ACCA Strategic Business Leader (SBL) Practice Exam

What does agency theory primarily examine?

1. The relationship between shareholders and customers

2. The dynamics between company owners and directors

3. The interaction between managers and employees

4. The roles of regulatory bodies in corporate governance

The correct answer is: The dynamics between company owners and directors

Agency theory primarily examines the dynamics between company owners, referred to as principals, and directors or managers, known as agents. This theory addresses the issues that arise when the interests of the principals do not align with those of the agents. For instance, shareholders (principals) may seek to maximize their investment returns, while managers (agents) might prioritize their own interests, such as job security or personal compensation, potentially leading to conflicts. Agency theory highlights the challenges in ensuring that agents act in the best interests of the principals, and it discusses mechanisms such as performance-based incentives, contracts, and monitoring systems that can help mitigate these conflicts. This focus on the relationship between owners and directors is crucial for understanding corporate governance and the agency problems that may arise in the management of a company. In contrast, the other options focus on different relational dynamics that do not align directly with the core tenets of agency theory. For instance, shareholders and customers' relationship concerns market dynamics rather than governance; the interaction between managers and employees deals with organizational behavior rather than the ownership conflict; and regulatory bodies in corporate governance relates more to external accountability rather than the specific principal-agent relationship that agency theory examines.