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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

In Sundaram Foods Ltd, a professionally managed company, the CEO's pay is mostly a fixed salary, and he has been avoiding risky but profitable expansion because he fears losing his job if it fails. Which governance problem is illustrated, and what is the usual remedy?

This is an agency problem, where the manager's interests diverge from shareholders'. The usual remedy is performance-linked, long-term remuneration recommended by the Nomination and Remuneration Committee, so the CEO shares in value creation and is willing to take sensible risks.

  1. AAgency problem; align executive pay with long-term shareholder value through performance-linked remuneration set by the Nomination and Remuneration CommitteeCorrect
  2. BPromoter dominance; remove independent directors from the board
  3. CRelated party abuse; ban all transactions with group companies
  4. DInformation asymmetry between auditors and regulators; appoint a second auditor

Explanation

Managers whose interests differ from owners' create an agency problem, here shown as excessive risk aversion. Linking a reasonable part of remuneration to long-term performance, recommended by the Nomination and Remuneration Committee, aligns interests. Removing independent directors would weaken oversight.

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