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Hello sir. In this question, I chose statements (2) and (3) because I thought statement (1) should refer to shareholders rather than stakeholders. However, ACCA’s answer includes (1), (2), and (3).
Should I follow ACCA’s approach in the exam or? Could you please give me some advice?
Which of the following statements about Fence Co is/are correct?
(1) Managerial reward schemes of listed companies should encourage the achievement of stakeholder objectives
(2) Requiring investment projects to be evaluated with return on capital employed is an example of dysfunctional behaviour encouraged by performance-related pay
(3) Fence Co has an agency problem as the directors are not acting to maximise the wealth of shareholders
1. Managerial reward schemes of listed companies should encourage the achievement of stakeholder objectives is correct. While the primary goal of financial management is to maximise shareholder wealth, it is recognised that satisfying the interests of other stakeholders such as employees and customers) can indirectly contribute to achieving this goal. E.g. satisfied employees may lead to higher productivity, which ultimately benefits shareholders.
2. This highlights that requiring investment projects to be evaluated using return on capital employed (ROCE) can lead to dysfunctional behavior. This is because ROCE may not adequately reflect the long-term value creation necessary for maximising shareholder wealth, especially when compared to methods like Net Present Value which considers the time value of money.
3. Addresses the agency problem, indicating that the directors may not be acting in the best interests of shareholders. This is a common issue in corporate governance where the interests of managers (agents) may diverge from those of shareholders (principals).
Therefore follow ACCA’s approach in the exam!
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