ACCA Applied Knowledge · Business and Technology · Stakeholders in business organisations
Directors of Brandt Co receive bonuses based on this year's reported profit. They delay essential equipment maintenance to cut costs and boost the bonus, although this risks long-term harm to the company. This is best described as:
This is an agency problem. The directors are agents acting for the shareholders, but they are putting their own short-term bonus ahead of the owners' interest in long-term value by deferring maintenance. Their personal objectives diverge from those of the principals they serve.
- AA conflict between shareholders and lenders over gearing
- BAn agency problem, where managers pursue their own interests at the expense of the ownersCorrect
- CA conflict between the company and government over taxation
Explanation
Directors act as agents of the shareholders, the principals. Here they put their personal bonus ahead of the long-term value that owners want, which is the classic agency problem. Gearing and taxation are not involved in the scenario.
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