I85PREP
⌘ K
Foundations of Directorship study materials
Foundations of Directorship study resources

Foundations of Directorship practice questions

One question at a time. Build your Foundations of Directorship understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Governance and the role of the director

Which statement best describes the primary duty of a company director?

  1. To follow instructions issued by the chief executive officer
  2. To maximise short-term profit for the current financial year
  3. To represent the personal interests of the largest shareholder
  4. To act in good faith in the best interests of the company as a whole Correct answer.

Explanation

Directors owe fiduciary duties to the company itself, not to any individual stakeholder. Acting in good faith in the company's best interests anchors every other duty, including loyalty and care. Short-term profit or obedience to management cannot override that obligation.

Question 2Governance and the role of the director

In governance terms, what does the principle of 'separation of ownership and control' refer to?

  1. The distinction between executive and non-executive remuneration
  2. The split of accounting duties between internal and external auditors
  3. The division between shareholders who own the company and directors who manage it Correct answer.
  4. The requirement that the chair and CEO be different people

Explanation

Separation of ownership and control describes the gap between shareholders who supply capital and managers who run the business day to day. This gap creates agency costs and is the reason governance mechanisms such as boards and disclosure exist. It is not about audit roles or chair independence.

Question 3Governance and the role of the director

A board is described as 'unitary' or 'single-tier'. What does this mean?

  1. One board combines oversight and executive leadership, often with some independent members Correct answer.
  2. Only one director is legally appointed at any time
  3. Two separate boards supervise management and audit respectively
  4. The board meets only once each financial year

Explanation

A unitary board is a single governing body that includes both executive and non-executive directors. It carries collective responsibility for oversight while executives also manage the business. Two-tier structures, by contrast, split supervisory and management functions into separate boards.

Question 4Governance and the role of the director

Which of the following is an example of a 'non-executive' director responsibility?

  1. Managing a business unit's operational budget
  2. Signing off monthly management accounts as the CFO
  3. Running the finance function on a daily basis
  4. Challenging management performance and scrutinising strategy independently Correct answer.

Explanation

Non-executive directors provide independent oversight, constructively challenging executives and scrutinising strategy and performance. They do not hold line management roles. Day-to-day operational and financial execution belongs to executives.

Question 5Governance and the role of the director

What is the main purpose of the 'comply or explain' approach in governance codes?

  1. To require every company to follow identical governance practices
  2. To let companies ignore governance rules entirely without consequence
  3. To allow flexibility where a rule's outcome would be worse for the company, provided the deviation is disclosed Correct answer.
  4. To transfer enforcement of governance rules to shareholders only

Explanation

Comply or explain lets companies depart from a code provision when a different approach better serves the company, as long as they disclose and justify the departure. It preserves flexibility while maintaining transparency and accountability. It is not a licence to ignore governance.

Question 6Governance and the role of the director

Which body typically has the authority to appoint and remove directors in a listed company?

  1. The company secretary
  2. The shareholders in general meeting Correct answer.
  3. The audit committee
  4. The external auditor

Explanation

Shareholders exercise the ultimate power to appoint and remove directors through general meeting resolutions, subject to the constitution and law. This is a core accountability mechanism. Committees, the secretary and auditors support governance but do not hold this power.

Question 7Governance and the role of the director

A director is offered a contract with a supplier in which she holds a significant personal stake. What should she do first?

  1. Vote on the contract to demonstrate good faith
  2. Declare the conflict of interest to the board and follow the process for managing it Correct answer.
  3. Resign from the board immediately without discussion
  4. Keep the interest private to avoid influencing the board

Explanation

Directors must disclose actual or potential conflicts of interest to the board so it can manage them, for example by recusal or independent approval. Concealment breaches the duty of loyalty. Resignation is not the automatic first step, and voting while conflicted compounds the problem.

Question 8Governance and the role of the director

What does 'board independence' most accurately mean?

