ACCA Strategic Professional · Strategic Business Leader · Agency
Zentara plc is owned by hundreds of dispersed institutional and retail shareholders who appoint a board to run the business day to day. The directors have far more information about the company's operations than the shareholders do. Which feature of the agency relationship does this situation most directly illustrate?
The situation illustrates information asymmetry. Directors who run the company know much more than the dispersed shareholders who own it, so shareholders cannot easily monitor or judge the agents' behaviour. This gap is a core problem in agency theory and creates the risk of self-interested conduct.
- AInformation asymmetry between principals and agentsCorrect
- BCollective responsibility of the board
- CSeparation of the chairman and chief executive roles
- DStakeholder power over the strategic decision-making process
Explanation
In agency theory, the agents (directors) hold more information than the principals (shareholders), which is called information asymmetry. This creates the risk that agents act in their own interests without detection. The other options describe board structure or stakeholder analysis, not the information gap between principal and agent.
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.
More Agency questions
- Kestrel Holdings' board of directors, who have little shareholding, approve a costly new corporate jet and an expensive head office refurbis…
- The CEO of Carvelle Group is paid a bonus based solely on this year's reported profit. She has delayed a major research programme and cut st…
- Brightwater Ltd's chief executive is paid a bonus based solely on this year's reported profit. Shareholders are concerned she is cutting res…
- Ormond Group's board proposes a bonus scheme for executives based on earnings per share (EPS) growth. A shareholder notes that executives co…
- Kestrel Foods grants its directors share options exercisable in three years at today's market price of $5. Following a market-wide rise, the…
- Halden Group pays its divisional managers a bonus based solely on current-year reported profit. Managers have cut research spending and dela…