FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure
A hedge fund's board includes two members from the investment team and one independent director who is a friend of the founder. An investor's due diligence team is assessing governance quality. Which feature would most strongly improve the board's effectiveness as an oversight body over risk-taking?
Adding independent directors with relevant risk and audit expertise and no ties to the founder most improves oversight, because they can challenge management's risk-taking objectively. More insiders, a founder casting vote or fewer meetings would weaken the board's ability to monitor and constrain risk.
- AAdding independent directors with relevant risk and audit expertise who have no business or personal ties to the founderCorrect
- BIncreasing the number of investment team members on the board to improve strategy knowledge
- CGranting the founder a casting vote on all risk limit decisions
- DReducing board meeting frequency to avoid interfering with trading
Explanation
Effective oversight depends on independence and expertise. Directors without ties to management can challenge risk-taking and valuation. More insiders or a founder casting vote weakens challenge, and fewer meetings reduce oversight.
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