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

Zerin Holdings is listed, with thousands of dispersed small shareholders. Its chief executive, who owns 0.1% of the shares, has approved an expensive new head office and a series of acquisitions that raise the size of the company and her pay but have lowered earnings per share. Which governance concept best describes the situation?

This is the agency problem. Owners are dispersed and have delegated control to a manager with a tiny shareholding, who pursues personal benefits such as status, pay and perquisites through size-increasing acquisitions, even though shareholder value, shown by falling earnings per share, suffers.

  1. AThe agency problem arising from a separation of ownership and control, where the agent pursues own interests over those of the principalsCorrect
  2. BStakeholder conflict arising because employees have too little influence over strategy
  3. CInformation asymmetry that exists only between the company and its external auditors
  4. DA failure of the company to comply with the legal duty to pay dividends

Explanation

Shareholders (principals) delegate control to the CEO (agent). Her empire-building and perquisites raise her own benefits while reducing shareholder returns, which is the classic agency problem. The other options describe different issues and do not fit the facts.

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