Acca

Answers

Professional Level – Essentials Module, Paper P1

Professional Accountant

1

(a)

(i)

December 2010 Answers

Institutional investor intervention

Six reasons are typically cited as potential grounds for investor intervention. Whilst it would be rare to act on the basis of

one factor (unless it was particularly unfavourable), an accumulation of factors may have such an effect. Furthermore,

institutional investors have a moral duty to use their power to monitor the companies they invest in for the good of all

investors, as recognised in most codes of corporate governance. Institutional investors have the expertise at their disposal

to understand the complexities of managing large corporations. As such, they can take a slightly detached view of the

business and offer advice where appropriate. The typical reasons for intervention are cited below.

Concerns about strategy, especially when, in terms of long-term investor value, the strategy is likely to be excessively

risky or, conversely, unambitious in terms of return on investment. The strategy determines the long-term value of an

investment and so is very important to shareholders.

Poor or deteriorating performance, usually over a period of time, although a severe deterioration over a shorter period

might also trigger intervention, especially if the reasons for the poor performance have not been adequately explained in

the company’s reporting.

Poor non-executive performance. It is particularly concerning when non-executives do not, for whatever reason, balance

the executive board and provide the input necessary to reassure markets. Their contributions should always be seen to

be effective. This is especially important when investors feel that the executive board needs to be carefully monitored or

constrained, perhaps because one or another of the factors mentioned in this answer has become an issue.

Major internal control failures. These are a clear sign of the loss of control by...