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CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Concept of Governance in Professional Managed Company and Promoters Driven Company

Bharat Allied Ltd has widely dispersed shareholding with no single holder above 3%. The board of directors is led by an experienced non-promoter CEO, hired through a search committee. Shareholders are largely passive. Which governance concern is most characteristic of this structure?

The key concern is the agency problem between dispersed shareholders and professional managers. Since owners are passive and no one holds a controlling stake, managers may pursue their own interests. Promoter expropriation of minority holders is the typical issue in promoter-driven companies, not in this structure.

  1. ARisk of the promoter group expropriating minority shareholders
  2. BAgency conflict between dispersed owners and professional managers pursuing their own interestsCorrect
  3. CComplete absence of any board accountability
  4. DInability to appoint independent directors

Explanation

In dispersed-ownership, professionally managed firms, owners are passive and management may act in its own interest, so the principal-agent conflict between shareholders and managers is the key issue. Expropriation of minorities is the typical concern in promoter-driven firms. Board accountability and independent directors remain possible.

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