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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 primarily intended to align a manager's interests with those of shareholders under agency theory?

Granting employee stock options linked to share price best aligns interests. The manager benefits only when the share value rises, so personal gain matches shareholder wealth maximisation. The other measures do not link rewards to owners' outcomes, and secrecy would worsen information asymmetry.

  1. AGranting the manager employee stock options linked to share priceCorrect
  2. BIncreasing the number of departments in the firm
  3. CReducing the frequency of board meetings
  4. DKeeping financial results confidential from owners

Explanation

Stock options tie the manager's reward to share price, so the manager gains when shareholders gain, reducing conflict of interest. The other options do not align incentives; hiding results actually worsens information asymmetry.

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