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ACCA Applied Knowledge · Business and Technology · Governance in business organisations

The directors of Brightway Ltd choose to expand through a large acquisition mainly because it will increase the size of the group and their own salaries, even though shareholder returns are expected to fall. Which concept does this best illustrate?

This illustrates the agency problem. The directors, as agents, are putting their own interests in higher pay and a bigger empire ahead of the shareholders' interest in returns, so the goals of agents and principals conflict.

  1. AThe agency problem arising from a conflict of interest between agents and principalsCorrect
  2. BStakeholder mapping using the power-interest grid
  3. CSeparation of the chair and chief executive roles
  4. DCorporate social responsibility reporting

Explanation

The directors (agents) are pursuing their own personal gain at the expense of the shareholders (principals). This divergence of goals is the agency problem. The other options are unrelated governance or stakeholder concepts.

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