Skip to content

ACCA Strategic Professional · Strategic Business Leader · Agency

Zentara plc is listed and its shareholders own the company but delegate daily decisions to a hired management team. The board notices that the CEO has expanded into unrelated businesses that raise her prestige but lower returns. Which statement best describes the issue under agency theory?

Under agency theory the managers are agents who may follow personal goals such as prestige instead of maximising shareholder wealth. Unprofitable diversification is a typical example of this conflict of interest and it creates agency costs for the principals.

  1. AManagers, as agents, may pursue their own interests rather than maximising the principals' wealth, creating an agency costCorrect
  2. BShareholders, as agents, are failing to monitor the community that is the principal
  3. CThe CEO is acting as a steward whose interests align fully with those of the shareholders
  4. DThe problem is a lack of power by employees, who are the principals in the relationship

Explanation

Agency theory treats shareholders as principals and managers as agents. Empire-building that reduces returns is a classic divergence of interests, which generates agency costs such as monitoring and loss of value. Describing managers as stewards ignores the conflict shown in the case.

Did you get it right without looking?

One question tells you little. A timed set on Agency shows your real accuracy, how long you take and where you lose marks.

Practise AgencyFree diagnostic mock

More Agency questions