In the agency relationship inside a public company, which party is the principal?
In the agency relationship inside a public company, which party is the principal?
Answer
The shareholders, who supply capital and bear the risk
Options - A. The shareholders, who supply capital and bear the risk - B. The senior managers, who run the business - C. The board of directors, who oversee management - D. The external auditor, who reports on the statements Why - A. Correct — principals own the company and hire agents to run it on their behalf. - B. Managers are the agents: they act for the owners and know more than the owners do — the source of the agency problem. - C. The board is elected to represent the principals; it is a governance mechanism, not the principal itself. - D. The auditor is an external check on management’s reporting, hired by the shareholders but not an owner.
OpenStax Finance §2.3–2.4; OpenStax Intro to Business §4.3; CBCA ss. 102, 106