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CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Financial Management

In a listed Indian company, the promoter family holds 30% of the equity and the day-to-day decisions are taken by hired professional managers. Managers approve a costly corporate jet that adds little to shareholder wealth. Which relationship best describes the conflict of interest that arises here?

The conflict is between shareholders, who are the principals, and managers, who are their agents. Managers take decisions such as buying a luxury jet that benefit themselves but not owners, so the separation of ownership from control creates the agency problem.

  1. ABetween shareholders (principals) and managers (agents)Correct
  2. BBetween the company and its statutory auditors
  3. CBetween customers and suppliers
  4. DBetween the company and the Registrar of Companies

Explanation

Agency theory describes a principal-agent relationship in which owners (shareholders) delegate decisions to managers. When managers pursue perquisites that do not add to shareholder wealth, the conflict is between shareholders and managers. The other relationships are not the source of the conflict described here.

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