Reading 50: The Corporate Governance of Listed Companies: A committee, frequency, determine, experience, 2011

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Session 11: Corporate Finance
Reading 50: The Corporate Governance of Listed Companies: A Manual for Investors

LOS b: Discuss and critique characteristics and practices related to board and committee independence, experience, compensation, external consultants, and frequency of elections, and determine whether they are supportive of shareowner protection.

 

 

A board of directors is most likely to protect the shareholders’ interests when:

A) the board requires that management attend all meetings.

B) one individual can be identified as the leading board member from outside the firm.

C) the board includes representatives from the firm’s key customers and suppliers.

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Especially in cases where the chairman of the board is closely aligned with the firm, independent board members are more able to protect shareholders’ interests when they have a leading or primary independent member. The board should meet regularly outside the presence of management. Board members who represent the firm’s customers and suppliers may have interests that conflict with those of shareholders.

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Rochelle Dixon is delivering a presentation on best practices for corporate governance. Two of her recommendations are as follows:

Statement 1: To avoid the potential for harming shareholders’ interests by wasting company resources, the Board of Directors should get management’s approval before it hires outside consultants.

Statement 2: The more members a Board of Directors has, the more likely it is to represent shareholders’ interests fairly.

Are Dixon’s statements CORRECT?

Statement 1

Statement 2

A) Incorrect Incorrect

B) Incorrect Correct

C) Correct Correct

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Both statements are incorrect. An independent board should have the ability to seek specialized advice by hiring outside consultants without management approval. The size of the board should be appropriate for the facts and circumstances of the firm; having more members does not imply that the board will be more independent if the additional members are aligned closely with management or are less well qualified.