  1. Directors being appointed without shareholder approval
  2. Directors having no prior industry experience
  3. Directors exercising objective judgement free from relationships that could compromise it Correct answer.
  4. Directors working without pay or benefits

Explanation

Independence refers to a director's ability to bring objective, unbiased judgement, free from material relationships with management or other parties. It is about objectivity, not inexperience or remuneration. Appointment still follows proper process.

Question 9Governance and the role of the director

A director who lacks personal expertise in a technical area of a board decision should:

  1. Vote against the proposal as a matter of course
  2. Abstain from all discussion and defer entirely to the technical director
  3. Seek independent advice and rely on informed, diligent enquiry before deciding Correct answer.
  4. Approve the proposal to show board unity

Explanation

The duty of care and diligence requires directors to inform themselves, and boards may obtain independent professional advice. Abstaining or automatic opposition is not diligent decision-making. Blind approval undermines collective responsibility.

Question 10Governance and the role of the director

Which committee is primarily responsible for overseeing the integrity of a company's financial reporting?

  1. The nomination committee
  2. The remuneration committee
  3. The audit committee Correct answer.
  4. The risk appetite committee

Explanation

The audit committee oversees financial reporting integrity, external audit and internal controls. Nomination and remuneration committees handle board composition and executive pay respectively. This division of labour keeps oversight focused and independent.

Question 11Governance and the role of the director

A director receives confidential board information and considers sharing it with a friend who trades shares. What is the correct governance response?

  1. Share it after the board meeting has ended
  2. Share it only if the friend promises not to tell others
  3. Refuse to disclose it because of the duty of confidentiality Correct answer.
  4. Share it because the information will become public eventually

Explanation

Directors owe a duty of confidentiality over board information and must not use it for personal or third-party advantage, which could also constitute insider trading. Promises of secrecy do not cure the breach. The obligation persists after meetings and before public release.

Question 12Governance and the role of the director

In a board skills matrix, what is the primary purpose of mapping directors' competencies?

  1. To determine each director's remuneration level
  2. To identify gaps and plan board composition and succession Correct answer.
  3. To allocate committee chairs by seniority
  4. To rank directors for removal at the next meeting

Explanation

A skills matrix maps the collective capabilities of the board against the company's strategic needs, revealing gaps and informing recruitment and succession. It is a planning tool, not a ranking or pay-setting device. Using it to allocate roles by seniority misuses its purpose.

Question 13Governance and the role of the director

What does the term 'stakeholder engagement' require of a board?

  1. Engaging only with shareholders who hold large stakes
  2. Prioritising every stakeholder demand equally without judgement
  3. Delegating all stakeholder contact to the marketing team
  4. Understanding and responding to the interests of parties affected by the company's activities Correct answer.

Explanation

Stakeholder engagement involves identifying parties affected by the company and understanding their interests so the board can weigh them in decisions. It does not mean treating all demands as equally binding. Engagement is a governance responsibility, not purely a communications task.

Question 14Governance and the role of the director

A board is reviewing a major acquisition. Which action best reflects the duty to exercise independent judgement?

  1. Deferring the decision to the investment bank advising on the deal
  2. Approving the deal to avoid delaying management's timetable
  3. Assessing the proposal critically on its merits, even if management strongly supports it Correct answer.
  4. Endorsing the proposal because the CEO has a strong track record

Explanation

Independent judgement requires directors to evaluate proposals critically against the company's interests, regardless of management enthusiasm. Reliance on a track record or adviser recommendation does not substitute for the board's own assessment. Time pressure is not a justification for inadequate scrutiny.

Question 15Governance and the role of the director

What is the primary role of the chair of the board?

  1. To manage the company's daily operations
  2. To lead the board, set its agenda and ensure it operates effectively Correct answer.
  3. To prepare the statutory financial statements
  4. To represent management at shareholder meetings

Explanation

The chair leads the board, shapes its agenda and fosters effective board performance and dynamics. Day-to-day operations are the CEO's responsibility. Financial statements and management representation are executive functions, though the chair may engage with shareholders.

Question 16Governance and the role of the director

A director sits on the board of two companies that are direct competitors. What governance issue arises?

