ACCA Strategic Professional · Advanced Financial Management · Corporate environmental, social, governance (ESG) and ethical issues
Under the agency relationship between shareholders and managers, which of the following is the most likely way that a conflict of interest with a wider stakeholder group, such as the local community, is mitigated in a multinational that aims to maximise shareholder wealth?
Embedding sustainability targets in long-term executive pay best mitigates stakeholder conflict, because managers' rewards become tied to environmental and social outcomes as well as financial returns. Short-term earnings-based bonuses, weaker boards or less reporting would increase the conflict rather than reduce it.
- ALinking management bonuses solely to short-term earnings per share
- BEmbedding sustainability-related targets in the long-term executive remuneration schemeCorrect
- CRemoving non-executive directors from the board
- DReducing the frequency of stakeholder reporting
Explanation
Including ESG targets in long-term remuneration aligns managers' rewards with outcomes that matter to stakeholders beyond shareholders. Short-term EPS bonuses tend to worsen the conflict by encouraging cost-cutting on environmental and social spending. Removing non-executives or reducing reporting weakens oversight and accountability.
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