Question #2
Reading: Reading 16 Environmental, Social, and Governance (ESG) Considerations in Investment Analysis
PDF File: Reading 16 Environmental, Social, and Governance (ESG) Considerations in Investment Analysis.pdf
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Question
All of the following are examples of the principal-agent relationship (PAR) problem EXCEPT:
Answer Choices:
A. an employee calls in sick to use up their sick time since they cannot carry it over to the next year
B. two members of a board of directors are having an illicit relationship
C. a senior executive routinely leaves the office early claiming to work from home yet there is no accountability
Explanation
The PAR problem is generally viewed as being between shareholders (principals) and
company executives (agents) but any employee of the firm could be viewed as an agent
and therefore contribute to the principal-agent problem if they act in their own best
interests to the detriment of the firm. Examples of the PAR problem are:
CEOs enjoying on-the-job consumption in the form of excessive corner offices or
lavish travel that is passed off as a necessary business expense.
CEOs manipulating the board of directors for excessive compensation packages
which are not linked to company performance.
Executives seeking status by expanding the business (empire building) through
acquisitions that do not benefit the existing shareholders. Company size has been
strongly linked to executive compensation.