CFA Level I · CFA Level I Exam · Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits
An analyst notes that a company has a dual-class share structure, a board dominated by the founder's relatives, and no independent audit committee. The analyst's most appropriate conclusion about the investment implications is that the company:
The company is likely exposed to higher governance risk that may warrant a higher required return. Concentrated voting control, a related-party board and no independent audit oversight weaken checks and expose minority shareholders to conflicts, so investors would typically demand compensation through a higher return or valuation discount.
- Ahas lower agency risk because the founder controls decisions
- Bis likely exposed to higher governance risk that may warrant a higher required returnCorrect
- Cwill benefit from stronger minority shareholder protection
Explanation
Concentrated control, a non-independent board and absent audit oversight weaken checks on management and expose minority shareholders to expropriation. Investors would typically demand a higher required return or apply a valuation discount. Founder control does not remove agency conflicts between controlling and minority holders.
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