Question Tag: Public Limited Liability Company

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  • 10 Marks

BMIS – March 2024 – L1 – Q1a – The business organisation and its stakeholders

Explain five features of a Public Limited Liability Company to a friend considering investment options.

You have been approached by a high school friend for advice as to the form of business organisation in which he should invest. He indicates to you that he does not necessarily want to be directly involved in the day-to-day running of the business because he has family matters to attend to. You intend to recommend that he invests in a public limited liability company.

Required: Explain FIVE (5) features of a Public Limited Liability Company to your friend.

Features/Characteristics of Public Limited Liability Company

  • A public limited liability company is incorporated under the Companies Act 2019, Act 992. It is composed of not less than seven members. That is, the minimum number of persons who can form a public limited liability company is seven.
  • Due to the large number of members, the company can raise large amount of initial capital to operate on a scale larger than other forms of business units.
  • It can also invite the public to subscribe for shares, thus making it possible for the firm to raise additional working capital.
  • The company is regarded in law as a person distinct and separate from the members. It can acquire and own property in its own name.
  • The liability of members is limited which means that unless in very special circumstances, members are not liable for the debts and liabilities of the firm.
  • Because it is a public company, a member can transfer his shares without the consent of other members.
  • 20 Marks

FM – NOV 2016 – L2 – Q1 – Introduction to Financial Management

Explains the agency problem in public companies, practical solutions, non-financial objectives, governance conflict solutions, and internal hedging methods.

a) Explain the term Agency problem in relation to a Public Limited Liability Company? (2 marks)

b) As a Finance expert, explain THREE practical steps to manage agency problem in public limited liability companies. (3 marks)

c) Profit maximization is the core objective of shareholders in Public limited Liability Companies. Identify and explain THREE other non-financial objectives that can be pursued by a Public limited liability Company. (3 marks)

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)

e) Explain THREE internal hedging methods that a company can use in order to minimize translation risk and transaction risk. (6 marks)

a) Agency problem occurs when managers or management take decisions that are not consistent with the objectives of shareholder value maximization. Contributors to this agency problem are: divergence of ownership and control, goals of managers differing from those of shareholders because of personal interest, and asymmetry of information between managers and shareholders. (2 marks)

b) The following can be used to manage or resolve the agency problem:

  • Use of performance-related reward scheme: Pay and bonuses based on satisfactory performance of managers in delivering shareholder value.
  • Executive share option scheme: Managers are allowed to buy shares of the company at a fixed price within a particular period. This encourages goal congruence between managers and shareholders.
  • Threat of firing or dismissal: Managers or directors can be forced out by the shareholders if they are unhappy with their performance.
  • Key Market participants like institutional investors such as fund managers,
    pension houses, insurance companies who have larger shareholdings can
    exercise that to push managers to perform or be voted out.
     Monitoring and control of managers performance through the use of external
    and internal auditors, Board committees and review consultants.

c) The following are other objectives:

  • Staff motivation
  • Top service to customers
  • Growth
  • Market leadership in research and development
  • Social responsibility
  • Environmental sustainability
  • Diversification purposes etc.

d) Managing conflict of interest:

  • Alignment of management goals with shareholder value maximization.
  • Corporate governance controls, like shareholder authority to replace directors.
  • Provide a framework for reviewing and modernizing existing policies. (6 marks)

e) Internal hedging methods include:

  • Matching assets and liabilities in the same currency to manage translation risk.
  • Invoicing in domestic currency to manage transaction risk.
  • Leading and lagging payments based on expected exchange rate movements. (6 marks)

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