Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is the 'agency problem' in corporate governance?

1. Directors often act against shareholder interests

2. Shareholders manage the daily operations

3. Agents are replaced by principals regularly

4. Directors have no responsibility to shareholders

The correct answer is: Directors often act against shareholder interests

The agency problem in corporate governance typically refers to the conflict of interest that arises when the goals of the shareholders (principals) do not align with those of the management (agents), particularly the directors. This misalignment can lead directors to make decisions that are more beneficial to themselves rather than to the shareholders. In this context, the first choice accurately captures the essence of the agency problem, highlighting how directors, who are tasked with managing the company, might prioritize their interests—such as job security, bonuses, or personal reputation—over the financial interests of shareholders looking for increased returns on their investments. Effectively addressing the agency problem often involves implementing measures such as aligning incentives, offering performance-based pay structures, and increasing transparency through regular reporting. The other options do not accurately describe the agency problem: they either misrepresent the roles within the corporate structure or suggest a lack of accountability where it indeed exists.