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ACCA Strategic Professional · Strategic Business Leader · Agency

Brindle Foods is a listed company. A pension fund holding 2% of its shares complains that the board has agreed a generous executive package, but the fund says it lacks the resources to monitor management closely. Which limitation of agency theory does this illustrate most directly?

The scenario illustrates that dispersed principals may be unable or unwilling to monitor agents because monitoring is costly and each small holder free-rides on others. This weakens the control that agency theory assumes shareholders can exercise over managers, allowing generous pay deals to pass.

  1. APrincipals may be dispersed and unable or unwilling to monitor agents, so monitoring costs and free-riding weaken the control that the theory assumesCorrect
  2. BAgents are always motivated by intrinsic duty, so incentive schemes are unnecessary
  3. CAgency theory applies only to public sector bodies, so it cannot explain behaviour in a listed company
  4. DStakeholders other than shareholders hold all the power in the relationship

Explanation

Agency theory assumes principals can monitor and control agents at acceptable cost. In widely held companies each small shareholder has little incentive to bear monitoring costs, so oversight is weak. The distractor claiming agents are always dutiful contradicts the theory's assumption of self-interest.

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