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IAI Actuarial Core Principles · Business Finance · Key principles of finance

In a listed Indian company, the promoter family holds 60% of the shares and also runs the board. Which agency conflict is most characteristic of this ownership structure?

The characteristic conflict is between controlling shareholders and minority shareholders. A promoter group with majority ownership and board control can pursue private benefits, such as related-party transactions, at the expense of minority investors, who have little power to stop it.

  1. AManagers undertaking risky projects at the expense of bondholders only
  2. BControlling shareholders extracting private benefits at the expense of minority shareholdersCorrect
  3. CManagers holding too much cash because shareholders cannot monitor them
  4. DLenders imposing covenants that restrict dividends
  5. Employees demanding higher wages than the market rate

Explanation

Where a dominant shareholder controls the board, the main agency problem shifts from owner-manager conflict to controlling versus minority shareholders. Related-party deals and preferential transfers are typical examples. The other options describe different relationships, such as bondholder-shareholder or lender-borrower conflicts.

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