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Q) 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..
A) 1 and 2 only
B) 1 only
C) 2 and 3 only
D) 1, 2 and 3
Option D is the right answer.Hello tutor my question is why they are saying that 1st statement is also correct ?
Because management’s objective must be that achievement of SHAREHOLDER’s objective and NOT stakeholders then why are they stating stakeholders ?
By the way I choose option C.Although the ultimate objective of the financial manager is to increase shareholders wealth, in order to achieve this they need to keep all stakeholders ‘happy’.
For example, employees are stakeholders. If they are not kept happy then they will leave and the company will suffer.
Banks are stakeholders. If they are not kept happy then they may refuse to lend money and the company will suffer.Yes you are right but managerial reward scheme must be based on achievement of SHAREHOLDER’s objective not all stakeholders.
Furthermore, it is in practice not possible to kept ‘Happy’ all stakeholders.But there are many managers and they should be rewarded based on what they are responsible for.
The production manager should be rewarded based on (for example) the quality of the production in order to satisfy the customers.
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