The requirement here was to discuss the reasons why small and medium-sized enterprises (SMEs) might experience less conflict between the objectives of shareholders and directors than large listed companies. The question was therefore looking for an understanding of why conflicts arise between the objectives of shareholders and directors.

One approach is look at why directors may not maximise shareholder wealth in the case of large listed companies (the agency problem) and why this failure might arise (for example, through the separation of ownership and control). Considering an SME, it can be argued that there is less conflict between the objectives of the two parties because the extent of the separation of ownership and control is smaller, or eliminated altogether in the case of owner-managed SMEs.