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CS Executive · Corporate Accounting and Financial Management · Introduction to Financial Management

Which statement best describes the agency problem between shareholders and managers in a company?

The agency problem is that managers, who act as agents of shareholders, may pursue their own interests instead of maximising shareholder wealth. It arises from the separation of ownership and control, and is reduced through monitoring, incentives such as stock options, and good governance.

  1. AManagers may pursue personal goals that conflict with maximising shareholder wealthCorrect
  2. BShareholders always control day-to-day operations directly
  3. CCreditors have no claim on the firm's assets
  4. DManagers are always paid only through dividends

Explanation

Agency problem arises from separation of ownership and management; managers (agents) may act in self-interest, such as pursuing perquisites or empire building, rather than maximising shareholder wealth. Measures such as ESOPs and monitoring reduce it. The other statements are factually incorrect.

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