Clare,the CEO of Femica Inc.,reports to the board of directors appointed by the shareholders of Femica.Based on shareholder suggestions,the board ties Clare's compensation to the performance of Femica.Due to this pressure,Clare begins devoting extra time to projects and undertakes other activities to ensure that she has job security and that she receives adequate compensation.This conflict between Clare's interests and the board's interests best illustrates a(n)

Question

Quizplus · Accepted Answer

This conflict represents a principal-agent problem. In publicly traded companies, the stockholders are the legal owners of the company, but they delegate decision-making authority to professional managers. The conflict arises if the agents pursue their own personal interests, which can be at odds with the principals' goals. For their part, agents may be more interested in maximizing their total compensation, including benefits, job security, status, and power. Principals desire maximization of total returns to shareholders.