.
DeleteI agree with you. The Stewardship theory is too utopian to be always realised. Anyway I think that there are steward managers but that they represent only a minority. Managers usually behave in an opportunistic way.
DeleteI agree with my colleagues. I think that there are more examples that prove the agency theory than the stewardship one.
DeleteBut I also think that there are some cases that may represent an execption: let's look all those firms that have been able to create a strong brand, a lifestyle. Let's look at Apple, or earlier Microsoft, or Google: they bring a lot of innovative things, that caused a lot of enthusiasm, which is implemented in the spirit of the company.
I think that when there is happiness of doing the job you are perfoming, all the actors involved in the organization will be oriented to the goal of the firm.
I think that the idea of "homo economicus" at the base of Agency Theory is more able to represent today reality rather than stewarship theory. Collectivistic, pro organizational, trustwothy behaviours are rare attributes to find,in today both private and public organizations.
DeleteI think that it's true that the "homo oeconomicus style" is much more diffused that the one described in the stewardship theory,but it is also true that it essentially depends on the culture of a country,of the environment in which individuals grow up and so on.. It's obvious that we rembember crisis and scandals examples much more than the good ones,but I think,as Silvia stated,that there is also the proliferation of companies managed by stewards.
DeleteI think that the agency theory prevails, it is more common to find a CEO who has personal interests and tries to exert private benefits instead of a CEO who only pursues the interest of the firm. Also for this reason the corporate governance is so important and it represents a tool for monitoring the management. However, of course there are exceptions and I think that the CEO of Starbucks is a good example in this sense.
DeleteLiving in this economic landscape, I would say that the agency theory is definitely the one which fits best. Nowadays it is absolutely rare to find managers fully committed within the company in which they work. Their interests are usually disaligned with the ones of shareholders and the bonuses they get separate them from the firm dimension. Furthermore, they are becoming "money" and "reputation" oriented, working only on things that can permit them to seat in more and more boards.
DeleteIn my humble view, agency theory is closer to reality, while stewardship theory is more "idealistic"
DeleteI agree with Silvia, till managers work for a company that is enough profitable and also gives them personal satisfaction due to customer awareness of the products realized , as Apple does, they could try to avoid opportunistic behaviour, however as soon as problems arise they are supposed to turn into an opportunistic mood.
DeleteIn my opinion and this is the sad truth but we are closer to the agency theory. Nowadays, if the owner doesn't follow the work of the managers than he might go bankrupt. Of course this is not always the case but I think most of the times it is.
DeleteYes, agency theory is closer to reality and we have many examples of bad performance due to the problem of misinformation. In addition, fewer and fewer CEO act with the only purpose of the interest of the firm.
DeleteIn the reality is more frequent to see cases of agency theory, because I think is more likely to have managers tempted to divert valuable resources away from the best interests of the shareholders and use them for their own personal gain.
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ReplyDeleteAccordimg to the discussion in class of last monday, how do you think a board should be composed? How many shall the directors be?
ReplyDeleteIs the ideal number of directors variable in accordance to the size of the firm or shall it remain fixed no matter how big the company is?
I think that the right number of the directors vary by the size of the firm. More directors are needed to govern and adjust to the needs of a bigger firm.
DeleteI think that, as pointed out by the Professor the number of Director is an important matter. Generally speaking, I think that the right size for the Board is about 9 Directors, however to better define the right number it is necessary to take into account the size of the company: the bigger the company the higher the number of directors.
DeleteThat's a very interesting question. In my opinion, it depends on the size of the firm of course! A greater number of directors is required, when we talk about big companies. Moreover, in US several pressures have led to an increase in the number of non-executive directors (especially independent), on the board.
DeleteI think that the number of members depends on the size of the firm while the prescriprion on its composition (outsiders/insiders) changes on the base of the theory used to evaluate, Agency or Stewarship Theory.
DeleteFrom my point of view, board of directors' size does not depend on firm's size. Huge numer of board members has some advandatages and disadvantages as well as a small one. The choice mainly depends on the interests of shareholders and how they want to influence the decision making process.
