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ACCA Strategic Professional · Strategic Business Leader · Governance scope and approaches

After a collapse, an inquiry into Corvane Bank found that the board had approved a high-risk trading strategy because executive bonuses were tied solely to short-term trading profits, with no adjustment for risk taken. Which governance lesson does this most directly illustrate?

The case shows that pay should align executives with long-term interests and the organisation's risk appetite. Bonuses based only on short-term profit with no risk adjustment encourage excessive risk-taking, which is an agency problem that remuneration design should prevent.

  1. ARemuneration structures should align executives' incentives with long-term shareholder and stakeholder interests and risk appetiteCorrect
  2. BExecutive pay should be set by the executives themselves to ensure motivation
  3. CBonuses should be based entirely on share price in the current year
  4. DRisk management should be delegated wholly to the internal audit function

Explanation

Short-term profit-based bonuses without risk adjustment encourage excessive risk-taking, an agency problem. Remuneration should be linked to long-term performance and risk appetite, often through deferral and clawback. Basing pay on current-year share price repeats the short-term problem, and risk ownership cannot be handed wholly to internal audit.

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