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ACCA Strategic Professional · Strategic Business Leader · Agency

Harlow Motors plc has shareholders who are dispersed and hold small stakes. The board wants to reduce the risk that executives pursue empire-building acquisitions at shareholders' expense. Which measure most directly addresses the agency problem by increasing independent oversight of executive decisions?

Appointing independent non-executive directors to review major acquisitions is the best answer. It adds objective monitoring of executives, reducing the chance they pursue self-serving empire-building. Higher fixed pay, relocation or outsourcing payroll do not monitor decisions or align management with shareholder interests.

  1. AAppointing a majority of independent non-executive directors to a board committee that reviews major acquisitionsCorrect
  2. BIncreasing the basic salary of the executive directors
  3. CMoving the company's head office to a cheaper location
  4. DOutsourcing the payroll function to a third party

Explanation

Agency problems arise when managers' interests diverge from owners'. Independent non-executives provide monitoring of executive decisions such as acquisitions. A higher fixed salary does nothing to align interests or monitor behaviour, and the other options are unrelated to agency control.

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