Positive Corporate Stewardship in Action

Economic Motivation:

The Principal and Agent Relationship from a Stewardship Perspective

The principal-agent relationship is when a principal (such as investors, who function as owners of an organization) allows an agent to make decisions on behalf of the agent and to exercise a certain degree of agreed-upon control (Principal-agent, 2021). Problems occur when there is a conflict between the economic interests of the agent and those of the principal. One of the most critical issues is the fact that the principal keeps the assets and the financial risk, and bears the burden of the losses, even when an agent makes a mistake (Principal-agent, 2021).

In theory, a principal can use discretion in selecting an optimal agent, and fire the agent in the event of impropriety. The risk of the agent making poor decisions is called agency costs (Principal-agent, 2021). This may be manageable with, say, a real estate agent not upholding the interests of a client during a house sale. But shareholders in a company often have relatively small percentages of interest in the company and are at the mercy of the agent’s superior knowledge and power to make excellent decisions.

To reduce agency costs, there are often specific controls written into the contracts of CEOs and other types of corporate agents, to ensure they behave to optimize the financial health of the firm and protect shareholder interests with the same care as if they were their own. For example, these might include offering CEOs stock options or profit-sharing plans, or even linking CEO pay to stock price (Principal-agent, 2021). This is not foolproof, of course, given that such a link may arguably encourage unethical behavior or at minimum unwise decisions to artificially inflate stock prices, rather than to undertake meaningful, intelligent decisions to build a company. On the other hand, it is better than the so-called golden parachutes, which often incentivize risky CEO behavior with the knowledge that the CEO could look forward to a handsome settlement upon leaving their positions, regardless of his or her performance.

A new model of corporate leadership has been taking hold, versus the idea that CEOs should be hired and fired based upon their ability to increase shareholder value. Instead, there is a so-called model of corporate stewardship, rather than agency, whereby the CEO or other agents are charged with the ability of being good stewards in an ethical and moral sense as part of the position they hold. Even Forbes magazine, a business-oriented publication, has advanced a new vision of how corporations can and must behave, reflecting the fact that “corporations play central roles in communities, nations, and the world, and their unprecedented access to resources and power position them” to act as stewards (Lawler, 2015, par.3). This means taking care of the environment and paying workers an ethical wage in ways that go above and beyond the bare legal requirements that they do so, as well as adhere to basic ethical standards.

The stewardship model can also result in better business and more profitability in the long run. Consumers are better able than ever before to monitor the ethics of the companies they patronize using websites and online news sources, and can give feedback via social media. Many companies such as The Body Shop and Starbucks use their ethical actions to promote their products. Additionally, high-quality employees who invest a great deal of care and concern in their performance are more apt to be wiling to work for a company which shows good stewardship towards its workers in the form of fair salaries, pay, and promotional possibilities. As companies grow larger and more powerful, the extent of their influence will likely be placed under greater regulatory and media scrutiny.