ACCA Applied Knowledge · Business and Technology · Stakeholders in business organisations
A company's directors receive large bonuses based on short-term profit. Shareholders want sustainable long-term growth in the share price. Which problem does this situation most directly illustrate?
This illustrates the agency problem. Directors act as agents of shareholders, but a short-term profit bonus may drive them to pursue their own reward rather than long-term share value. Linking pay to long-term performance helps align the two sets of interests.
- AThe agency problem between managers and shareholdersCorrect
- BThe free rider problem between competitors
- CA conflict between connected and unconnected stakeholders
- DA lack of power for the supplier group
Explanation
Directors act as agents for shareholders, but short-term bonus incentives can lead them to pursue their own interests, such as boosting short-term profit, at the expense of long-term value. This is the agency problem. Aligning rewards with long-term performance helps reduce it.
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