Study notes from a previous year's CFA exam:
e. describe responsibilities of the audit, compensation, and nominations committees and identify factors an investor should consider when evaluating the quality of each committee;
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Subject 5. Board Resources
There need to be internal mechanisms to support the Independent work of the Board, including the budgetary authority to hire outside consultants without management's intervention or approval. This mechanism alone provides the Board with the ability to obtain expert help in specialized areas, to circumvent potential areas of conflict with management, and to preserve the integrity of the Board's Independent oversight function.
Why does the Board need outside third-party consultants?
- Independent Board Members typical have limited time to devote to their Board duties. They need support in gathering and analyzing a large amount of information relevant to managing and overseeing the Company.
- Very specialized advice and expertise are needed when dealing with issues such as compensation, proposed mergers and acquisitions, legal, regulatory and financial matters, and reputational concerns.
- Independent outside advisors, including public accountants, law firms, investment bankers, and consultants, can be critical to the effectiveness of corporate governance and enhance the legal and regulatory compliance of the corporate client.
The Board should have the authority to decide whether to hire external consultants, whom should be hired, and how they are to be compensated, etc. without having to receive approval from management.
Practice Question 1The Board has the authority to decide whether to hire external auditor, whom should be hired, and how much to pay the auditor, subject to the CFO's (Chief Financial Officer's) approval. True or False?Correct Answer: False
The CFO is a member of management. The Board should have the authority to hire the auditor without having to receive approval from management.