IAI Actuarial Core Principles · Business Finance · Corporate governance and the regulation of companies
Which of the following is a governance mechanism that mainly helps reduce agency costs between shareholders and managers by providing independent oversight?
A board with a strong element of independent non-executive directors and an independent audit committee reduces agency costs, because these directors monitor and challenge management on behalf of shareholders. Combining CEO and chair roles, reducing disclosure or relying on executives for audit oversight weakens that control.
- AAppointing a majority of executive directors to the audit committee
- BHaving the CEO also chair the board
- CA board with a strong element of independent non-executive directors and an independent audit committeeCorrect
- DRemoving the requirement for annual disclosure of directors' remuneration
- Paying directors only through unrestricted bonuses
Explanation
Independent non-executive directors and an independent audit committee monitor management and challenge decisions, lowering agency costs. Executives on the audit committee, a combined CEO-chair role, less disclosure and unrestricted bonuses weaken oversight or worsen incentives.
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