ACCA Applied Knowledge · Financial Accounting · Duties and responsibilities of those charged with governance
Which of the following is a recognised way of reducing the agency problem between shareholders and directors?
Linking part of directors' pay to share price or earnings through share options reduces the agency problem because it aligns directors' financial rewards with shareholders' interests. Fixed pay, executive-led audit committees and removing audits do not align interests or strengthen monitoring.
- APaying directors a fixed salary with no performance element
- BAllowing the finance director to chair the audit committee
- CLinking part of directors' remuneration to share price or earnings performance through share optionsCorrect
- DRemoving the requirement for the financial statements to be audited
Explanation
Performance-related pay such as share options aligns directors' rewards with shareholders' interests, so it reduces the agency problem. A fixed salary gives no alignment. An executive director chairing the audit committee weakens independence, and removing the audit reduces the monitoring of directors.
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