A Level Economics AQA Practice Exam

What does the divorce of ownership and control refer to?

1. Shareholders indirectly influencing company management

2. Directors managing a company owned by shareholders

3. Investors having complete control over day-to-day operations

4. Ownership being split between multiple companies

The correct answer is: Directors managing a company owned by shareholders

The correct answer highlights a crucial concept in corporate governance. The divorce of ownership and control refers specifically to the situation where the owners of a company (shareholders) do not directly manage the day-to-day operations of the business. Instead, professional managers or directors are entrusted with running the company on behalf of the shareholders. This separation can lead to issues such as agency problems, where the interests of the managers and shareholders may not completely align. Shareholders rely on directors to make decisions for the company, which encapsulates the essence of this phenomenon. The other options do not encapsulate this concept accurately. For instance, while shareholders can influence management indirectly, this does not capture the core idea of the divorce itself. Moreover, the idea of investors having complete control contradicts the fundamental premise that shareholders delegate authority to managers. The notion of ownership being split among multiple companies pertains to joint ventures or other ownership structures, which is a separate issue from the principal-agent relationship described in the divorce of ownership and control.