{"id":30003,"date":"2021-09-12T02:24:29","date_gmt":"2021-09-12T02:24:29","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=30003"},"modified":"2026-01-24T16:47:08","modified_gmt":"2026-01-24T16:47:08","slug":"principal-agent-relationships-in-corporate-governance","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/","title":{"rendered":"Principal-Agent Relationships in Corporate Governance"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Principal\u2013Agency Relationships\",\n    \"text\": \"Which of the following statements about principal\u2013agency relationships is most likely accurate?\\n\\nA. Managers typically have greater access to information about the company\u2019s affairs than the shareholders.\\n\\nB. In a principal\u2013agent relationship one entity, the agent, appoints another entity, the principal, to act on its behalf.\\n\\nC. Shareholders and creditors tend to have similar risk tolerance with respect to the investments that a company should undertake.\",\n    \"answerCount\": 3,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"Managers typically have greater access to information about the company\u2019s affairs than the shareholders.\",\n      \"explanation\": \"In principal\u2013agency relationships, managers (agents) usually possess more detailed and timely information about the firm\u2019s operations than shareholders (principals), leading to information asymmetry. Creditors and shareholders generally have different risk tolerances, and the principal appoints the agent\u2014not the other way around.\"\n    }\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Introduction to Corporate Governance and Other ESG Considerations (2025 Level I CFA\u00ae Exam \u2013 Module 2)\",\n  \"description\": \"This video lesson covers the CFA Level 1 reading on corporate governance and ESG considerations. It explains how corporations make decisions, the roles of key stakeholders, agency conflicts, and mechanisms for effective governance. The video also explores how environmental and social factors influence investment decisions and long-term value creation.\",\n  \"uploadDate\": \"2022-09-23T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/i.ytimg.com\/vi\/535QsiUC1UU\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=535QsiUC1UU\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/535QsiUC1UU\",\n  \"duration\": \"PT1H08M48S\"\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/535QsiUC1UU?si=_MrkBpxQK2STvpuR\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n\n<p>The term \u2018Principal-agent relationship\u2019 or just simply, \u2018Agency relationship\u2019 is used to describe an arrangement where one entity, the principal, legally appoints another entity, the agent, to act on its behalf by providing a service or performing a particular task.<\/p>\n<p>The agent is expected to act in the best interest of the principal. It is, however, not unusual for principal-agent relationships to lead to conflicts. The most common example of this occurs when managers, acting as agents, do not act in the best interest of the shareholders of the company (the principals).<\/p>\n<h2><strong>Shareholder and Manager or Director Relationships<\/strong><\/h2>\n<p>Directors and managers (agents) are expected to act in the best interests of the shareholders (principal) by maximizing the company\u2019s equity value. These two groups, however, tend to have conflicting interests on issues related to the risks that a company should undertake. Managers and directors tend to act in a more risk-averse manner to better protect their employment status. On their part, shareholders would want directors and managers to accept more risk to maximize equity value.<\/p>\n<p>In addition, managers usually have greater access to information and are more knowledgeable about the company\u2019s affairs than the shareholders.&nbsp; This information asymmetry makes it easier for managers to make strategic decisions that are not necessarily in the best interests of shareholders.<\/p>\n<h2><strong>Controlling and Minority Shareholder Relationships<\/strong><\/h2>\n<p>Minority shareholders usually have limited or no control over the management. Similarly, they have limited or no voice in director appointments or in major transactions that could directly impact shareholder value. As a result, conflicts between minority and controlling shareholders usually occur. Such conflicts arise when the opinions or desires of the minority shareholders are eclipsed by the influence of the controlling shareholders.<\/p>\n<h2><strong>Manager and Board Relationships<\/strong><\/h2>\n<p>Whereas managers are involved in the day-to-day operations of a company, the board of directors, especially the non-executive board members, are not. This leads to information asymmetry and makes it difficult for the board to effectively carry out its functions.<\/p>\n<h2><strong>Creditor Versus Shareholder Interests<\/strong><\/h2>\n<p>Creditors&#8217; interest is to have a company undertake activities that promote stable financial performance and maintain default risk at an acceptable level. This essentially guarantees a safe return of their principal and payment of interest by the company. Shareholders, on the other hand, prefer to have the company venture into riskier activities that have high return potential and are as such more likely to enhance equity value. There is, therefore, a divergence of interest in risk tolerance between these two groups.<\/p>\n<h2><strong>Other Stakeholder Conflicts<\/strong><\/h2>\n<p>Examples of other conflicts between stakeholders include conflicts between customers and shareholders, customers and suppliers, and shareholders and governments or regulators.<\/p>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>Which of the following statements about principal-agency relationships is <em>most likely<\/em> accurate?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li>Managers typically have greater access to information about the company\u2019s affairs than the shareholders.<\/li>\n<li>In a principal-agent relationship one entity, the agent, appoints another entity, the principal, to act on its behalf.<\/li>\n<li>Shareholders and creditors tend to have similar risk tolerance with respect to the investments that a company should undertake.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>Shareholders and creditors tend to have different risk tolerance with respect to the investments that a company should undertake.<\/p>\n<p><strong>B is incorrect.<\/strong> In a principal-agent relationship one entity, the principal, appoints another entity, the agent, to act on its behalf.<\/p>\n<p><strong>&nbsp;C is incorrect.<\/strong> The interest of creditors is to have a company undertake activities that promote stable financial performance. Shareholders, on their part,&nbsp; prefer to have the company undertake riskier activities that have high return potential.