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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

Sundaram Textiles Ltd is founded and run by the Sundaram family, who hold 68% of the shares and occupy the Chairman, Managing Director and CFO positions. Minority shareholders complain that related-party purchases are priced favourably to family firms. Which governance concern is most characteristic of this promoter-driven structure?

The characteristic concern is the conflict between controlling promoters and minority shareholders. Because promoters own most shares and hold key posts, they can steer related-party transactions in their favour, whereas the manager-shareholder conflict is more typical of professionally managed companies with dispersed ownership.

  1. AConflict between controlling promoters and minority shareholdersCorrect
  2. BConflict between dispersed shareholders and professional managers
  3. CAbsence of any promoter accountability under company law
  4. DLack of a statutory requirement to have a board

Explanation

In promoter-driven companies ownership and control sit together, so the main agency problem is the controlling shareholder expropriating minorities, for example through related-party dealings. The manager-versus-dispersed-shareholder conflict is typical of professionally managed firms, so option 2 is wrong.

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