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

Which of the following is an action that shareholders could take to reduce the agency problem through monitoring, rather than through incentive schemes?

Requiring an independently audited annual report and appointing non-executive directors are monitoring measures, because they check and challenge management. Share options, EPS-linked bonuses and share awards are incentive schemes that reward performance rather than monitor behaviour.

  1. AOffering directors performance-related share options
  2. BRequiring the company to issue an annual report audited by an independent auditor and appointing non-executive directorsCorrect
  3. CPaying directors a bonus linked to earnings per share
  4. DGranting directors a long-term share award scheme

Explanation

Independent audit and non-executive directors are monitoring mechanisms that scrutinise management behaviour. The other three options are incentive mechanisms that reward directors for performance, which is the alternative approach to monitoring.

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