CFA Practice Question

There are 233 practice questions for this study session.

CFA Practice Question

Select the warning sign(s) that a board may not be independent.

I. The board reports on their activities to shareholders every six months.
II. The current CEO of the company serves as the board chair.
III. A board member retires as CEO and is elected as the board chair.
IV. Several board members are representatives from suppliers, big clients, and the union.
Correct Answer: II and III

I. The board should report to shareholders at least annually.
IV in itself is not a warning sign, as long as the majority of the board members are independent.

User Contributed Comments 11

User Comment
todolist difference between the "board" being independent and an independent "board member"
epizi I don't think III is right.He still has some connection with the management of the company.He may want to continue settling scores or promoting his failing policies.
kutta2102 epizi - the question is asking "not independent", so you answered your own question
boddunah majority of board members independent is board independence.

if board member is not Executive board member and Non executive board member, he is independent board member.
dipu617 Father is the board member and daughter is the cleaner of the company!!! Very unlikely........ ;-)
viruss I would have say IV is a warning sign on its own ... a warning sign doesn't mean a breach of independance :)
johntan1979 For I, I can't comprehend how the frequency of the company's report to shareholders has anything to do with independence.

So the correct reasoning that I should not be a correct answer is because it is unrelated to Board independence. Whether the report is monthly or longer than every year don't show any warning on Board independence/non-independence.
gill15 IV should be false as well. Unions are Non-executive members which are not independent.
ascruggs92 IV definitely sounds like a warning sign to me. "several" members implies enough for influence (not control), and getting too cozy with big clients and suppliers could lead to business decisions that aren't beneficial for all shareholders
epfrndz Agreed, IV is a warning sign. This could limit the bargaining power of the company with respect to its business partners.

I would think twice about investing in a company with this kind of board composition.
Dabuya @epfrndz: I understand your concern but note the "majority" in explanation. If there are 30 members and 3 are from these related parties I would not be concerned.
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