CFA Level I · CFA Level I Exam · Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits
A company combines the roles of chair and chief executive officer in one person. Which of the following is the most likely governance risk of this structure?
The most likely risk is reduced ability of the board to challenge and monitor management objectively. A combined chair and CEO controls the board agenda and the information directors receive, which weakens independent oversight of the person who runs the company.
- AReduced ability of the board to challenge and monitor management objectivelyCorrect
- BHigher likelihood that the board will have too many independent directors
- CExcessive separation between strategy setting and day-to-day operations
Explanation
When one person leads both the board and management, the board's monitoring of the CEO is weakened because the CEO controls the agenda and information flow. The other options describe outcomes unrelated to CEO duality.
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