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CMA Foundation · Fundamentals of Business Economics and Management · Stewardship Theory and Agency Theory of Management

The core assumption about human behaviour in agency theory, which creates the agency problem between owners and managers, is that:

Agency theory assumes both principal and agent are self-interested utility maximisers, so their goals may diverge. A manager may pursue personal benefits instead of maximising shareholder wealth, creating the agency problem. Assuming managers always put organisational goals first belongs to stewardship theory instead.

  1. AManagers always place organisational goals above personal goals
  2. BBoth principal and agent are self-interested utility maximisers whose goals may conflictCorrect
  3. CManagers are motivated only by intrinsic rewards such as recognition
  4. DOwners and managers always share identical risk preferences

Explanation

Agency theory assumes individuals act in self-interest, so the agent may pursue personal benefits rather than the principal's wealth maximisation. This conflict of interest causes the agency problem. The first option describes stewardship theory, which is the opposite view.

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