ICAEW SE · Chapter 7 · Question 6 of 18
Shareholders own a company but appoint directors to run it. The directors award themselves large bonuses linked to short-term profits, at the expense of long-term value. Which concept does this illustrate?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) The agency problem
Explanation
The agency problem arises when agents (directors) act in their own interests rather than in the interests of the principals (shareholders) who appointed them. Governance mechanisms such as independent boards, well-designed remuneration and transparent reporting aim to reduce this conflict.
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