IAI Actuarial Core Principles · Business Finance · Corporate governance and the regulation of companies
A company has a promoter family holding 60% of shares and professional managers running operations. Minority shareholders complain that the promoters approve related-party contracts at above-market prices. Which governance problem is this, and which response best addresses it?
This is a conflict between controlling promoters and minority shareholders, where related-party deals expropriate value. The best response is requiring approval by independent directors and disinterested shareholders, which limits the promoters' ability to push through above-market contracts for their own benefit.
- AA conflict between controlling and minority shareholders; require independent director and disinterested shareholder approval of related-party transactionsCorrect
- BA conflict between shareholders and lenders; increase the debt covenants
- CA conflict between managers and employees; introduce an employee share scheme
- DA conflict between the company and the tax authority; hire a tax adviser
- A conflict between auditor and management; rotate the audit partner
Explanation
Where ownership is concentrated, the main agency problem is expropriation of minorities by controlling shareholders, for example via related-party deals. Independent director review and approval by disinterested shareholders directly constrains this. The other responses address different relationships and do not tackle the pricing of related-party contracts.
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