Skip to content

ACCA Applied Skills · Financial Management · Financial objectives and relationship with corporate strategy

Directors of Zeta plc own very few shares and are paid a fixed salary with no performance element. Shareholders worry the directors may avoid risky but profitable projects to protect their own jobs. Which term best describes the underlying problem?

This is the agency problem. Ownership is separated from control, so directors acting as agents may pursue their own interests, such as job security, rather than maximising shareholder wealth by accepting profitable but risky projects.

  1. AAgency problem arising from the separation of ownership and controlCorrect
  2. BCredit risk arising from customer default
  3. CTranslation risk arising from consolidating overseas subsidiaries
  4. DLiquidity risk arising from a shortage of cash

Explanation

Shareholders (principals) delegate decisions to directors (agents) whose personal interests, such as job security, may differ from wealth maximisation. This conflict is the agency problem. The other options are unrelated financial risks.

Did you get it right without looking?

One question tells you little. A timed set on Financial objectives and relationship with corporate strategy shows your real accuracy, how long you take and where you lose marks.

Practise Financial objectives and relationship with corporate strategyFree diagnostic mock

More Financial objectives and relationship with corporate strategy questions