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CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Concept of Governance in Professional Managed Company and Promoters Driven Company

Zenith Foods Ltd is a listed company in which the founding Mehta family holds 62% of the shares and the Mehta brothers serve as Chairman and Managing Director. The board is being asked to approve a large purchase of raw material from a firm owned by the Chairman's brother-in-law. Which governance concern is most characteristic of a promoter-driven company in this situation?

The characteristic concern is that related-party dealings may be shaped by promoter interests to the detriment of minority shareholders. Concentrated family control and links with the counterparty weaken arm's-length decision-making, so independent directors and audit committee scrutiny become essential safeguards in promoter-driven companies.

  1. ARisk that related-party dealings are influenced by promoter interests at the expense of minority shareholdersCorrect
  2. BLack of any control by shareholders over the appointment of directors
  3. CAbsence of any long-term vision because owners change frequently
  4. DInability of the company to raise funds from the public

Explanation

In promoter-driven companies, concentrated ownership and family links make related-party transactions a key risk, as promoters may favour their own interests over minority shareholders. Hence independent scrutiny of such deals is needed. Option B is wrong because shareholders still vote on directors; option C describes a short-term-ownership issue more typical of dispersed ownership.

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