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IAI Actuarial Core Principles · Business Finance · Corporate governance and the regulation of companies

Several corporate collapses have involved a single individual acting as both chairman and chief executive. Which is the main governance concern with such a combination?

The main concern is concentration of power. The chairman should lead the board in supervising the chief executive, so when one person holds both roles the board loses an independent check on executive decisions, increasing the risk of unchecked or self-serving behaviour.

  1. AIt concentrates power and reduces the board's ability to monitor the executive independentlyCorrect
  2. BIt automatically increases the company's cost of equity by a fixed amount
  3. CIt prevents the company from paying dividends
  4. DIt requires the company to be delisted
  5. It removes the need for an audit committee because one person controls reporting

Explanation

The chairman leads the board in overseeing the chief executive. If one person holds both roles, nobody independent leads the monitoring of executive actions and power is concentrated. The other options state consequences that do not follow; an audit committee remains required regardless.

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