Final answer:
The scenario described refers to the 'agency problem' or 'principal-agent problem,' which occurs when a company's management, such as the CEO, makes decisions that benefit themselves rather than the company and its shareholders.
Step-by-step explanation:
The scenario where GLD Inc.'s CEO, George, focuses on maximizing his personal compensation to the detriment of the company's performance illustrates a concept known as agency problem or principal-agent problem. In a public company, shareholders delegate decision-making authority to a CEO and a management team, expecting them to act in the best interests of the company and its owners (the shareholders). However, when the interests of the management diverge from those of the shareholders, and they begin making decisions that benefit themselves rather than the company, an agency problem arises.
This is a challenge in corporate governance, where the goals of the top executives may not align with the goals of the shareholders. Economists like Milton Friedman have argued that firms should operate in a way that maximizes shareholder returns, which implies managers should act on behalf of the true owners. Yet, the agency problem highlights the conflict of interest that can occur when top executives, like CEOs, have considerable leeway in decision-making, and they prioritize their personal benefits over shareholder value.