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CA Intermediate · Financial Management and Strategic Management · Scope and Objectives of Financial Management

In financial management, the 'agency problem' between shareholders and managers arises primarily because:

The agency problem arises because ownership is separated from management, so managers acting as agents may pursue their own goals, such as perquisites or job security, instead of maximising the wealth of shareholders who are the principals.

  1. AManagers may pursue personal goals that differ from the goal of maximising shareholder wealthCorrect
  2. BShareholders are legally barred from appointing directors
  3. CCreditors fix the dividend policy of the company
  4. DManagers always own a majority of the equity shares

Explanation

The agency problem arises from separation of ownership and management. Managers (agents) may act in their own interest, such as higher perquisites or empire building, rather than maximising wealth of shareholders (principals). The other options state things that are not true of the agency relationship.

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