ACCA Applied Knowledge · Business and Technology · Governance in business organisations
Which of the following is the most direct reason why corporate governance is needed in a company with many dispersed shareholders?
Governance is needed mainly because ownership is separated from control, creating an agency problem. Dispersed shareholders delegate running the company to directors who may act in their own interests. Governance structures such as independent directors, disclosure and accountability help align managers' behaviour with shareholders' interests.
- AOwnership is separated from control, creating an agency problem between shareholders and managersCorrect
- BDispersed shareholders can easily run the business themselves on a daily basis
- CDirectors have no legal duties towards the company they manage
- DGovernance removes the need for any internal controls or external audit
Explanation
In large companies the owners (principals) delegate control to directors (agents), who may pursue their own interests rather than those of shareholders. Governance mechanisms such as independent directors and disclosure reduce this agency problem. The other statements are false: shareholders usually cannot manage daily, directors do have duties, and governance complements rather than replaces controls and audit.
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