RedMart Corp. operates a chain of supermarkets. The managers and other employees of the company have been on strike for months due to their differences with its owners. As a result, the share price of the company has fallen drastically. Pro Investments Inc. purchases a majority of the shares of RedMart, confident that it can manage the company better. The problem faced by RedMart Corp. as result of the separation of ownership and control can be termed as a(n)_________.

Question

Quizplus · Accepted Answer

The problem faced by RedMart Corp. due to the separation of ownership and control is an agency problem where the managers may not act in the best interest of the shareholders. Pro Investments Inc. buying a majority of shares is a way to resolve this agency problem by having a higher control over the company's decisions. Hostile takeover and proxy fight involve more aggressive approaches for gaining control of a company, while accountability problem is not a suitable term for describing this scenario.