DeleteLook at the french companies in which the decision making power is often left in just one hands ( the CEO or "directeur génerale").
I strongly agree with Lorenzo Onofri; not always a large firm requires a large BoD, and not always a small firm requires a small BoD; however, I have another question for you: what should be the proportion of dependent/independent directors?
DeleteI think that The size of the board should be based on the needs of the organization, not only based on the size of the firm. There is no common optimail size. Many factor can influence the size of the board such as legal mandates, work load, number of subsidiaries, demand for diversification, phase of life cycle...
DeleteI agree with you Natalie. It is not only the size of the company that matters. There are many factors, like you said, that need to be considered, and in my opinion this also includes the agency theory or the stewardship theory. More board members have more types of individual interests, but it means more knowledge when it comes to decision-making.
DeleteWhat would you guys say if I say that the minimum number of board members is 6 or 7?
DeleteAnswering to Giovanni, the ratio between independent directors and dependent ones depends on how the shareholders want to present the board in terms of independence in making decisions. In some cases, the presence of independent directors is legally oblidged ( ex: presence of a lead independent director with CEO duality) whereas in others it is a simple guarantee of board independence from shareholders "advices".
DeleteFor what concerns the minimum number of board members, it is stated in firm's Statuto and can vary from company to company. Of course, following the agency thepry, wide BoDs will seem as a UN General Assembly with more influence groups arising. On the other hand, small BoD will be like UN Committees with the probability of a total consensus and less divergencies.
The average number of the board should be 9 but it depends of course on the type of corporation. Of course the ideal number depends on the type of corporation as I have stated earlier.
DeleteAs we have seen in class, according to the agency theory, the majority of studies of board and corporate financial perfomance have looked at how the four usual suspects influence varios performance measure. In this sense, we have seen how the ideal board size is of 9 members
DeleteAn ideal board should have 9 members (independents) and the directors should have different knowledge, skills and experiences. According to me, the numbers should not remain fixed but it should neither be too high since has been proved that boards with to many members have a poorer performance.
DeleteAs the professor said, the perfect number of indipendent directors should be 9,but this can significantly varies according to the size of the firm.. but it's important not just to keep in consideration this ratio,but also the other ratios or element individuated to evaluate the performance of a firm
DeleteI believe that the composition of the BOD, in terms of the proportion of outsiders and insiders, depends on the theory we choose.
ReplyDeleteAccording to the Agency theory is better to have an high proportion of outsiders, since the role of the BOD is to monitor ( so it is better to have in the board people who have no link with the firm). Accoding to the stewartship theory, an high performance is reached when the BOD is mainly composed of Insiders, since the role of the board is to support the management. In fact, the main advantage of having insiders within the board is to have people with depht knowledge of the firm and technical expertise.
yes, I agree with you; only insiders could have the expertise and the knowledge necessary to achieve an high performance for the company
DeleteI agree. Inside knowledge and understanding is important. But insiders mean possible conflict of interest. Just like the outsider who is an insider with conflict of interest, but not realized because of a wrong definition of "an outsider" in the firm.
Delete“Internal is better in every case unless you have a really deficient internal candidate,” said John Thompson, vice chairman of Heidrick & Struggles.
DeleteTotally agree with you, Federica. I would like to add that in the case of the agency theory, however, it is possible to monitor management even without having high proportion of outsiders. For example, other possibile solutions in order to monitor manager are: shareholders activism, incentives, dividend policy, and security analysts.
DeleteFederica I think that insider directors for some reason are better. There is an involvement + sharing values in running the business that they act as stewards, trying to sustain the continuity of the family firm. But according with Andi, if we have a lot of insider directors we could have possible problems of conflict of interest.
DeleteI agree with Federica Brunetti, the proportion of outsiders and insiders, depends on the theory we choose. Agency theory is better to have an high proportion of outsiders but in the stewartship theory, an high performance is reached when the BOD is mainly composed of Insiders
DeleteDoes the Agency Theory prescribe any mechanism to align agent-principal interest?
ReplyDeleteYes of course, there are different mechanisms that are able to reduce agency costs, and that allow the principal to exert control over the Agents. These mechanisms can be internal, such as to appoint a Board of Directors composed of independent directors, or external, such as the market for corporate control.
