Explanation

The principal-agent conflict arises when managers (agents) may not act in the best interests of shareholders (principals). This conflict is most severe when:

• Dispersed ownership: Many small shareholders who individually lack incentive/monitoring power
• Dispersed voting power: No single shareholder has significant voting control

Mitigation mechanisms:

• Voting caps (A): Limit voting power regardless of share ownership - actually exacerbates the problem by further dispersing control
• Controlling shareholders (B): Large shareholders with significant voting power have strong incentives to monitor management and ensure alignment with shareholder interests
• Insiders with large ownership (C): While helpful, insiders may still prioritize personal interests over general shareholder interests

Correct answer is B because controlling shareholders provide the most effective monitoring mechanism for the specific scenario of dispersed ownership and dispersed voting power.