ACCA Strategic Professional · Strategic Business Leader · Agency
Zentara Foods plc is run by professional managers who own under 1% of the shares. The managers recently approved a costly acquisition of a business in an unrelated sector. Analysts believe it will lower shareholder returns but increase the managers' pay, status and job security. Which problem does this situation best illustrate?
This is an agency problem. The managers, as agents, are making a value-reducing acquisition that benefits their own pay, status and security instead of shareholders, the principals. It arises because ownership is separated from control and managers hold almost no shares.
- AAgency problem, where managers pursue their own interests rather than those of the ownersCorrect
- BInformation asymmetry between the company and its lenders only
- CStakeholder power exceeding stakeholder interest
- DFailure to apply the Five Forces analysis to the acquisition
Explanation
Agents (managers) are acting in their own interest at the expense of principals (shareholders), which is the classic agency problem arising from separation of ownership and control. The lender option is wrong because the conflict is between managers and shareholders. The other options are unrelated frameworks.
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