  1. A tax liability triggered by dual directorships
  2. An automatic breach of the duty of care in all cases
  3. A potential conflict of interest that may require disclosure, recusal or resignation from one role Correct answer.
  4. No issue, because directors may hold multiple directorships freely

Explanation

Serving on the boards of competing companies can create conflicts of interest and confidentiality tensions. The director must disclose the situation and manage it, potentially through recusal or stepping down. Multiple directorships are not automatically prohibited, but they require careful handling.

Question 17Governance and the role of the director

Which statement best captures the board's role in risk oversight?

  1. Eliminating all risk from the business
  2. Delegating all risk oversight permanently to the external auditor
  3. Personally managing each operational risk as it arises
  4. Setting risk appetite and ensuring a sound risk management framework exists Correct answer.

Explanation

The board sets the company's risk appetite and ensures management maintains an effective risk framework, monitoring it over time. Directors do not manage individual risks operationally. Eliminating all risk is neither feasible nor desirable for a growing business.

Question 18Governance and the role of the director

A board discovers that a senior executive has been misusing company funds. What is the most appropriate governance response?

  1. Ignore the matter to protect the executive's reputation
  2. Wait until the next annual general meeting to raise it
  3. Handle it informally without board involvement
  4. Investigate promptly, take remedial action and ensure proper disclosure and controls review Correct answer.

Explanation

The board must act promptly to investigate misconduct, take remedial steps and address control weaknesses. Concealment or delay exposes the company to further harm and breaches directors' duties. Informal handling without board oversight is inadequate for a material issue.

Question 19Governance and the role of the director

In governance, what is the significance of the 'business judgement rule'?

  1. It requires directors to guarantee profitable outcomes
  2. It protects directors who make informed, good-faith decisions from hindsight liability Correct answer.
  3. It exempts directors from any duty of care
  4. It applies only to non-executive directors

Explanation

The business judgement rule shields directors from liability for decisions made with due care, in good faith and on an informed basis, even if outcomes are poor. It does not guarantee results or remove the duty of care. It applies to directors generally, not a subset.

Question 20Governance and the role of the director

A company's constitution allocates certain decisions to shareholders. Why does this matter for directors?

  1. It allows directors to override shareholder resolutions at will
  2. It defines the limits of board authority and requires directors to respect reserved matters Correct answer.
  3. It removes all board responsibilities for those decisions
  4. It automatically converts directors into employees

Explanation

The constitution and applicable law set out which matters are reserved to shareholders, and directors must operate within those limits. Reserved matters require shareholder approval, and directors cannot unilaterally override valid resolutions. This allocation is a core accountability safeguard.

Question 21Governance and the role of the director

Which of the following best describes the concept of 'board diversity' in governance discussions?

  1. A requirement that all directors share the same professional background
  2. A rule limiting board size to a fixed number
  3. A method for reducing director remuneration
  4. A mix of backgrounds, skills and perspectives that improves board decision quality Correct answer.

Explanation

Board diversity refers to variation in skills, experience, gender, background and perspective, which research links to better challenge and decision quality. It is not about uniformity or board size. Remuneration is unrelated to the diversity concept.

Question 22Governance and the role of the director

A director consistently misses board meetings and rarely reads board papers. Which duty is most directly implicated?

  1. The duty of confidentiality
  2. The duty to avoid conflicts of interest
  3. The duty to promote the success of each subsidiary
  4. The duty of care and diligence Correct answer.

Explanation

The duty of care and diligence requires directors to devote appropriate time, attend meetings and inform themselves before decisions. Persistent absence and failure to read papers undermine informed oversight. Confidentiality and conflicts duties address different concerns.

Question 23Governance and the role of the director

A controlling shareholder pressures the board to approve a related-party transaction on favourable terms. How should independent directors respond?

  1. Approve it because the controlling shareholder has the votes to force it through
  2. Assess the transaction on arm's-length terms and ensure robust disclosure and independent approval Correct answer.
  3. Delegate the decision to the controlling shareholder's nominee on the board
  4. Resign immediately without raising concerns

Explanation

Independent directors must safeguard minority interests by testing related-party transactions for arm's-length terms and ensuring proper disclosure and independent approval. Yielding to shareholder pressure or delegating to a conflicted nominee breaches their oversight role. Resignation without action leaves the issue unresolved.

