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CFA Level I · CFA Level I Exam · Organizational Forms, Corporate Issuer Features, and Ownership

Which of the following mechanisms is most likely to reduce the conflict between a company's shareholders and its managers?

A board with a majority of independent directors and an independent audit committee is most likely to reduce shareholder-manager conflict. Independent monitoring of management and of financial reporting limits self-serving behavior, whereas takeover defenses and unapproved executive loans tend to entrench managers or enable self-dealing.

  1. AA board with a majority of independent directors and an independent audit committeeCorrect
  2. BA staggered board combined with a poison pill that is difficult to remove
  3. CA rule that related-party loans to executives need no board approval

Explanation

Independent oversight monitors managers and the financial reporting process, which reduces agency costs. Staggered boards and poison pills tend to entrench management, and waiving approval for loans to executives increases the opportunity for self-dealing.

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