Question #14
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
Page: 5
Status: Unattempted
Question
A principal-agent problem may exist between:
Answer Choices:
A. managers and directors
B. regulators and directors
C. shareholders and directors
Explanation
An agency relationship exists when an individual (the agent) acts on behalf of another
individual (the principal). Such a relationship creates the potential for a principal-agent
problem where the agent may act for his own well being rather than that of a principal.
The key test of whether a principal-agent problem may exist is if one party is responsible
for acting in the best interest of the other. Of the answer choices given, directors are
responsible for acting in the best interests of shareholders.