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ACCA Strategic Professional · Strategic Business Leader · Governance scope and approaches

Marlowe Plc's directors rejected a profitable acquisition because it would raise the company's risk and could threaten their own jobs, even though diversified shareholders would have benefited. Which agency issue does this illustrate?

It shows managers being more risk-averse than diversified shareholders. Because the directors' jobs depend on the one company, they avoid a value-adding but riskier acquisition, causing under-investment that harms shareholders. This divergence of risk attitude is a recognised agency problem.

  1. AManagers being more risk-averse than diversified shareholders, leading to under-investmentCorrect
  2. BShareholders being more risk-averse than managers
  3. CExcessive disclosure to stakeholders
  4. DProper application of the stewardship model

Explanation

Managers' careers and income are tied to one firm, so they may avoid risk that diversified shareholders would accept. Rejecting value-adding projects to protect their own positions is an agency problem of differing risk attitudes.

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