ACCA Applied Knowledge · Business and Technology · Governance in business organisations
Which of the following is a mechanism intended to reduce the agency problem by aligning directors' interests with those of shareholders?
Granting directors share options tied to share price performance helps reduce the agency problem because directors benefit when shareholder value rises. This aligns the interests of agents with principals, unlike fixed pay or concentrated board power.
- AGranting directors share options linked to share price performanceCorrect
- BPaying directors a fixed salary unrelated to performance
- CIncreasing the number of executive directors on the board
- DAllowing the chief executive to also chair the board
Explanation
Share options give directors a financial stake in share price growth, which aligns their interests with shareholders. Fixed pay does not link reward to performance, and more executives or combined chair and CEO roles weaken oversight and worsen the problem.
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