ACCA Strategic Professional · Advanced Financial Management · The role and responsibility of senior financial executive/advisor
In the context of the role of a senior financial executive, which of the following best describes the 'agency problem' between shareholders and managers of a listed multinational?
The agency problem is that managers, who control the company on behalf of shareholders, may pursue their own interests such as higher pay or empire building instead of maximising shareholder wealth, because ownership is separated from control and managers hold more information.
- AManagers may pursue their own objectives, such as empire building or higher pay, rather than maximising shareholder wealthCorrect
- BShareholders are unable to sell their shares when managers underperform
- CManagers always hold more shares than the outside shareholders
- DLenders have the power to remove directors who underperform
Explanation
Agency theory describes a conflict that arises because ownership and control are separated. Managers (agents) have their own interests and information advantages, so they may act in ways that do not maximise shareholder (principal) wealth. The other options do not describe this conflict.
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