Question 24Governance and the role of the director

How does the 'stewardship' concept differ from the 'agency' concept in governance theory?

  1. Agency theory denies that shareholders own the company
  2. Stewardship assumes managers are motivated to act in the company's interest, while agency emphasises monitoring self-interest Correct answer.
  3. Stewardship removes the need for any board oversight
  4. Stewardship applies only to family firms, while agency applies to listed companies

Explanation

Stewardship theory views managers as intrinsically motivated to serve the organisation, favouring empowerment and trust. Agency theory assumes divergent interests and stresses monitoring and incentives. The two are contrasting lenses, not limited to particular ownership types.

Question 25Governance and the role of the director

A board committee approves a transaction that, under the constitution, is reserved to the full board. What is the governance consequence?

  1. The decision may be invalid or require ratification because the committee exceeded its delegated authority Correct answer.
  2. The decision is automatically valid because committees act for the board
  3. The committee chair becomes personally liable as the sole decision-maker
  4. The transaction is valid if management supports it

Explanation

Committees exercise only the authority delegated to them; a decision on a matter reserved to the full board may be invalid or require ratification. Committee members act collectively, not through the chair alone. Management support cannot cure a lack of authority.

Question 26Governance and the role of the director

Which statement best describes the legal nature of a company as a separate legal entity?

  1. The company is a partnership in which shareholders are jointly liable for its debts.
  2. The company exists only while its original founders remain directors.
  3. The company is an agent of its shareholders and acts only on their instructions.
  4. The company has its own legal personality distinct from its shareholders and directors. Correct answer.

Explanation

A company is a separate legal person from its shareholders and directors, meaning it can own property, enter contracts, sue and be sued in its own name. Shareholder liability is generally limited to unpaid amounts on their shares, and the company's existence does not depend on particular individuals remaining in office.

Question 27Governance and the role of the director

What is the primary source of a director's authority to manage the company's business?

  1. A resolution passed by a majority of employees.
  2. The board chair's informal delegation of tasks.
  3. The directors' personal shareholdings in the company.
  4. The company's constitution and applicable corporations law. Correct answer.

Explanation

Directors derive their power to manage the company from the constitution (or equivalent governing document) and from the corporations statute under which the company is incorporated. Shareholdings, employee votes and informal chair delegations do not confer management authority on the board.

Question 28Governance and the role of the director

A director is asked to approve a transaction that would benefit a company in which her spouse is a major shareholder. What is the most appropriate first step?

  1. Disclose the interest to the board and follow the conflict-of-interest procedure. Correct answer.
  2. Vote in favour because the transaction is commercially sound.
  3. Resign from the board immediately to avoid any appearance of conflict.
  4. Abstain silently without telling anyone about the connection.

Explanation

Directors must disclose material personal interests in matters before the board and then follow the procedure set by the constitution or law, which may require abstention from voting or discussion. Silent abstention does not satisfy the disclosure obligation, and resignation is not automatically required.

Question 29Governance and the role of the director

Which of the following best describes the duty of care and diligence owed by a director?

  1. A duty to attend every meeting regardless of relevance or preparation.
  2. A duty to act with the degree of care and diligence that a reasonable person would exercise in the same position. Correct answer.
  3. A duty to guarantee that the company never suffers a financial loss.
  4. A duty to follow the chair's instructions without independent inquiry.

Explanation

The duty of care and diligence is measured objectively against what a reasonable person with the same responsibilities would do, and may also take into account the director's actual knowledge and experience. It does not impose strict liability for losses, nor does it reduce directors to passive followers of the chair.

Question 30Governance and the role of the director

What is the main purpose of a board charter?

  1. To record the minutes of each board meeting.
  2. To list the personal contact details of each director.
  3. To set out the board's role, responsibilities and relationship with management. Correct answer.
  4. To replace the company's constitution entirely.

