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ACCA Strategic Professional · Strategic Business Leader · Agency

Karlov Foods plc is listed and managed by a team of salaried executives who own almost none of its shares. Shareholders worry that the executives may pursue empire-building acquisitions that raise their own status but lower shareholder returns. Which analysis best describes this concern?

This is an agency problem. Shareholders (principals) have delegated control to executives (agents) who hold few shares, so the agents may pursue their own status through empire-building acquisitions rather than maximising shareholder wealth. The separation of ownership and control creates the divergence of interests.

  1. AAn agency problem arising from the separation of ownership and control, where the agent's interests diverge from the principal'sCorrect
  2. BA stakeholder conflict between primary and secondary stakeholders over corporate social responsibility
  3. CA problem of bounded rationality in the strategic planning process
  4. DA failure of the company to apply the contingency approach to leadership

Explanation

In agency theory the shareholders are principals and the executives are agents. Because ownership and control are separated, agents may act in their own interest (status, power), creating an agency problem. The stakeholder, bounded rationality and leadership options do not describe the divergence of principal and agent interests.

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