Question

Which of the following is not a characteristic of a Board of Directors that usually leads to effective corporate governance.   

Board members are compensated appropriately (not too high, and some compensation is linked to company’s performance).

The board has a majority of inside management who have a deep understanding of the company.

The board is not too large.

The CEO is not also the chairman of the board and does not have undue influence over the nominating committee

None of the above

Answer 1

Answer is Statement 2.

Effective corporate governance is a framework where there is accountability and fairness.

All the factors that help assess how effective the corporate governance at an entity is, measure how independently the board of directors can function and make decisions.

So, statement 1 defines how compensation of board of directors is decided, which influences the decision making.

Statement 3 is not a measure of corporate governance. Size of a board will depend upon the size of entity.

Statement 4 also defines how CEO and chairman of board should be different to have no conflict of interest in any decision making.

Statement 2 is the answer. Best corporate governance practice involves adding independent members to the board, which may bring in fresher perspective plus will have little or no vested interests (unlike the inside management).