Nov 2016 Q1 d.
Shareholders are risk-takers but Directors are risk averse. Explain THREE approaches that corporate governance has identified for addressing conflict of interest between shareholders and Directors. Reference can be made to Companies Act 1963, (Act 179) (6 marks)
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- Alignment of management goals with the shareholder value maximisation. This applies to the form of compensation/rewards provided for the Directors. It should be such that their actions will create a win-win situation for both the Directors and the shareholders. This process leads to goal congruence where the goals of the Directors that can influence them to pursue their personal interest are aligned with the goals of the shareholders.
- Various corporate governance controls also push the Directors to act in the interest of shareholders. Shareholders are responsible for the appointment of Directors, and the Directors in turn appoint their managers. Just as Directors can fire nonperforming managers, the shareholders can also replace the Directors if they consider them to be nonperforming. Again monitoring of management performance through periodic audit (internal and external) and other attestation arrangements will enable weaknesses in systems to be identified and steps taking to address those weaknesses.
- Provide a practical framework of reference for reviewing and modernising existing policy solutions in line with good practice. Promoting a culture in which conflicts of interest are properly identified and resolved or managed.