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CS Professional GRMCE practice questions

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Question 1Corporate Governance Framework and Principles

Under the UK Corporate Governance Code, what is the recommended maximum tenure for an independent non-executive director before the board should consider whether they remain independent?

  1. Nine years from date of first appointment Correct answer.
  2. Three years from date of first appointment
  3. Twelve years from date of first appointment
  4. Six years from date of first appointment

Explanation

The Code provides that the board should identify in the annual report each non-executive director it considers to be independent, and that tenure beyond nine years from date of first appointment is a factor likely to impair independence. After nine years the director may still serve but independence should be subject to particularly rigorous review and explained.

Question 2Corporate Governance Framework and Principles

In agency theory, the principal-agent problem in corporate governance arises primarily because of which combination of conditions?

  1. Absence of limited liability combined with unlimited director tenure
  2. Divergence of interests between owners and managers combined with information asymmetry Correct answer.
  3. Convergence of shareholder and creditor interests combined with full disclosure
  4. Equal bargaining power between shareholders and executives combined with aligned incentives

Explanation

Agency theory holds that managers (agents) may pursue their own interests rather than those of owners (principals), and that the principal cannot fully observe or verify the agent's effort and decisions. The twin conditions of interest divergence and information asymmetry create agency costs that governance mechanisms such as boards, audit, and incentives are designed to mitigate.

Question 3Corporate Governance Framework and Principles

A company operates a two-tier board system. Which characteristic distinguishes this structure from a unitary board?

  1. The board delegates all monitoring to external auditors appointed by the CEO
  2. Executive and non-executive duties are combined in a single body chaired by the CEO
  3. Independent directors are prohibited from sitting on any board committee
  4. A supervisory board oversees and appoints or dismisses the management board, which runs the business Correct answer.

Explanation

In a two-tier model, the supervisory board is separated from the management board that runs day-to-day operations; the supervisory body monitors management and typically appoints its members. This separation of monitoring from execution is the defining feature compared with the unitary board, where executive and non-executive directors sit together.

Question 4Corporate Governance Framework and Principles

Which statement best describes the principle of shareholder primacy as traditionally understood in Anglo-American governance?

  1. Creditors rank ahead of shareholders in all board decisions regardless of solvency
  2. Directors owe their duties to the company but should ultimately pursue long-term value for shareholders Correct answer.
  3. Shareholders directly manage operations through binding referenda on management decisions
  4. Directors must balance shareholder returns equally against employee and community interests in every decision

Explanation

Shareholder primacy holds that directors' duties are owed to the company, with the ultimate objective of generating long-term value for shareholders, subject to law and stakeholder obligations. It does not mean shareholders run the business or that other interests are legally irrelevant.

Question 5Corporate Governance Framework and Principles

In the OECD Principles of Corporate Governance, which right is expressly identified as a fundamental shareholder right?

  1. The right to set individual executive remuneration packages directly
  2. The right to inspect every internal management email on request
  3. The right to appoint the chief financial officer personally
  4. The right to participate in and be sufficiently informed on decisions concerning fundamental corporate changes Correct answer.

Explanation

The OECD Principles state that shareholders should have the right to participate in, and be sufficiently informed on, decisions concerning fundamental corporate changes such as amendments to statutes, authorisation of additional shares, and extraordinary transactions. Routine management matters fall outside this fundamental right.

Question 6Corporate Governance Framework and Principles

What is the primary governance purpose of separating the roles of board chair and chief executive officer?

  1. To reduce the cost of directors' and officers' liability insurance
  2. To allow the CEO to chair the audit committee without conflict
  3. To prevent concentration of power and strengthen the board's ability to hold management to account Correct answer.
  4. To satisfy a statutory requirement that applies to all listed companies worldwide

Explanation

Combining the chair and CEO roles can concentrate influence over board agendas, information flow, and challenge, weakening independent oversight. Separation is recommended to preserve the board's capacity to scrutinise and hold management accountable, even though it is not universally mandated by statute.

Question 7Corporate Governance Framework and Principles

Which concept describes the situation where a director's judgement could be influenced by a personal interest in a transaction before the board?

  1. Board diversity
  2. Independence of mind
  3. Collective responsibility
  4. Conflict of interest Correct answer.

Explanation

A conflict of interest arises where a director has a personal interest, direct or indirect, in a matter before the board that could compromise objective judgement. Governance codes require such conflicts to be declared and managed, often by recusal from discussion and voting.

Question 8Corporate Governance Framework and Principles

In corporate governance, what does the term 'comply or explain' require of a listed company?

  1. It must explain its business strategy before it can comply with the code
  2. It must comply with every provision of the code without exception
  3. It must comply only with those provisions its auditors select
  4. It must either comply with code provisions or give reasoned explanation for any departure Correct answer.

Explanation

'Comply or explain' allows flexibility: a company either follows a code provision or explains in its annual report why it has not, so that shareholders can judge whether the departure is justified. It is not a licence for silent non-compliance, because the explanation must be reasoned and specific.

Question 9Corporate Governance Framework and Principles

A board committee is being established to oversee the integrity of financial reporting and the relationship with external auditors. Which committee is appropriate?