Explanation

A board charter documents how the board will operate, including its role, composition, committees and the division of responsibilities with management. It is a governance policy rather than a minute book, contact list or substitute for the constitution.

Question 31Governance and the role of the director

A board is deciding whether to enter a new market. Which action best demonstrates the directors are fulfilling their oversight role?

  1. Deferring the decision to the finance team without board discussion.
  2. Requesting independent market analysis and challenging management's assumptions before deciding. Correct answer.
  3. Postponing the decision indefinitely to avoid personal risk.
  4. Approving the entry because the CEO recommends it.

Explanation

Effective oversight requires directors to obtain sufficient information, test management's assumptions and exercise independent judgement before approving significant strategic moves. Simply endorsing a CEO recommendation or outsourcing the decision to staff does not discharge the board's responsibility.

Question 32Governance and the role of the director

Which body is typically responsible for appointing the external auditor of a public company?

  1. The chief financial officer acting alone.
  2. The company secretary.
  3. The audit committee recommending and the shareholders resolving at the annual general meeting. Correct answer.
  4. The internal audit manager.

Explanation

In most jurisdictions the external auditor is appointed by shareholders in general meeting, with the audit committee recommending or nominating the candidate and overseeing the relationship. Management and the company secretary support the process but do not hold the appointment power.

Question 33Governance and the role of the director

What does the principle of 'one share, one vote' primarily protect?

  1. The equal treatment of shareholders in proportion to their economic interest. Correct answer.
  2. The ability of management to control the shareholder register.
  3. The confidentiality of board deliberations.
  4. The right of directors to vote at board meetings.

Explanation

One share, one vote is a shareholder-rights principle that aligns voting power with economic ownership and supports equal treatment of shareholders. It concerns shareholder voting, not board voting, management control of registers or board confidentiality.

Question 34Governance and the role of the director

A director is unsure whether a proposed dividend is lawful given the company's financial position. What is the most appropriate course?

  1. Approve the dividend because shareholders expect it.
  2. Decline to attend the meeting so as not to be associated with the decision.
  3. Delegate the decision to the CFO and record no board discussion.
  4. Ask management for a solvency and profits test analysis and seek advice before voting. Correct answer.

Explanation

Dividends may only be paid out of available profits and, in many jurisdictions, only if the company remains solvent; directors should obtain and test the relevant financial analysis before approving. Approving on expectation alone or absenting oneself does not avoid the director's responsibility.

Question 35Governance and the role of the director

Which statement best explains the concept of 'limited liability' for shareholders?

  1. Shareholders' liability is generally capped at the amount unpaid on their shares. Correct answer.
  2. Directors must personally repay any company losses.
  3. Creditors can recover directly from shareholders regardless of share type.
  4. Shareholders are liable for all company debts if the company fails.

Explanation

Limited liability means shareholders risk only the capital they have invested or agreed to invest, typically any unpaid amount on their shares. It does not make shareholders liable for company debts generally, nor does it shift losses onto directors personally.

Question 36Governance and the role of the director

A board is considering a takeover bid. One director has a close family relationship with the bidder's chief executive. What governance response is most appropriate?

  1. Have the director disclose the relationship and recuse from related board deliberations and votes. Correct answer.
  2. Ask the director to keep the relationship confidential from the rest of the board.
  3. Refer the entire bid to the director's family member for an opinion.
  4. Allow the director to lead negotiations because of the useful connection.

Explanation

A close personal relationship with a counterparty can create a material conflict, so the director should disclose it and step back from deliberations and voting on the matter. Using the connection to lead negotiations or keeping it confidential would compromise the board's independence and decision quality.

Question 37Governance and the role of the director

Which of the following best describes the role of the nomination committee?

  1. To manage the company's day-to-day operations.
  2. To identify and recommend board candidates and oversee board succession planning. Correct answer.
  3. To approve the company's annual financial statements.
  4. To set the remuneration of the external auditor.

