Chapter 1.3 Encouraging SH wealth maximisation

Question 1

Agency theory

Answer 1

• SH is the Principal, owner of the biz
• Management act as the Agent of the principal

Question 2

Agency problems

Answer 2

Managers may not act in the best interest of the company
- Short-termism
- minimise dividend payment
- neglect risk management
- boost their own pay & perks
Ways to address: corporate governance & incentive schemes

Question 3

What is Corporate Governance

Answer 3

Rules and processes by which the behaviour of a firm is dircted

Question 4

BOD

Answer 4

• Separate management directors and chairman; no one person holding too much power
• Significant % of NED to monitor the actions of ED
• NED should be independent; 3 years contract & no share options

Question 5

Key committees

Answer 5

Remuneration
- Pay & incentives of ED set by NED
Audit
- Monitors risk management process
- NED only
Nomination
- Choice of new directors by NEDs

Question 6

Incentive schemes

Answer 6

• Performance-related pay
• Share options