CMA Foundation · Fundamentals of Business Economics and Management · Stewardship Theory and Agency Theory of Management
In agency theory, the party who delegates decision-making authority to another person to act on its behalf is called the:
The party who delegates decision-making authority is the principal. In agency theory, shareholders act as principals who appoint managers as agents to run the business on their behalf. The agent receives and exercises the delegated authority, so the delegating party is the principal.
- APrincipalCorrect
- BAgent
- CSteward
- DArbitrator
Explanation
Agency theory describes a relationship in which one party, the principal, hands over decision-making authority to another party, the agent. In a company the shareholders are the principals and the managers are the agents. The agent is the one who receives the authority, so option Agent is wrong.
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