Chartered Financial Analyst Level 2
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An analyst gathers the following information about three companies:
| Company 1 | Company 2 | Company 3 |
|---|---|---|
| Percentage of independent directors: | Low | Low |
| CEO serves as chairperson: | No | Yes |
All else being equal, which of the companies most likely has the weakest corporate governance?
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A
Company 1
B
Company 2
C
Company 3
Explanation:
Explanation
Corporate governance quality is assessed based on board independence and separation of CEO/Chairperson roles:
Key Factors:
- Board Independence: Higher percentage of independent directors indicates stronger governance
- CEO/Chairperson Separation: When CEO also serves as chairperson, it weakens board oversight and creates potential conflicts of interest
Analysis of Each Company:
-
Company 1:
- Low percentage of independent directors (weak)
- CEO does NOT serve as chairperson (strong)
- Mixed governance characteristics
-
Company 2:
- Low percentage of independent directors (weak)
- CEO serves as chairperson (weak)
- Both governance weaknesses present
-
Company 3:
- High percentage of independent directors (strong)
- CEO serves as chairperson (weak)
- Has one strong governance characteristic
Conclusion: Company 2 has the weakest corporate governance because it combines both negative factors: low board independence AND CEO-chairperson duality. This creates the greatest potential for governance failures and lack of effective oversight.
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