Financial Risk Manager Part 1
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Board independence is fundamental to effective corporate governance, as it ensures objective oversight and decision-making free from conflicts of interest. Identifying factors that may compromise this independence is crucial for maintaining the integrity and accountability of the board. Which of the following combinations is most likely to affect the independence of the board?
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A
Chief Executive Officer as a member of the board of directors.
B
Chairman of the board as a member of the remuneration committee.
C
Chief Executive Officer as the Chairman of the remuneration committee.
D
Chairman of the board as the Chairman of the ethics committee.
Explanation:
Explanation
Correct Answer: C - Chief Executive Officer as the Chairman of the remuneration committee
This combination most severely compromises board independence because:
- Direct conflict of interest: The CEO has a direct personal financial stake in remuneration decisions
- Self-dealing risk: The CEO would be setting their own compensation package
- Lack of objective oversight: No independent check on executive compensation
- Governance failure: Violates the principle of separation between management and oversight functions
Why other options are less problematic:
- Choice A: CEO as board member is common practice (executive director role) and doesn't inherently compromise independence when balanced with independent directors
- Choice B: Chairman on remuneration committee poses some risk but is less severe than CEO involvement in compensation decisions
- Choice D: Chairman chairing ethics committee can actually strengthen governance by demonstrating leadership commitment to ethical standards
The remuneration committee specifically deals with executive compensation, making CEO involvement particularly problematic due to the direct personal financial implications.
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