Stewardship Theory Case Study

CHAPTER 1

INTRODUCTION

1.1 Introduction

Previous studies (Abor & Biekpe, 2007) proof that corporate governance mechanisms have the relevant relationship with firm’s performance. Thus, to achieve the firm’s goal which is to maximizing the shareholder wealth, both management and stakeholder must have good relationship so that they can co-operate with each other. The stakeholder, such as shareholder should have the active monitoring function so that the management will do their best to achieve profit. In making sure the firm’s performance is good, the management will do their best way to get their goals for business operation. The management of the firm should have to strong management skill, especially managing the operation in order for the

Contrast to agency theory, stewardship theory suggest that stewards as a person are willing to show their personal interest to support the long term welfare of beneficiaries of others (hernandez, 2012). The main distinction between the both theories are that both are focusing on self-interest perspective where stewardship theory oppose the agency theory whereby a person wiling to subjugate a personal interest to protect others welfare. The stewardship theory shows that a person who works their personal interest to support other (shareholder) beneficial interest are willing to sacrifice extrinsic rewards for a better rewards in the future. The manager who’s in the agency side are expected to be more short term oriented whereas they tries to maximize their own benefit in the shortest time period. This may give the company a highly profit maximization in term of short term period but it might sacrifice the long term sustainable development (kraft & ravix, 2005). In the other hand, those who are in the stewardship side are more likely to sacrifice their short term performance to protect the company well-being in the future. The stewardship oriented manager are willing to risk the job security in order to keep up with the company interest and longer

This is because larger size board of director can provide better monitoring to the firm’s performance. This hypotheses consistent with agency cost theory, the size of board can affect the level of firm’s performance which for this study, the more of numbers of board director the better the firm’s performance. This is because if the firms have small size of board director will facing problem like lack of coordination and communication can lead to problem to make firm’s to perform better. Therefore, the first hypothesis for this study has positive relationship between size of board and the return on assets ratio.

Board and staff skill level

Board and staff have main relation to the firm’s performance which the skill level they can reduce the agency cost through monitor the corporate governance mechanisms performance. Board and staff can influence the firm’s performance. From the previous research, (Lybaert, 1998) state that better performance is because higher level of education among board and staff .. This study shows that the relation between board and staff and firm’s performance have positive relationship. Therefore, the association of board and staff skill level and return on assets ratio have significant positive.

Board