Explanation

The nomination committee leads the process for board appointments, assesses director independence and skills, and plans for board renewal and succession. Auditor remuneration, financial statement approval and daily operations sit with other bodies or with management.

Question 38Governance and the role of the director

A director believes the board is about to make a decision that may breach environmental law. What is the most appropriate action?

  1. Raise the concern, seek legal advice and ensure the issue is minuted before any vote. Correct answer.
  2. Vote in favour but record a private note for personal protection.
  3. Resign immediately without raising the issue.
  4. Remain silent to preserve board harmony.

Explanation

Directors have a duty to act within the law and to ensure the board is properly informed; raising the concern, obtaining advice and having the discussion minuted protects both the company and the director. Silence, immediate resignation or a private note do not discharge the duty or prevent the breach.

Question 39Governance and the role of the director

What is the primary purpose of an annual general meeting for shareholders?

  1. To approve the board's internal meeting schedule.
  2. To allow management to present detailed operational plans for approval.
  3. To elect the chief executive officer directly.
  4. To provide shareholders with an opportunity to receive accounts, appoint directors and auditors, and question the board. Correct answer.

Explanation

The annual general meeting is the principal forum for shareholders to receive the financial report, appoint directors and auditors, and hold the board to account through questions and resolutions. It is not a management planning session, nor does it ordinarily elect the CEO or set the board's internal calendar.

Question 40Governance and the role of the director

A board is reviewing its own performance. Which approach best reflects good governance practice?

  1. Ask only the CEO to rate the directors' performance.
  2. Conduct a structured evaluation, possibly with external facilitation, covering the board, committees and individual directors. Correct answer.
  3. Skip evaluation in years when the company is performing well.
  4. Rely solely on the chair's informal impressions of each director.

Explanation

Regular, structured board evaluation-covering the board as a whole, its committees and individual directors-is a recognised governance practice, and periodic external facilitation adds objectivity. Informal impressions, CEO-only ratings or skipping evaluation when results are good do not provide a reliable assessment.

Question 41Governance and the role of the director

Which statement best describes the concept of 'shareholder activism'?

  1. Directors lobbying regulators to change listing rules.
  2. Shareholders using their rights to influence company strategy and governance, often through public campaigns or resolutions. Correct answer.
  3. Employees forming a union to negotiate wages.
  4. Creditors enforcing security over company assets.

Explanation

Shareholder activism refers to shareholders actively using their ownership rights-such as voting, resolutions, engagement and public campaigns-to influence board composition, strategy or governance. It is distinct from director lobbying, employee organising and creditor enforcement.

Question 42Governance and the role of the director

A director is offered a payment by a supplier in return for supporting the supplier's contract. What is the director's primary legal obligation?

  1. To negotiate a larger payment for the company instead.
  2. To accept the payment and donate it to charity.
  3. To refuse the payment and report the offer, because directors must not misuse their position for personal gain. Correct answer.
  4. To accept the payment if it is disclosed to the board.

Explanation

Directors must not use their position to gain an advantage for themselves or someone else, and secret commissions or bribes are unlawful. Disclosure does not legitimise a personal payment for a board decision, and redirecting or renegotiating the payment does not cure the conflict.

Question 43Governance and the role of the director

What is the purpose of a company's whistleblower policy?

  1. To encourage employees to report misconduct safely and to protect them from retaliation. Correct answer.
  2. To allow management to suppress unfavourable information.
  3. To require employees to report every minor workplace disagreement.
  4. To replace the board's audit committee.

Explanation

A whistleblower policy provides safe channels for reporting suspected misconduct and protects reporters from retaliation, supporting the board's oversight of risk and culture. It is not a tool for trivial reporting, a substitute for the audit committee or a means of suppressing information.

Question 44Governance and the role of the director

Which of the following best describes 'related-party transactions' in a governance context?

  1. Transactions approved by the external auditor.
  2. Transactions between the company and parties connected to directors, senior managers or major shareholders. Correct answer.
  3. Transactions between two unrelated public companies.
  4. Transactions between the company and another entity in the same industry.

