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CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Conceptual Framework of Corporate Governance

Meridian Textiles Ltd is promoted by a family holding 62% of its shares. Its board has two promoter directors, a few independent directors, and the shareholders mostly rely on the board to protect them. In which governance model is the central concern the conflict between the controlling shareholder and minority shareholders, rather than between managers and dispersed owners?

The insider or relationship-based model fits, because ownership is concentrated in a promoter family. The main agency problem is the conflict between controlling and minority shareholders. In outsider models with dispersed ownership, the main conflict is instead between managers and shareholders.

  1. AThe outsider (market-based) model with widely dispersed shareholding
  2. BThe insider (relationship-based) model with concentrated ownershipCorrect
  3. CThe stakeholder model in its pure form only
  4. DThe shareholder model of dispersed institutions

Explanation

Concentrated ownership by promoters or families is typical of insider or relationship-based systems, as in India. The key agency problem there is controlling versus minority shareholders. In the outsider model, ownership is dispersed, so the main conflict is between managers and shareholders; this is why option A is wrong.

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