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IAI Actuarial Core Principles · Business Finance · Corporate governance and the regulation of companies

Which combination of mechanisms would best reduce the agency costs arising from the separation of ownership and control in a widely held listed company?

Independent non-executive directors, an audit committee and the threat of takeover together monitor and discipline managers, reducing agency costs. Executive-dominated boards, combined chair and chief executive roles, reduced disclosure and removal of shareholder votes weaken oversight and increase the conflict between owners and managers.

  1. AA board dominated by executives and a chairman who is also chief executive
  2. BIndependent non-executive directors, an audit committee and a threat of takeover for poor performanceCorrect
  3. CRestricting disclosure of results to annual shareholder meetings only
  4. DRemoving shareholders' right to vote on director appointments
  5. Paying all directors a fixed fee unrelated to performance and eliminating monitoring

Explanation

Independent directors and an audit committee monitor management, while the market for corporate control disciplines poor performers. Executive-dominated boards, combined chair and CEO roles, limited disclosure, removal of voting rights and absence of monitoring all weaken oversight and raise agency costs.

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