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ACCA Applied Skills · Financial Management · The nature and purpose of financial management

Which of the following is a corporate governance mechanism intended to reduce the agency problem?

Appointing independent non-executive directors to a remuneration committee reduces the agency problem, because they independently oversee executive pay and performance, helping to ensure that managers are rewarded for acting in shareholders' interests rather than their own.

  1. AAppointing independent non-executive directors to a remuneration committeeCorrect
  2. BIncreasing the proportion of debt in the capital structure to nil
  3. CSetting dividends at zero for several years
  4. DPaying all directors the same fixed salary

Explanation

Independent non-executive directors on a remuneration committee provide objective oversight of executive pay and help ensure rewards are linked to shareholder interests. Removing debt, paying zero dividends or equal fixed salaries do not monitor managers or align their incentives with shareholders.

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