CFA Level I · CFA Level I Exam · Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits
A controlling shareholder owns 60% of voting shares but only 25% of the economic interest through a dual-class structure. The controlling shareholder approves a related-party purchase of assets at an above-market price from another firm they fully own. The shareholder conflict this best illustrates is:
This best illustrates a conflict between controlling and minority shareholders. The controller bears only part of the cost of overpaying but gains fully from the related firm, so value is extracted from minority shareholders. Control exceeding economic interest magnifies the incentive for such related-party transactions.
- Aa conflict between managers and employees
- Ba conflict between controlling and minority shareholdersCorrect
- Ca conflict between customers and suppliers
Explanation
The controlling holder bears only 25% of the cost of overpaying but receives 100% of the proceeds from the firm it owns, so wealth moves from minority shareholders to the controller. This is a controlling versus minority shareholder conflict, not one among managers, employees, customers or suppliers.
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