CFA Level I · CFA Level I Exam · Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits
A company combines the roles of chair of the board and chief executive officer in one person. The governance risk that is most likely heightened by this arrangement is:
Combining the chair and CEO roles most likely weakens the board's independent oversight of management. The same person runs the board agenda and the company, so challenging or evaluating the CEO becomes harder. This concentrates power and raises the risk of unchecked management decisions.
- Areduced ability of the board to independently oversee and challenge management.Correct
- Blower disclosure of related-party transactions to regulators.
- Cgreater likelihood of cumulative voting being required for director elections.
Explanation
When one person leads both the board and management, the board's ability to monitor and challenge the CEO is weakened because the CEO effectively oversees themselves and controls the board agenda. The other options are not direct consequences of combining the roles.
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