DeleteYes it does. It prescribes the incentive alignment mechanisms to the management, in order to make them think as shareholders. Moreover, these incentives are usually linked with firm's performance.
DeleteSecondly, it considers the share ownership of directors as another tool to link principal's interests with the agent's ones.
In addition, it provides separation between directors and firm's management.
I totally agree with Federica. To minimize the agency costs, we also can use some other mechanisms which are related to incentives, financial leverage, dividend policy. The Managerial reputation and legal protection of investors can be used to reach this objective as well
DeleteAnother mechanism in the Agency theory to align the interests of the agent (manager) with that of the principal (shareholders) is the stock-option compensation for the agent, even though several studies have shown that is not a good tool
DeleteYes of course we have both internal mechanisms and external ones. The internal ones like financial leverage, independent directors, incentives and so on. As for the external mechanisms, well mainly they are the managerial reputation and legal protection of the investors.
DeleteWe can take into consideration five possible mechanisms:
Delete1. Usual Suspect (The use of outsiders on the board of directors)
2. Debt Financing
3. Insider Shareholdings
4. Istitutional Shareholdings
5. Use of the market for corporate control
Of course, Arianna. The main mechanisms in order to align the interests of principal and agents are: making managers more and more dependent to the organization through stock options and using financial incentives
DeleteYes, of course. We have a lot of mechanism to reduce agency costs. Internal mechanism such as independent director, financial leverage etc. External mechanism like legal protection, managerial reputation, institutional shareholdings.
DeleteYes, there are internal and external mechanisms that can minimize agency costs and align the interests of both agent and principal. Among the others, in the internal ones we can distinguish the Incentives schemes, the shareholder activism and among the external we can identify the managerial reputation, the legal protection of the investors and the market for corporate control.
DeleteI think the Agency Theory prescribe many mechanisms to align agent-principal interest for example: Use of the market for control, Insider Shareholdings, Debt Financing ....
DeleteYes,there are several mechanisms according to this theory,even if the main one is the exert of control of the principals over agents. Other importants tools are divided into internal and external one,such as financial leverage,the presence of independent directors in the board or market protection.
DeleteThere are different mechanisms to align the agent's interest to their principal's one. As Claudia correctly pointed out, we can observe both internal and external mechanisms. Internal mechanisms can be bonuses on the salary or a partial payment in shares to the managers, in order to align the private interests of the agent to the firm's interests. Among the external machenisms the most effective intruments are a high risk of takeover, that in case actually happened would put in jeopardy the manager, or, alternatively, a high leverage of the firm, due to which also banks would observe more deeply the managerial effectiveness.
DeleteCan we find some industries in which the agency theory fit best and industries in which the stweardship theory is dominant?
ReplyDeleteCan you give me some examples?
Of course we can. In the case of agency theory it's quite easy to find examples, as it is the most diffused situation to date. An example is provided by Valero Corporation, in which the separation between ownership and control leads to an agency problem of type I. On the other hand, stewardship theory is evident in the case of Micheal Kors, a company which is effective despite the presence of CEO duality thanks to the steward attributes of its CEO, as we learned from the interesting presentation on Hugo Boss and Micheal Kors.
DeleteFor the agency theory mainly the public companies has it. s for the stewardship theory, well maybe privately held companies.
DeleteWhen we talk about goodness of fit of the agency theory I have in mind the food processing industry, such as Barilla.
DeleteWhile I consider the IT industry as a best practice of the stewardship theory.
I don't think that these two theories can be generally connected to specific industries, given that they are developed to describe human traits and managerial behaviors not industries or sectors.
DeleteI completely agree with Federico. Firms operating in the same industry can have different managerial approaches as well. So, we should not connect each theory to specific industries.
DeleteCan we think about the application of agency theory to non-profit organizations? What could be the main implications and differences with the thoery applied to profit organization?
ReplyDeleteAgency theory refers to interests misalignment between agent and principal (in our case, shareholders and management). Since we have got used to think on shareholders' main interest as dividends, I find it hard to apply the agency theory on non-profit organizations (dividends are based on firm's profits).
