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ACCA Strategic Professional · Strategic Business Leader · Governance scope and approaches

Zenara Holdings is listed, and its shareholders appoint directors to run the business on their behalf. The directors, who hold almost no shares, have recently approved an expensive new head office with luxury facilities that will not increase profits. Which agency-theory concept best describes this situation?

This is an agency problem. The directors, as agents, are using company resources for their own benefit through perks that add no profit, while the shareholders, as principals, bear the cost. Their interests have diverged, which is the core issue agency theory describes.

  1. AManagers pursuing their own interests at the expense of the principals, an agency problemCorrect
  2. BShareholders delegating authority effectively with fully aligned objectives
  3. CStakeholders exercising power through a legitimate regulatory framework
  4. DDirectors fulfilling their stewardship obligations to wider society

Explanation

Agency theory describes principals (shareholders) delegating to agents (directors) whose own interests can diverge. Spending on perks that do not add value is a classic agency problem, since the directors gain benefits while shareholders bear the cost. Aligned objectives would not produce such a decision.

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