ACCA Applied Knowledge · Business and Technology · Governance in business organisations
Which of the following is the root cause of the agency problem in a large listed company?
The root cause is the separation of ownership from control. Shareholders own the company but managers run it, and managers may pursue their own goals and hold more information than owners. This divergence of interests and information asymmetry creates the agency problem.
- ASeparation of ownership from controlCorrect
- BA high level of dividend payments
- CUse of international accounting standards
- DCompulsory retirement of directors by rotation
Explanation
Because owners delegate control to managers who may have different objectives and more information, conflicts of interest arise. Dividends, accounting standards and rotation are not the source of this conflict.
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