IAI Actuarial Core Principles · Business Finance · Ethical responsibilities of owners and managers
Which of the following is the best example of a shareholder acting ethically in relation to the company's long-term interests?
Backing retention of earnings for a well-evaluated expansion, even at the cost of a lower near-term dividend, shows concern for the company's long-term value. The alternatives involve covenant breaches, misstated accounts, coercion or concealment, which serve one shareholder's private interest unfairly.
- ADemanding a special dividend funded by borrowing, which would breach the company's loan covenants
- BSupporting a resolution to retain earnings for a sound, well-evaluated expansion, despite a lower near-term dividendCorrect
- CPressing management to understate provisions so reported profit looks higher before a planned share sale
- DThreatening directors with removal unless they approve a favourable related-party contract
- Lobbying the board to withhold bad news from the market until the shareholder has sold
Explanation
Supporting reinvestment in a sound project balances current income against long-term value for all shareholders. The other options involve breaching covenants, misstating accounts, coercing directors for private gain, or concealing information, all of which put the shareholder's interest above fairness.
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