Paying Payroll Service (PPS) recently declared bankruptcy.The price of PPS's shares has dropped from approximately R10 per share one year ago to R1 today.You can imagine that shareholders are not happy that the value of their shares has dropped so significantly.At the same time the financial position of the firm was deteriorating, PPS executives increased their salaries and perquisites substantially.Nothing they did violated any laws or was considered an unethical act.We would most likely describe this situation as __________.

Question

Quizplus · Accepted Answer

This situation is an example of an agency problem, where the interests of the executives (who are the agents of the shareholders) do not align with those of the shareholders. The executives increased their salaries and perquisites at a time when the financial position of the firm was deteriorating, which can be seen as putting their own self-interest over those of the shareholders. This problem can arise because the agents have more information about the company than the principals do, and therefore they might act in their own self-interest instead of the interest of the shareholders.

Paying Payroll Service (PPS) Recently Declared Bankruptcy