ACCA Strategic Professional · Strategic Business Leader · Agency
The board of Halvern Industries is considering an acquisition. The chief executive's bonus depends on revenue growth, and she strongly favours a large deal that would double revenue, although analysts believe it would destroy shareholder value because the price is too high. Which agency problem does her stance most clearly represent?
This is moral hazard. The chief executive's bonus rewards revenue growth, so she favours a value-destroying acquisition that benefits herself while harming shareholders. Her goals diverge from the principals' goals after appointment, which is a classic agency conflict, rather than stewardship behaviour or an appointment-stage selection problem.
- AMoral hazard arising from the agent pursuing personal reward at the principal's expenseCorrect
- BAdverse selection because shareholders chose the wrong chief executive at appointment
- CStewardship behaviour in which the agent is motivated by the organisation's interests
- DCorporate social responsibility conflict between shareholders and the community
Explanation
The chief executive's pay is linked to revenue, so she is motivated to pursue growth even where it harms shareholder wealth. This is a conflict of goals between agent and principal, a moral hazard issue. Stewardship theory would predict she acts in the interests of the organisation, which is not what the case shows. Adverse selection concerns hidden characteristics at appointment, not behaviour after it.
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