The theory of the firm, a microeconomic concept (in neoclassical economics), states that a company’s main goal should be to maximize profits, to create as big a gap between revenue and costs as possible by allocating resources to maximize net profits.
The theory of the firm influences decision-making in several business areas, including resource allocation, production techniques, pricing adjustments, and the volume of production.
Modern perspective to the theory of the firm distinguishes between long-run motivations (such as sustainability), and short-run motivations (such as profit maximization).
Agency Theory & Agency Problem
Agency Theory says that in a principal-agent kid of relationship, there is potential for misaligned interests. The Agency Problem is a specific issue that can arise within that framework.
Read: Agency theory and Agency problem explained
Stewardship Theory
While Agency theory is focused on economic and financial outcomes and control, Stewardship theory focuses on how managers behave; Stewardship theory is driven by trust, engagement and a focus on mutual interests.
Managers are motivated by satisfaction gained from doing their job well and they consider themselves part of the organisation and have strong sense of duty towards it.
Although managers want to receive good reward for their work, they do not want this to be at the overall expense of the organisation.
This leads to alignment with the organisation’s interests, and consequently their behaviour is aligned to organisational interests and reputation.
This reduces or eliminates conflict between managers and shareholder.
Leave a Reply