<\/p>\n<p>&nbsp;<\/p>\n<\/blockquote>\n<div class=\"notes_inv\"><hr>\n<p><em><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/learning-sessions-curriculum-corporate-finance\/\">Corporate Issuers &#8211; Learning Sessions<\/a><\/em><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>The term \u2018Principal-agent relationship\u2019 or just simply, \u2018Agency relationship\u2019 is used to describe an arrangement where one entity, the principal, legally appoints another entity, the agent, to act on its behalf by providing a service or performing a particular task&#8230;.<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[25],"tags":[],"class_list":["post-30003","post","type-post","status-publish","format-standard","hentry","category-corporate-issuers","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Principal-Agent Relationships | CFA Level 1 - AnalystPrep<\/title>\n<meta name=\"description\" content=\"Learn about agency relationships in corporate governance, including the roles, conflicts, and solutions to principal-agent problems.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Principal-Agent Relationships | CFA Level 1 - AnalystPrep\" \/>\n<meta property=\"og:description\" content=\"Learn about agency relationships in corporate governance, including the roles, conflicts, and solutions to principal-agent problems.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/\" \/>\n<meta property=\"og:site_name\" content=\"AnalystPrep | CFA\u00ae Exam Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2021-09-12T02:24:29+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-01-24T16:47:08+00:00\" \/>\n<meta name=\"author\" content=\"Kosikos Tuitoek\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Kosikos Tuitoek\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/\"},\"author\":{\"name\":\"Kosikos Tuitoek\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20\"},\"headline\":\"Principal-Agent Relationships in Corporate Governance\",\"datePublished\":\"2021-09-12T02:24:29+00:00\",\"dateModified\":\"2026-01-24T16:47:08+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/\"},\"wordCount\":600,\"articleSection\":[\"Corporate Issuers\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/\",\"name\":\"Principal-Agent Relationships | CFA Level 1 - AnalystPrep\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\"},\"datePublished\":\"2021-09-12T02:24:29+00:00\",\"dateModified\":\"2026-01-24T16:47:08+00:00\",\"author\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20\"},\"description\":\"Learn about agency relationships in corporate governance, including the roles, conflicts, and solutions to principal-agent problems.\",\"breadcrumb\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Principal-Agent Relationships in Corporate Governance\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\",\"name\":\"AnalystPrep | CFA\u00ae Exam Study Notes\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20\",\"name\":\"Kosikos Tuitoek\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/secure.gravatar.com\/avatar\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g\",\"contentUrl\":\"https:\/\/secure.gravatar.com\/avatar\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g\",\"caption\":\"Kosikos Tuitoek\"},\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/kosikos-tuitoek-enockanalystprep-com\/\"}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/535QsiUC1UU\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"4129\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2021-09-12T02:24:29+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Principal-Agent Relationships | CFA Level 1 - AnalystPrep","description":"Learn about agency relationships in corporate governance, including the roles, conflicts, and solutions to principal-agent problems.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/","og_locale":"en_US","og_type":"article","og_title":"Principal-Agent Relationships | CFA Level 1 - AnalystPrep","og_description":"Learn about agency relationships in corporate governance, including the roles, conflicts, and solutions to principal-agent problems.","og_url":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/","og_site_name":"AnalystPrep | CFA\u00ae Exam Study Notes","article_published_time":"2021-09-12T02:24:29+00:00","article_modified_time":"2026-01-24T16:47:08+00:00","author":"Kosikos Tuitoek","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Kosikos Tuitoek","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/"},"author":{"name":"Kosikos Tuitoek","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20"},"headline":"Principal-Agent Relationships in Corporate Governance","datePublished":"2021-09-12T02:24:29+00:00","dateModified":"2026-01-24T16:47:08+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/"},"wordCount":600,"articleSection":["Corporate Issuers"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/","name":"Principal-Agent Relationships | CFA Level 1 - AnalystPrep","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website"},"datePublished":"2021-09-12T02:24:29+00:00","dateModified":"2026-01-24T16:47:08+00:00","author":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20"},"description":"Learn about agency relationships in corporate governance, including the roles, conflicts, and solutions to principal-agent problems.","breadcrumb":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/principal-agent-relationships-in-corporate-governance\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/cfa-level-1-exam\/"},{"@type":"ListItem","position":2,"name":"Principal-Agent Relationships in Corporate Governance"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/","name":"AnalystPrep | CFA\u00ae Exam Study Notes","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20","name":"Kosikos Tuitoek","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g","caption":"Kosikos Tuitoek"},"url":"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/kosikos-tuitoek-enockanalystprep-com\/"}]},"og_video":"https:\/\/www.youtube.com\/embed\/535QsiUC1UU","og_video_type":"text\/html","og_video_duration":"4129","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2021-09-12T02:24:29+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/30003","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/comments?post=30003"}],"version-history":[{"count":8,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/30003\/revisions"}],"predecessor-version":[{"id":58294,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/30003\/revisions\/58294"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/media?parent=30003"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/categories?post=30003"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/tags?post=30003"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}