Answer: A company's management puts their own interests above those of shareholders.

## Explanation A principal-agent conflict (also known as an agency problem) occurs when the interests of the principal (shareholders/owners) and the agent (management) diverge, and the agent acts in their own self-interest rather than in the best interests of the principal. **Key points:** 1. **Principals**: Shareholders/owners who hire agents to manage the company 2. **Agents**: Management/executives hired to run the company on behalf of shareholders 3. **Conflict**: Management may prioritize their own compensation, job security, or personal benefits over maximizing shareholder value **Why other options are incorrect:** - **Option A (regulators)**: While management may have conflicts with regulators, this is not the classic principal-agent conflict. Regulators are external oversight bodies, not principals who hire management. - **Option B (customers)**: Conflicts with customers represent market or stakeholder issues, not the principal-agent relationship. Customers are not the principals who hire management. **Examples of principal-agent conflicts:** - Management pursuing empire-building through unnecessary acquisitions - Excessive executive compensation not tied to performance - Avoiding risky but profitable projects to protect job security - Using company resources for personal benefits This concept is fundamental in corporate governance and is addressed through mechanisms like performance-based compensation, board oversight, and shareholder activism.

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