ACCA Strategic Professional · Advanced Financial Management · Strategic business and financial planning for multinational organisations
Shareholders of Orion plc, a multinational, are concerned that the CEO is pursuing a large overseas acquisition mainly to increase company size and personal prestige. Which combination of governance measures would most directly address this agency problem?
An independent board with non-executive-led audit and remuneration committees, plus executive pay tied to long-term return on invested capital, best addresses empire-building. It adds scrutiny of acquisitions and penalises growth that fails to earn adequate returns, aligning the CEO with shareholder wealth.
- AIncreasing dividend cuts and removing all debt covenants
- BGiving the CEO a larger fixed salary and a longer notice period
- CA majority independent board with a non-executive-led audit and remuneration committee, and executive pay linked to long-term return on invested capitalCorrect
- DMoving the head office to a low-tax jurisdiction
Explanation
Empire-building is a managerial agency problem. Independent oversight scrutinises acquisitions, and pay linked to long-term return on capital penalises value-destroying growth. A larger fixed salary and longer notice period weaken accountability, while relocation addresses tax rather than agency. Cutting dividends would leave more free cash flow with managers, worsening the problem.
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