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IAI Actuarial Core Principles · Business Finance · Ethical responsibilities of owners and managers

A promoter family holds 62% of the shares of a listed Indian manufacturing company. Which of the following best describes an ethical responsibility of a controlling shareholder in this position?

A controlling shareholder should use its voting power fairly and avoid unfairly prejudicing minority shareholders. It has no obligation to guarantee dividends or buy out minorities, and entrenching family control or chasing short-term price is not an ethical responsibility.

  1. ATo vote and act in a way that does not unfairly prejudice the interests of minority shareholdersCorrect
  2. BTo guarantee minority shareholders a minimum annual dividend
  3. CTo buy out minority shareholders whenever the share price falls
  4. DTo ensure that the board is made up only of family members for continuity
  5. To maximise short-term share price at any cost, even at the expense of other stakeholders

Explanation

A controlling shareholder has power to carry resolutions, so ethical conduct requires it not to use that power to expropriate value from or unfairly treat minorities. No duty exists to guarantee dividends or to buy out minorities, and packing the board with relatives or pursuing price at any cost is not an ethical duty.

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