Reading 50: The Corporate Governance of Listed Companies: A corporate, 2011, following, members, statements

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

LOS c: Describe board independence and explain the importance of independent board members in corporate governance.

 

 

Which of the following statements related to corporate governance is least accurate?

A) It is desirable for the chairman of the board to be the firm’s current CEO or former CEO.

B) Board members should not have any material relationships with the firm’s advisers, auditors, and their families.

C) It is desirable for board members to have board experience with other boards.

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The willingness of independent board members to express opinions that are not aligned with managements’ may be impaired when the chairman is the firm’s current CEO or a former CEO.

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There are a lot of issues to consider in determining board independence. What would be the best definition of true “independence”? Independence, as it relates to board members, refers to:

A) the degree to which these persons are not biased or otherwise controlled by firm management or the outside audit group.

B) avoidance of material conflicts of interest.

C) the degree to which these persons are not biased or otherwise controlled by firm management or other groups which may have some degree of control over management.

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Avoiding material conflicts of interest is important, but this is not a true definition of independence. Independent board members should be independent from the outside audit group, but this is not part of the actual definition. Benefiting management interests should not be a board priority.