What does the principal-agent issue refer to in corporate governance?

• A. The discrepancy between a manager's goal (bonuses; increase sales) vs shareholder's goal (dividends; increase profits).
• B. A conflict between consumers and producers over price.
• C. A mismatch between suppliers and customers.
• D. An issue with inventory management.

Answer: (A)

The core idea is the mismatch of interests between those who own the company and those who run it. In corporate governance, owners (the principals) want to maximize long-term shareholder value—think steady profits and dividends. Managers (the agents) are hired to run the company but may pursue their own objectives, such as earning bigger bonuses or chasing pageantry like rapid growth or flashy sales figures, even if those choices don’t maximize shareholder value. This divergence happens because managers often have more information about the firm and face different incentives, which can lead to decisions that benefit the managers more than the owners. Governance mechanisms like performance-based pay, board monitoring, and aligned incentives aim to reduce this gap.

Other options describe different problems: price disputes between buyers and sellers, supply chain or contract mismatches, or operational issues like inventory management, none of which capture the ownership-control misalignment at the heart of the principal-agent issue.