ACCA Applied Skills · Financial Management · Financial objectives and relationship with corporate strategy
Which of the following is a mechanism intended to reduce agency costs by monitoring managers, rather than by rewarding them?
Appointing independent non-executive directors and an audit committee is a monitoring mechanism, because they oversee management behaviour. The other options are incentive schemes that reward managers for results rather than monitoring what they do.
- AAppointing independent non-executive directors and an audit committeeCorrect
- BGranting directors share options
- CPaying a bonus based on return on capital employed
- DOffering a profit-related pay scheme
Explanation
Independent non-executives and audit committees oversee and monitor management, which reduces agency costs. Share options, ROCE bonuses and profit-related pay are all reward-based incentives, not monitoring mechanisms.
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