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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

Kaveri Infotech Ltd has no promoter holding above 2%, its shares are held by many institutions and retail investors, and the CEO is a hired professional. Which statement best describes the principal agency problem in this company?

The main problem is the conflict between hired management and widely dispersed shareholders. Since no owner holds a controlling stake, monitoring is weak and managers may pursue their own interests, so independent directors, disclosures and performance-linked pay become the key safeguards.

  1. AConflict between hired management and widely dispersed shareholdersCorrect
  2. BConflict between a controlling promoter and minority shareholders
  3. CConflict between the company and its statutory auditor
  4. DConflict between lenders and the promoter group

Explanation

With dispersed ownership and hired management, shareholders are too fragmented to monitor effectively, so managers may act in their own interest. This is the classic owner-manager agency problem. Option B applies to promoter-driven firms.

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