Multiple Choice
Which of the following best describes the primary role of a business leader in an organization?
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1. Introduction to Accounting
Business Organization
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In a shareholder–manager relationship, who is considered the agent?
A
The shareholder
B
The manager
C
Both the shareholder and the manager
D
Neither the shareholder nor the manager
Verified step by step guidance1
Understand the concept of agency relationship: In financial accounting, an agency relationship occurs when one party (the principal) delegates decision-making authority to another party (the agent).
Identify the roles in the shareholder-manager relationship: Shareholders are the owners of the company, while managers are responsible for running the company and making decisions on behalf of the shareholders.
Determine who acts as the agent: In this relationship, the manager is considered the agent because they are entrusted by the shareholders (the principals) to make decisions and manage the company on their behalf.
Clarify the principal-agent dynamic: The shareholders (principals) rely on the managers (agents) to act in their best interest, which can sometimes lead to agency problems if the agent's goals differ from the principal's goals.
Conclude the answer: Based on the agency theory, the manager is the agent in the shareholder-manager relationship.
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