Easy2 marksMultiple Choice
Financial Management FunctionSection AFinancial ManagementSyllabus AAgency Theory

ACCA · Question 15 · Financial Management Function

'BlockLogistics', a publicly listed supply chain firm, is experiencing an 'agency problem' where directors are prioritizing short-term bonuses over long-term shareholder wealth.

Which TWO of the following mechanisms are designed to reduce the agency problem?

Answer options:

A.

Linking executive remuneration to long-term share price performance.

B.

Increasing the fixed base salary of directors regardless of performance.

C.

Implementing strong corporate governance codes and independent non-executive directors.

D.

Allowing the CEO to also hold the position of Chairman of the Board.

How to approach this question

Identify methods that align the goals of managers with shareholders (goal congruence) or increase monitoring of managers.

Full Answer

The agency problem arises from the separation of ownership and control. To mitigate it, companies use goal congruence mechanisms (like linking pay to long-term share performance, Option A) and monitoring mechanisms (like corporate governance and non-executive directors, Option C). Increasing fixed salaries (Option B) or combining the CEO/Chairman roles (Option D) generally exacerbate the agency problem.

Common mistakes

Assuming higher pay automatically solves the agency problem, ignoring the need for performance linkage.

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