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

In the context of a listed company, the 'agency problem' arises because:

The agency problem arises because ownership and control are separated: shareholders own the company but directors manage it, and directors as agents may act in their own interests rather than those of the shareholders, who are the principals.

  1. ADirectors, who manage the company, may act in their own interests rather than those of the shareholders who own itCorrect
  2. BShareholders are legally responsible for the day-to-day running of the company
  3. CThe external auditor prepares the financial statements on behalf of the directors
  4. DLenders have a right to appoint directors to the board

Explanation

The agency problem stems from the separation of ownership (shareholders, the principals) from control (directors, the agents). Directors may pursue their own goals, such as higher pay or empire building, rather than maximising shareholder wealth. Shareholders do not run the business day to day, so the second option reverses the relationship.

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