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CFA Level I · CFA Level I Exam · Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

A company's board is dominated by long-serving directors who are close friends of the CEO, and the CEO also serves as board chair. Which governance weakness does this situation most likely illustrate?

The situation most likely illustrates a lack of board independence. Directors who are friends of the CEO, with the CEO also chairing the board, cannot be expected to monitor management objectively, which weakens oversight and the protection of shareholders' interests.

  1. ALack of board independenceCorrect
  2. BExcessive shareholder activism
  3. COverly rigorous internal audit

Explanation

Directors with personal ties to the CEO and a combined CEO/chair role reduce the board's ability to monitor management objectively. This is a lack of independence. Shareholder activism and a rigorous internal audit would strengthen, not weaken, governance.

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