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CFA Level I · CFA Level I Exam · Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

In a company with dispersed ownership, the conflict between managers and shareholders is most likely an example of:

The manager-shareholder conflict under dispersed ownership is a principal-agent problem. Owners are many and have weak control, so managers as agents may pursue their own interests, such as pay or empire building. Controlling-shareholder and creditor conflicts are different relationships.

  1. Aa principal-agent problem arising because managers may pursue their own interestsCorrect
  2. Ba conflict in which a controlling shareholder extracts private benefits from minority holders
  3. Ca conflict in which creditors transfer value to shareholders by increasing business risk

Explanation

Dispersed ownership separates ownership from control, so managers (agents) may act in their own interests rather than those of shareholders (principals). The second option describes a shareholder-shareholder conflict and the third a creditor-shareholder conflict.

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