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

Which of the following measures is most directly aimed at aligning a manager's interests with those of shareholders and so reducing the agency problem?

Granting managers stock options linked to share price performance best reduces agency problems. It links the manager's rewards to shareholder wealth, aligning their interests. Fixed pay, fewer independent directors and restricted disclosure do not align interests and weaken oversight, so they worsen the conflict.

  1. AGranting managers stock options linked to share price performanceCorrect
  2. BPaying managers a fixed salary regardless of performance
  3. CReducing the number of independent directors on the board
  4. DRestricting disclosure of financial results to shareholders

Explanation

Stock options tie the manager's wealth to share price, so the manager gains when shareholders gain, aligning interests. A fixed salary gives no link to performance. Fewer independent directors and less disclosure weaken oversight and worsen the agency problem.

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