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

Halden Plc has dispersed shareholders and an executive team that controls the information flow to investors. The board is proposing the following to reduce agency costs: (1) an audit committee of independent non-executives, (2) fuller disclosure of executive pay, (3) a ban on any shareholder voting on remuneration. Which assessment is correct?

Independent audit committees and fuller pay disclosure strengthen monitoring and reduce information asymmetry, helping control agents. Banning shareholder votes on remuneration removes an accountability mechanism, so it would increase the agency problem rather than reduce it.

  1. AMeasures 1 and 2 reduce information asymmetry and monitoring costs problems, but 3 would weaken shareholder oversight and increase the agency problemCorrect
  2. BAll three measures reduce the agency problem by limiting interference with managers
  3. COnly measure 3 reduces the agency problem because it protects managers' autonomy
  4. DNone of the measures affect agency costs, which are determined only by share price

Explanation

Independent monitoring and disclosure reduce information asymmetry and help principals control agents, although they involve monitoring costs. Removing shareholder votes on pay removes a control mechanism, leaving agents less accountable and worsening the problem.

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