CFA Practice Question

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CFA Practice Question

A publicly listed company has a 12-person board of directors whose composition is as follows:

  • The chairman, who is the past president of the company and was named chairman on his retirement date four years ago,
  • Five members of senior management (including the current president), and
  • Six outside directors.

Each member is elected for a two-year term and half of the positions stand for election every year. The three members of the audit committee are all outside directors with relevant financial experience. The remuneration committee is composed of the chairman and two outside directors.

Which of the following actions would provide the greatest improvement in the corporate governance of this company?
A. The chairman of the board should be an independent director.
B. All members of the board of directors should stand for election every year.
C. The company's vice-president of finance should be a member of the audit committee.
Explanation: If the chair of the board is a former chief executive of the company, it may hamper efforts to undo the mistakes made by him or her as chief executive. It is not clear if it is better to have all members elected annually (providing more flexibility to meet changes in the marketplace) or if it is better to have staggered board terms (providing better continuity of board expertise). All members of the audit committee should be independent members of the board.

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