ACCA Strategic Professional · Strategic Business Leader · Governance scope and approaches
Halvor Group's board is dominated by executives. The CEO also chairs the board and the remuneration committee. Managers hold large share options that vest only if the share price exceeds a set level in two years. The company is highly geared and has a risky project with a small chance of very large gains. Which statement best analyses the agency implications?
Share options give managers upside without downside, so they may favour excessively risky projects at the expense of shareholders and lenders. Because the board is executive-dominated and the CEO chairs it and the remuneration committee, independent oversight is weak, so the agency problem persists rather than being resolved.
- AThe options fully remove agency conflict, so no further governance reform is needed
- BOption holders gain from upside but not downside, so managers may favour excessive risk-taking at the expense of lenders and shareholders, and the lack of board independence weakens oversight of thisCorrect
- CThe main problem is that managers will be too risk-averse because their wealth is tied to the company
- DAgency theory does not apply because the CEO chairs the board, which unifies ownership and control
Explanation
Options have asymmetric payoffs: gains are shared but losses are not borne, which can encourage risk-taking beyond shareholders' preference, especially with high gearing. Combined role CEO/chair and an executive-dominated board with the CEO on remuneration reduce independent monitoring. Option C describes the risk-aversion problem of undiversified managers with salary only, which is not the effect of options here.
Did you get it right without looking?
One question tells you little. A timed set on Governance scope and approaches shows your real accuracy, how long you take and where you lose marks.
More Governance scope and approaches questions
- Brindle Engineering is a listed company whose shareholders do not manage it. Directors run the business and shareholders have complained tha…
- A university, a not-for-profit body, is judged by its governing council on teaching quality, research impact and access for disadvantaged st…
- Castelo Group's board is deciding how to report on governance. The chair proposes publishing only financial results, because 'governance dis…
- Halvern Plc is listed in a jurisdiction whose corporate governance code applies a 'comply or explain' approach. In its annual report the boa…
- A council-owned leisure trust has a board made up mostly of council officials who also approve the trust's budget as the funder. A review fi…
- Zerin Holdings is listed, with thousands of dispersed small shareholders. Its chief executive, who owns 0.1% of the shares, has approved an …