Skip to content

ACCA Strategic Professional · Advanced Financial Management · The role and responsibility of senior financial executive/advisor

A company's managers hold only salary-based contracts with a small annual bonus tied to reported profit. Shareholders suspect managers reject a positive-NPV project because its profits would arrive after the managers' expected departure. Which agency problem is this, and which remedy best addresses it?

This is a short-termism agency problem, where managers favour near-term profit over long-term value. The best remedy is to tie part of their pay to long-term share price performance through share options or deferred shares, aligning their interests with shareholders' wealth over the full project horizon.

  1. ADividend signalling; remedy: raise the dividend payout ratio
  2. BShort-termism; remedy: link part of remuneration to long-term share price through share options or deferred sharesCorrect
  3. CAsset substitution; remedy: add restrictive covenants to loan agreements
  4. DInformation asymmetry in takeover bids; remedy: issue a profit warning

Explanation

Rejecting positive-NPV projects because the benefits fall after managers leave is a short-term horizon problem. Linking pay to long-term shareholder value, via options or deferred shares, aligns managers' interests with shareholders. Covenants address shareholder-versus-lender conflict, not this one.

Did you get it right without looking?

One question tells you little. A timed set on The role and responsibility of senior financial executive/advisor shows your real accuracy, how long you take and where you lose marks.

Practise The role and responsibility of senior financial executive/advisorFree diagnostic mock

More The role and responsibility of senior financial executive/advisor questions