- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 3. Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits
- Subject 1. Shareholder Conflicts and Management
CFA Practice Question
John, an independent board member of company A, borrows $1 million from A at the prevailing market rate of 5.6% to finance his own independent start-up company. Should this situation be considered an appropriate corporate governance practice?
B. No, because this is a related party transaction.
C. No, because this creates a conflict of interest.
A. Yes, as he pays the prevailing interest rate.
B. No, because this is a related party transaction.
C. No, because this creates a conflict of interest.
Correct Answer: C
The company should not lend the money to John, regardless of whether he pays the market interest rate. Any appearance of a conflict of interest should be avoided.
User Contributed Comments 5
| User | Comment |
|---|---|
| zeiad | any appearance of conflict of interest shoud be avoided |
| abhinavkapoor | what if the company's nature of business is lending funds, such as banks? would the same rule apply then? Can sombody confirm? |
| johntan1979 | That's even worse. |
| SalimBouch | worse? why? if he got the market interest rate? |
| Inaganti6 | Probably because in this case it could be the company's money whereas with a bank theres a high chance it has origins from public deposits. |