Chartered Financial Analyst Level 2
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Percentage of non-executive directors with relevant industry experience
| Low | High | High | |
|---|---|---|---|
| Say-on-pay provision | Yes | Yes | No |
All else being equal, which of the three companies has the most effective corporate governance practices?
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A
Company 1
B
Company 2
C
Company 3
Explanation:
Explanation
Based on the table provided:
- Company 1: Low percentage of non-executive directors with relevant industry experience, but has say-on-pay provision
- Company 2: High percentage of non-executive directors with relevant industry experience, and has say-on-pay provision
- Company 3: High percentage of non-executive directors with relevant industry experience, but NO say-on-pay provision
Analysis of Corporate Governance Effectiveness:
-
Non-executive directors with industry experience: This is a key governance factor as directors with relevant industry expertise can provide better oversight and strategic guidance. Companies 2 and 3 both have high percentages, which is superior to Company 1's low percentage.
-
Say-on-pay provision: This allows shareholders to vote on executive compensation, which is a strong governance mechanism to align management interests with shareholder interests. Companies 1 and 2 have this provision, while Company 3 does not.
Comparison:
- Company 1 has weak director expertise but strong compensation oversight
- Company 2 has strong director expertise AND strong compensation oversight
- Company 3 has strong director expertise but weak compensation oversight
Conclusion: Company 2 has the most effective corporate governance practices because it combines both key governance elements - high percentage of experienced non-executive directors AND say-on-pay provisions for executive compensation oversight.
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