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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

Mahanadi Ltd is professionally managed. Its CEO proposes a risky acquisition that may lift short-term profit, and thereby his performance bonus, but raises long-term risk. The board, wanting to align management with long-term shareholder value, should most appropriately:

The board should link a meaningful part of variable pay to long-term and risk-adjusted performance through its remuneration committee. This aligns hired managers with long-term shareholder value, whereas bonuses on current-year profit alone encourage risky acquisitions and weaken accountability.

  1. ALink a meaningful part of variable pay to long-term performance and risk-adjusted measures, as recommended by the remuneration committeeCorrect
  2. BPay the bonus solely on current-year profit to keep it simple
  3. CRemove the board's role in approving large acquisitions
  4. DAsk the CEO to abstain from reporting risks

Explanation

Short-term-only incentives encourage excessive risk-taking. Tying variable pay to long-term, risk-adjusted outcomes aligns managers with owners. Pay purely on current profit worsens the problem, and removing board approval or risk reporting reduces accountability.

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