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ACCA Strategic Professional · Strategic Business Leader · Agency

Kestrel Holdings' board of directors, who have little shareholding, approve a costly new corporate jet and an expensive head office refurbishment, while dividends are cut. Shareholders complain that managers are serving their own interests rather than theirs. Which concept best describes this situation?

This is the agency problem. Owners delegate control to directors, whose personal interests, such as perks and status, diverge from shareholders' wish for returns. The separation of ownership and control lets agents pursue their own benefit at the principals' expense.

  1. AThe agency problem arising from the separation of ownership and controlCorrect
  2. BStakeholder conflict arising from the power-interest relationship
  3. CGroupthink within the board of directors
  4. DCorporate social responsibility failure

Explanation

Shareholders (principals) have delegated control to directors (agents), whose interests diverge from theirs, leading to perquisite consumption. This is the classic agency problem. Stakeholder mapping or groupthink do not describe the divergence of goals between owner and manager.

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