ACCA Strategic Professional · Strategic Business Leader · Agency
Marlow Water is a state-owned utility whose board is accountable to a government ministry, regulators, customers and the public. An analyst proposes using a simple shareholder-agent model to assess its governance. Which is the main reason this model is of limited use here?
The simple shareholder-agent model fits poorly because a state-owned utility answers to multiple principals, including government, regulators, customers and the public, whose objectives are varied and often non-financial. Agency theory's focus on a single principal seeking wealth maximisation therefore cannot capture this accountability.
- AThere are multiple principals with differing, often non-financial objectives, so the single principal-agent relationship focused on wealth does not fitCorrect
- BState-owned bodies have no agents, so agency issues cannot arise
- CThe utility has no managers who could act in their own interest
- DRegulators are agents of the managers, which reverses the relationship
Explanation
Public bodies answer to many principals with different, often non-financial aims such as service quality and public interest. This makes the simple wealth-maximising principal-agent model a poor fit. Agency problems can still arise because managers may pursue their own interests, so the claim that they cannot arise is wrong.
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