Skip to content

CFA Level I · CFA Level I Exam · Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

A firm pays its executives almost entirely through annual bonuses tied to current-year reported net income. This compensation structure most likely increases the risk that managers will:

Managers are most likely to focus on short-term earnings at the expense of long-term value. Bonuses tied to current-year net income reward near-term profit, encouraging cuts to investment or earnings manipulation, so pay is poorly aligned with long-term shareholder interests.

  1. Afocus on short-term earnings at the expense of long-term valueCorrect
  2. Breduce risk-taking to protect the company's credit rating
  3. Cdisclose more information to minority shareholders

Explanation

Pay linked to short-term accounting profit encourages managers to boost near-term earnings, possibly by cutting investment or manipulating results, harming long-term shareholder value. The other options are not the typical consequence of such incentives.

Did you get it right without looking?

One question tells you little. A timed set on Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits shows your real accuracy, how long you take and where you lose marks.

Practise Corporate Governance: Conflicts, Mechanisms, Risks, and BenefitsFree diagnostic mock

More Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits questions