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ACCA Strategic Professional · Advanced Financial Management · Corporate environmental, social, governance (ESG) and ethical issues

A listed group is considering its board structure under a principles-based corporate governance code. Which of the following is the strongest argument for the board appointing a remuneration committee composed wholly of independent non-executive directors?

The key benefit is reduced conflict of interest. Independent non-executives have no personal stake in executive pay, so they can set rewards objectively and in line with shareholder interests, rather than executives influencing their own remuneration. It does not guarantee low pay or remove shareholder oversight.

  1. AIt guarantees that executive pay will fall below the industry average
  2. BIt removes the need for shareholders to vote on remuneration
  3. CIt reduces the conflict of interest that arises when executives influence their own payCorrect
  4. DIt transfers legal liability for pay decisions from the board to the committee

Explanation

Independent non-executives have no personal stake in executive pay, so they can set remuneration to align with shareholder interests and avoid self-dealing. The committee does not guarantee lower pay, replace shareholder votes or shift legal liability.

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