Stewardship theory and entrepreneurship
In the late 1980s, Lex Donaldson and James Davis introduced stewardship theory as a compelling alternative to the prevailing agency theory, which they critiqued for its inherently negative assumptions about managerial behaviour.
Agency theory, rooted in economic and management thought, assumes that agents—typically managers and entrepreneurs—are self-interested and opportunistic. It characterizes the relationship between principals (such as investors) and agents as one of inevitable conflict. To mitigate this tension, agency theory promotes mechanisms like stock-based compensation, designed to align the interests of managers with those of shareholders by turning employees into part-owners of the firm.
Stewardship theory, by contrast, offers a more optimistic view. Donaldson and Davis proposed that managers are not merely self-serving actors but can be trustworthy stewards of organizational goals. According to this theory, individuals derive greater utility and personal satisfaction from pro-social behaviour—actions that benefit the organization and its stakeholders—than from pursuing narrow self-interest. In essence, a steward thrives when the organization succeeds, and this intrinsic motivation drives their conduct.
Because stewards are presumed to act in alignment with the principals’ interests, stewardship theory argues for greater autonomy and discretion in managerial roles. Rather than investing in costly monitoring systems or incentive structures, organizations should empower stewards to lead. In fact, excessive control mechanisms may backfire, dampening motivation and undermining the very pro-social behaviours they aim to encourage (Argyris, 1964).
One structural embodiment of stewardship theory is the dual role of CEO and chair of the board, which Donaldson and Davis (1991) suggested could enhance organizational effectiveness by consolidating leadership. However, this view is not without controversy. Rechner and Dalton (1991) found that companies with non-executive chairs often outperform those with dual-role CEOs, suggesting that independent oversight may still be crucial.
A modern illustration of agency theory in action is the case of Elon Musk, who was removed as chair of Tesla Motors’ board after tweeting about plans to take the company private—plans that lacked substance. This disciplinary move was intended to curb agency problems by reinforcing accountability and separating oversight from executive power.
Sources:
Argryis, C. 1964. Integrating the individual and the organization. New York: Wiley.
Donaldson, L., and Davis, J. H. (1991). Stewardship theory or agency theory: CEO governance and shareholder returns. Australian Journal of management, 16(1), 49-64.
Davis, J. H., Schoorman, F. D., and Donaldson, L. (1997). Toward a stewardship theory of management. Academy of Management Review, 22(1), 20-47.
Rechner, P. L., and Dalton, D. R. (1991). CEO duality and organizational performance: A longitudinal analysis. Strategic Management Journal, 12(2), 155-160.
Agency theory, rooted in economic and management thought, assumes that agents—typically managers and entrepreneurs—are self-interested and opportunistic. It characterizes the relationship between principals (such as investors) and agents as one of inevitable conflict. To mitigate this tension, agency theory promotes mechanisms like stock-based compensation, designed to align the interests of managers with those of shareholders by turning employees into part-owners of the firm.
Stewardship theory, by contrast, offers a more optimistic view. Donaldson and Davis proposed that managers are not merely self-serving actors but can be trustworthy stewards of organizational goals. According to this theory, individuals derive greater utility and personal satisfaction from pro-social behaviour—actions that benefit the organization and its stakeholders—than from pursuing narrow self-interest. In essence, a steward thrives when the organization succeeds, and this intrinsic motivation drives their conduct.
Because stewards are presumed to act in alignment with the principals’ interests, stewardship theory argues for greater autonomy and discretion in managerial roles. Rather than investing in costly monitoring systems or incentive structures, organizations should empower stewards to lead. In fact, excessive control mechanisms may backfire, dampening motivation and undermining the very pro-social behaviours they aim to encourage (Argyris, 1964).
One structural embodiment of stewardship theory is the dual role of CEO and chair of the board, which Donaldson and Davis (1991) suggested could enhance organizational effectiveness by consolidating leadership. However, this view is not without controversy. Rechner and Dalton (1991) found that companies with non-executive chairs often outperform those with dual-role CEOs, suggesting that independent oversight may still be crucial.
A modern illustration of agency theory in action is the case of Elon Musk, who was removed as chair of Tesla Motors’ board after tweeting about plans to take the company private—plans that lacked substance. This disciplinary move was intended to curb agency problems by reinforcing accountability and separating oversight from executive power.
Sources:
Argryis, C. 1964. Integrating the individual and the organization. New York: Wiley.
Donaldson, L., and Davis, J. H. (1991). Stewardship theory or agency theory: CEO governance and shareholder returns. Australian Journal of management, 16(1), 49-64.
Davis, J. H., Schoorman, F. D., and Donaldson, L. (1997). Toward a stewardship theory of management. Academy of Management Review, 22(1), 20-47.
Rechner, P. L., and Dalton, D. R. (1991). CEO duality and organizational performance: A longitudinal analysis. Strategic Management Journal, 12(2), 155-160.
