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ACCA Strategic Professional · Strategic Business Leader · Agency

Orvane Ltd is run by a CEO who is also chair. The CEO has sole control over the nomination of directors, all of whom are former colleagues. A major institutional investor argues that the agency relationship is poorly governed. Which change would most effectively strengthen the principal's position under agency theory while remaining realistic?

Separating the chair and CEO roles and giving an independent non-executive-led nomination committee control of board appointments best strengthens shareholders. It prevents the agent from controlling those who monitor it, whereas cash bonuses, fewer meetings or CEO-appointed committees increase agent power or weaken oversight.

  1. ASeparate the roles of chair and CEO and create a nomination committee led by independent non-executive directorsCorrect
  2. BIncrease the CEO's bonus so it is paid wholly in cash each year
  3. CReduce the number of board meetings to cut monitoring costs
  4. DAllow the CEO to appoint the remuneration committee members

Explanation

Separating roles and using an independent nomination committee reduces the agent's control over the body that monitors it. A cash bonus encourages short-termism, fewer meetings weaken oversight, and CEO-appointed remuneration members undermine independence. Only the first strengthens the principal's position.

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