Explanation

Related-party transactions involve the company and parties connected to its directors, senior managers or significant shareholders, and therefore carry heightened conflict-of-interest risk requiring disclosure and approval safeguards. Same-industry or unrelated-party transactions are not related-party transactions merely by virtue of the sector.

Question 45Governance and the role of the director

A board is setting the CEO's remuneration. Which governance arrangement is most appropriate?

  1. The CEO proposes and approves her own package.
  2. The finance team sets the package without board involvement.
  3. The package is decided by a show of hands at the annual general meeting alone.
  4. The remuneration committee, composed of independent directors, recommends the package to the board. Correct answer.

Explanation

Executive remuneration should be set through a process that manages conflicts, typically by a remuneration committee of independent directors recommending to the board, with shareholder approval where required. Self-approval, staff-only decisions or an AGM vote alone do not provide adequate governance.

Question 46Governance and the role of the director

Which statement best explains the difference between 'compliance' and 'governance'?

  1. Compliance and governance are identical concepts with no meaningful distinction.
  2. Compliance focuses on conforming to laws and rules, while governance concerns the broader system of decision-making, accountability and oversight. Correct answer.
  3. Compliance is the board's responsibility, while governance belongs to management.
  4. Governance applies only to not-for-profit organisations.

Explanation

Compliance is about meeting legal and regulatory requirements, whereas governance is the wider framework of decision rights, accountability, oversight and ethical behaviour through which an organisation is directed. They overlap but are not identical, and governance applies across organisation types.

Question 47Governance and the role of the director

A director of a listed company is also a director of a private company that is about to acquire a stake in the listed company. What is the key governance concern?

  1. The director may face a conflict between duties to the two companies and must manage it transparently. Correct answer.
  2. There is no concern because one company is private.
  3. The director should keep the information confidential from both boards.
  4. The director should automatically resign from both boards.

Explanation

Multiple directorships can create conflicting duties and access to confidential information across companies, requiring disclosure, recusal and careful information management. The private status of one company does not remove the conflict, and blanket resignation or secrecy are not the appropriate responses.

Question 48Governance and the role of the director

A board is considering whether to adopt a 'comply or explain' governance code. What does this approach require?

  1. Companies must comply with every provision of the code without exception.
  2. Companies may ignore the code entirely without any disclosure.
  3. Only the external auditor decides which provisions apply.
  4. Companies either comply with the code's recommendations or publicly explain why they have not. Correct answer.

Explanation

Under a comply-or-explain regime, companies follow the code's recommendations or disclose and explain any departure, allowing flexibility while maintaining transparency for shareholders. It is not a rigid mandatory regime, nor does it permit silent non-compliance or auditor discretion.

Question 49Governance and the role of the director

A controlling shareholder proposes that the company buy a business owned by the shareholder at a price above market value. Independent directors are in the minority. What is the most robust governance response?

  1. Establish an independent committee with independent advice, disclose the conflict and, where required, obtain minority shareholder approval. Correct answer.
  2. Refer the matter to the controlling shareholder's nominated director to decide.
  3. Delay the transaction until the independent directors resign.
  4. Approve the transaction because the controlling shareholder's vote will carry it anyway.

Explanation

Where a controlling shareholder is conflicted, robust governance requires an independent process-independent committee, independent valuation and advice, full disclosure and, where required, minority shareholder approval-to protect minority interests. Deferring to the controller or its nominee undermines the very protections the process is meant to provide.

Question 50Governance and the role of the director

Which of the following best explains why the board, rather than management, should approve the company's risk appetite statement?

  1. Because risk appetite is a purely operational matter.
  2. Because the external auditor requires the board to do so.
  3. Because management has no role in identifying risks.
  4. Because setting risk appetite allocates the company's tolerance for risk, which is a core board oversight responsibility. Correct answer.

Explanation

The board sets the company's risk appetite as part of its oversight role, defining how much risk the company is willing to accept in pursuit of its strategy, while management implements within that tolerance. Management remains central to risk identification, and risk appetite is a strategic rather than purely operational matter.