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CFA Level I · CFA Level I Exam · Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

A shareholder (the principal) hires a manager (the agent) to run a company. The conflict that arises because the manager's interests may differ from the shareholder's, and the shareholder cannot fully observe the manager's actions, is best described as:

This is an agency conflict. It arises when a manager hired to act for shareholders has different interests from them and the shareholders cannot fully observe what the manager does. The separation of ownership and control creates the problem, and governance mechanisms aim to align the two parties.

  1. Aan agency conflictCorrect
  2. Ba liquidity conflict
  3. Ca pricing conflict

Explanation

When an agent acts on behalf of a principal and their interests diverge, with the principal unable to monitor fully, the result is an agency (principal-agent) conflict. Liquidity and pricing conflicts are not the standard terms for this relationship.

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