ACCA Strategic Professional · Strategic Business Leader · Agency
Zorvan Plc's board holds a large share option scheme, and the CEO has recently cut research spending to lift this year's profit. A non-executive director says this shows the classic agency problem. Which description best captures that problem?
The agency problem is that managers, who act as agents for shareholders, may pursue their own interests, such as profit-linked bonuses, rather than maximise shareholder wealth. Cutting research to boost current profit and option value is a typical example of this divergence of interests.
- AManagers act as agents of shareholders but may pursue their own interests, such as bonuses, instead of maximising shareholder wealthCorrect
- BShareholders act as agents of managers and demand short-term returns that harm long-term investment
- CManagers are accountable to all stakeholders equally and have failed to balance their competing claims
- DDirectors have breached a statutory duty because they have reduced discretionary expenditure
Explanation
Agency theory describes a relationship in which principals (shareholders) delegate decisions to agents (managers), whose interests may diverge from theirs. Here the CEO's pay is linked to short-term profit, so cutting research serves personal reward at the expense of long-term value. The stakeholder-balancing option describes stakeholder theory, not agency theory.
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