ACCA Applied Knowledge · Business and Technology · Governance in business organisations
In the context of corporate governance, which of the following best describes the agency relationship?
The agency relationship exists because shareholders, as principals, delegate the running of the company to directors, who act as their agents. Directors are expected to act in the shareholders' interests, which is why the roles cannot be reversed.
- ADirectors act on behalf of shareholders, who are the principalsCorrect
- BShareholders act on behalf of directors, who are the principals
- CAuditors act on behalf of directors, who are the principals
- DEmployees act on behalf of customers, who are the principals
Explanation
In a company, shareholders (the owners) appoint directors to run the business for them. The shareholders are therefore the principals and the directors are their agents. Reversing the roles, as in the second option, misstates who delegates authority.
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