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CS Executive · Corporate Accounting and Financial Management · Introduction to Financial Management

In a company, the managers who run day-to-day operations own only a negligible share of the equity, and they approve a costly corporate jet that adds little to shareholder value. Which relationship best describes the conflict this situation illustrates?

The situation shows the agency conflict between shareholders as principals and managers as agents. Managers with little ownership may spend on perquisites such as a corporate jet that do not raise shareholder wealth, because ownership is separated from control.

  1. AConflict between shareholders (principals) and managers (agents)Correct
  2. BConflict between creditors and the statutory auditor
  3. CConflict between the company and its competitors
  4. DConflict between the Registrar of Companies and the board

Explanation

Agency problem arises when ownership is separated from control and managers pursue their own benefits (perquisites) at the cost of owners. The jet is a perquisite consumption example, so the shareholder-manager conflict is the relevant one. The other pairs are not principal-agent conflicts over managerial decisions.

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