CMA Foundation · Fundamentals of Business Economics and Management · Stewardship Theory and Agency Theory of Management
According to agency theory, why do conflicts of interest arise between shareholders and the managers who run the company?
Conflicts arise because agency theory assumes managers are self-interested and may pursue personal goals, such as perks or job security, instead of maximising shareholder wealth. Owners and managers have divergent interests and unequal information, so owners need monitoring and incentives to align behaviour.
- AManagers are assumed to be self-interested and may pursue their own goals rather than maximise owners' wealthCorrect
- BManagers are assumed to be intrinsically motivated and always put the organisation first
- CShareholders are legally barred from monitoring managers
- DManagers always hold a majority of the company's shares
Explanation
Agency theory rests on the assumption that principals (owners) and agents (managers) both seek to maximise their own utility. Because their interests can diverge and the manager has more information, conflict arises. The second option describes the stewardship view, not agency theory.
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