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

The managing director of a listed Indian company approves an expensive corporate jet for personal comfort, although it adds nothing to shareholder returns. In agency theory terms, this is best described as:

This is opportunistic behaviour by the agent arising from divergent interests. Agency theory assumes managers are self-interested and may spend company resources on personal perks that do not increase shareholder returns, so the owners bear the cost while the manager enjoys the benefit.

  1. AOpportunistic behaviour by the agent due to divergent interestsCorrect
  2. BStewardship behaviour driven by intrinsic motivation
  3. CEffective delegation of authority by the principal
  4. DReduction of information asymmetry

Explanation

Agency theory assumes agents are self-interested and may use resources for personal benefit at the principal's expense. The jet gives personal perks without raising shareholder value, which is opportunistic behaviour. Stewardship theory would expect the manager to act in the owners' interest, so that option is wrong.

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