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ACCA Strategic Professional · Advanced Financial Management · The role and responsibility of senior financial executive/advisor

Which of the following is the most appropriate description of the agency problem a senior financial adviser must manage in a multinational group with overseas subsidiaries?

The agency problem in a multinational is that subsidiary managers may pursue local targets or personal rewards that conflict with group shareholder wealth maximisation. Information asymmetry, goal incongruence and suboptimal transfer pricing make this a real issue the adviser must manage through monitoring and incentives.

  1. ASubsidiary managers may pursue local targets or personal rewards that conflict with group shareholder wealth maximisationCorrect
  2. BShareholders always have perfect information about subsidiary performance
  3. CDebt holders can never be harmed by group investment decisions
  4. DSubsidiaries always set transfer prices that maximise group profit

Explanation

Agency problems arise where managers' objectives diverge from owners' objectives, such as subsidiary managers maximising local profit at the expense of group value. The other statements are false because information asymmetry exists, debt holders can be harmed, and local managers may set suboptimal transfer prices.

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