ACCA Strategic Professional · Strategic Business Leader · Agency
Karvel Foods is a listed company whose managers act diligently for shareholders. Critics say that this strictly shareholder-focused agency relationship ignores that the firm's pollution harms a local fishing community with no contract with the company. Which limitation of agency theory does this criticism highlight?
The criticism shows that agency theory is narrow because it concentrates on the contract between shareholders and managers. Affected parties without a contract, such as the local community harmed by pollution, are not considered, which is why stakeholder perspectives are used to supplement it.
- AAgency theory assumes managers are always honest, so monitoring is unnecessary
- BAgency theory recognises only the principal-agent contract and so overlooks wider stakeholders affected by the firmCorrect
- CAgency theory requires the agent to be a non-executive director
- DAgency theory applies only to public sector bodies, not listed companies
Explanation
The criticism concerns scope: agency theory focuses on the shareholder-manager contract, so wider stakeholders such as the community, who are affected but not principals, are overlooked. The first option states the opposite of agency theory's assumption of self-interest.
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