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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 run by its founding family, which holds 62% of the shares. The Managing Director is the founder's son, and three of the seven directors are his relatives. Which governance concern is most characteristic of this promoter-driven structure?

The characteristic concern is that controlling promoters may favour family interests at the expense of minority shareholders. Because ownership and management overlap, the agency conflict is between majority and minority holders, unlike professionally managed firms where the conflict is between dispersed owners and managers.

  1. ADispersed shareholding leads to weak monitoring of management by owners
  2. BPromoters may use control to favour family interests over minority shareholdersCorrect
  3. CProfessional managers pursue short-term goals to protect their tenure
  4. DAbsence of any identifiable person accountable for decisions

Explanation

In promoter-driven companies ownership and control sit together, so the main agency problem is between controlling promoters and minority shareholders, including related party dealings and family appointments. Option A and C describe professionally managed companies with dispersed ownership. Option D is not a typical feature as promoters are clearly identifiable.

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