ACCA Applied Knowledge · Business and Technology · Governance in business organisations
A bank has lent a company a large long-term loan. The loan agreement contains covenants limiting dividends and further borrowing. Which statement best describes the influence of the bank on the company's governance?
The bank influences governance through contractual covenants that restrict decisions such as dividend payments and further borrowing. It need not own shares to do so. Lenders do not normally appoint directors, since that right rests with shareholders, but covenants still constrain the board.
- AThe bank has no influence because it is not a shareholder
- BThe bank exerts influence through contractual covenants that constrain board decisionsCorrect
- CThe bank has direct power to appoint the directors as a lender
Explanation
Lenders influence governance through contract terms such as covenants, which restrict decisions on dividends and borrowing. Not being a shareholder does not remove this influence. Lenders do not normally appoint directors; that power belongs to shareholders.
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