CFA Level I · CFA Level I Exam · Company Analysis: Past, Present, and Future
When an equity analyst evaluates a company's governance, which of the following findings is most likely a red flag for minority shareholders?
Related-party transactions approved only by the CEO are the red flag. They allow insiders to extract value without independent review, harming minority shareholders. Majority-independent boards and annual director re-election improve oversight and accountability, so they are positive governance features rather than warning signs.
- AAnnual re-election of all directors
- BA board with a majority of independent directors
- CRelated-party transactions approved by the CEO aloneCorrect
Explanation
Related-party transactions can transfer value from minority shareholders to insiders, so they need independent oversight. Approval by the CEO alone removes that check and is a governance weakness. Independent board majorities and annual director elections strengthen accountability.
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