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ACCA Applied Knowledge · Financial Accounting · Duties and responsibilities of those charged with governance

In a company whose shares are widely held by outside investors, the directors run the business day to day on behalf of the shareholders. Which statement best describes the agency problem that arises in this situation?

The agency problem is the risk that directors, who manage the company on behalf of shareholders, act in their own interests, for example by taking excessive pay or perks, instead of maximising shareholder wealth. It stems from the separation of ownership and control.

  1. ADirectors may pursue their own interests, such as high pay or perks, rather than maximising shareholder wealthCorrect
  2. BShareholders may be unable to sell their shares because no market exists for them
  3. CAuditors may charge fees that are too high for the work performed
  4. DEmployees may refuse to follow instructions given by the directors

Explanation

The agency problem arises from the separation of ownership and control. The directors (agents) manage the company for the shareholders (principals) but may put their own interests first. The other options describe matters unrelated to the principal-agent relationship.

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