DeleteBesides, non-profit organizations are usually regulated in a different way with respect of profit ones and the monitoring activity of legal institutions on their interests is very restrictive. Therefore, agents with interests that are far away from the ones of their principals may usually become unfair and lead to legal consequences.
I dont' think we can apply the agency theory on non-profit organizations, because agency theory is based on the "shareholder theory" and refers to the case when managers may behave in a opportunistic manner.
DeleteInstead, we should apply stakeholder theories on non-profit organizations, since the main insterest can be, for example, to achieve social goals.
I agree with my colleagues, agency theory is not applicable to non-profit organizations due to the difference in regulation and dividends policy they have from common organizations. In fact the main point of conflict between shareholders and CEOs are usually dividends policies, which, on the other hand, aren't a central matter when we talk about non-profit organizations.
DeleteGuys what do you think about the usual suspects? Do they really serve in enhancing the board of directors performance?
ReplyDeleteI don't think that the mechanism of usual suspect can work to have a better performance within the board of directors. I would rather prefer the stock option tool in order to link better the interest of all the stakeholders.
DeleteUsual suspects are outside directors, so they should be more vigilant than insiders because they are less dependent on the CEO......but let's consider directors who own stock, so we can say that they have "skin in the game" and have an incentive to pay more attention. Of course we should avoid the CEO duality problem.
I believe that some usual suspects can work under the agency theory to enhance the performance of the firm. For example, in composing the BOD we must add an adequate proportion of outsiders. The outsiders, under the agency theory, will increase the performance of the firm since they are less dependent on the CEO and, thus, they are more objective and vigilant than the insiders. Consequently, they ensure that the firm's goal will be reached.
DeleteI agree with Federica, some of the usual suspects can actually work to improve the performance of the directors. For example, the fact that the Directors own, even in a small amount, the shares of the firm can help them to be more involved in the life and in the dynamics of the company, since they are engaged in the monetary risk.
DeleteEven if the usual suspect will give the benefits you mentioned, I consider stock options as a better tool to align interests as stated before.
DeleteFurthermore, stock options work better with an adequate incentive plan to inside directors. Nonetheless, this mix is usually inapplicable to outside directors.
Of course usual suspects can enhance the BoD performance, coming from different studies of board and corporate financial performance. However, as Lorenzo said, I think stock options are a better mechanism and a better incentive solution in order to align interests.
DeleteIn your opinion, what is the best corporate governance system? The Italian, Anglo-Saxon outsider system or German-Japanese insider system?
DeleteUsual suspects are the number of outsiders on boards, director shareholdings, board size, and whether the CEO also holds the Chair position (CEO duality). So I think that usual suspects do not ensure a truly independent board.
DeleteI believe that usual suspects can be good measures to enhance the board of directors performance. However, to archieve the truly independent board, we also need to consider the Board process and actual board behaviour.
DeleteI believe the German-Japanese insider system, together with their types of legislation (work, taxation, etc...).
DeleteI don't think that we have to take this elements as an absolutely efficient way to measure the performance of the firm,but just as a relative one.For example if we think about the number of independent directors,both in presence or absence of CEO duality we cannot state a REAL independence.
DeleteI think that "usual suspects" are the result of years of research about the Firm Performance. So they are an useful starting point to consider to improve the performance.
ReplyDeleteGuys, can an executive director be also independent?
ReplyDeleteAn executive director usally can be applied both to the CEO or to a managing director of the firm,while in order to be independent a director has to respect some criteria which do not allow the director to be a manager of the firm or to receive compensations different from the directorship fees and so on..so I don't think that an executive can be also independent Lucio,and you?
DeleteI'm completely agree with you Federica, you got it.
DeleteThe requirement for an independent director is to be non-executive so a agree with you guys.
DeleteGuys, What is generate the usual suspects? why usual suspects can improve the board of directors performance?
ReplyDeleteHi Thuy Le, usual suspects are the number of outsiders in a boards for example, but I think that usual suspects do not ensure a truly independent board, so I think also that usual suspects is not the best way to improve the board of directors performance.
ReplyDelete