  1. Nomination committee
  2. Remuneration committee
  3. Audit committee Correct answer.
  4. Risk and strategy committee

Explanation

The audit committee's remit covers the integrity of financial statements, oversight of internal control and risk related to reporting, and the appointment, independence, and performance of external auditors. Remuneration and nomination committees address pay and board composition respectively.

Question 10Corporate Governance Framework and Principles

Under the UK Corporate Governance Code, what is the recommended minimum proportion of the board (excluding the chair) that should comprise independent non-executive directors for a FTSE 350 company?

  1. At least one quarter
  2. At least one half Correct answer.
  3. At least one third
  4. At least three quarters

Explanation

The Code provides that at least half the board, excluding the chair, should be independent non-executive directors for companies in the FTSE 350. Smaller companies outside the FTSE 350 should have at least two independent non-executive directors. The chair is excluded from this calculation because the chair is counted separately for independence purposes.

Question 11Corporate Governance Framework and Principles

A director resigns from the board and, six months later, is appointed as a consultant to the company's executive team on a substantial retainer. Which governance concern is most directly engaged?

  1. The director's obligation to hold a minimum share qualification
  2. Revolving-door arrangements that may compromise the former director's earlier independence and objectivity Correct answer.
  3. The requirement that all consultants be appointed by the nomination committee
  4. The company's duty to provide a deferred bonus to all former directors

Explanation

Post-resignation consultancy arrangements with former board members can create perceived or actual conflicts, because the individual may have shaped decisions affecting the terms of the later engagement. Governance codes require such relationships to be disclosed and managed, and they are relevant when assessing independence.

Question 12Corporate Governance Framework and Principles

In a unitary board, what does the concept of collective responsibility mean for directors?

  1. Executive directors are accountable only to the CEO
  2. The board shares responsibility for decisions, and dissent should be recorded rather than disowned later Correct answer.
  3. Only the chair is accountable to shareholders for board decisions
  4. Each director is personally liable for the entire company's debts

Explanation

Collective responsibility means the board owns its decisions as a body, with each director participating in good faith; a director who disagrees should ensure dissent is minuted rather than later disowning the decision. It does not create personal liability for company debts, which depends on separate legal doctrines such as wrongful trading.

Question 13Corporate Governance Framework and Principles

A company's board wishes to strengthen its nomination committee. Which activity falls within that committee's proper remit?

  1. Negotiating the external audit fee
  2. Approving the annual financial statements before publication
  3. Setting the CEO's annual bonus target
  4. Leading the process for board appointments and recommending candidates for approval Correct answer.

Explanation

The nomination committee leads the process for board and senior appointments, identifies and recommends candidates, and oversees succession planning and board evaluation. Pay, financial statements, and audit fees sit with the remuneration and audit committees respectively.

Question 14Corporate Governance Framework and Principles

Under the UK Corporate Governance Code, what is the recommended maximum period for which a chair should hold office?

  1. Three years, extendable by two
  2. Seven years, extendable by two
  3. Five years, extendable by three
  4. Nine years, with no extension possible Correct answer.

Explanation

The Code provides that the chair should not remain in post beyond nine years from the date of first appointment to the board, whether as chair or in another role. A proposed extension beyond nine years requires rigorous review and explanation, but the recommended maximum is nine years.

Question 15Corporate Governance Framework and Principles

A listed company's remuneration committee is designing the CEO's package. Which practice best aligns with good governance principles on executive remuneration?

  1. Allowing the CEO to set the pay of fellow executive directors to preserve internal equity
  2. Setting bonuses that vest immediately on the announcement of annual results
  3. Removing all share-based elements to eliminate shareholder dilution concerns
  4. Linking a substantial portion of pay to long-term performance measures and including malus and clawback provisions Correct answer.

Explanation

Good remuneration design ties a significant part of executive pay to sustained long-term performance and includes mechanisms to recover or reduce pay where results are later restated or misconduct emerges. This addresses the agency problem by aligning executive interests with long-term shareholder value.

Question 16Corporate Governance Framework and Principles

Which statement correctly distinguishes internal control from risk management in a governance framework?

  1. Internal control is the process designed to provide reasonable assurance over objectives, while risk management identifies, assesses, and treats risks including those outside controls Correct answer.
  2. Internal control is solely the responsibility of external auditors
  3. Internal control and risk management are identical and interchangeable terms
  4. Risk management applies only to financial risks, while internal control covers operational risks

Explanation

Internal control comprises the policies and procedures providing reasonable assurance about the reliability of reporting, effectiveness of operations, and compliance. Risk management is the broader process of identifying, assessing, and responding to risks, of which controls are one response.

Question 17Corporate Governance Framework and Principles

A board is reviewing its stakeholder engagement approach. Under a stakeholder-oriented governance model, what is the primary justification for board consideration of employee and community interests?

  1. Stakeholder interests automatically override shareholder returns in every decision
  2. External auditors require evidence of community consultation
  3. Those groups hold enforceable ownership rights over company assets
  4. Long-term sustainable value depends on maintaining legitimate relationships with parties affected by the company Correct answer.

Explanation

Stakeholder models justify attention to employees, customers, communities, and suppliers on the basis that sustainable long-term value depends on trust and legitimate relationships with those affected by corporate activity. It does not grant those groups ownership rights or an automatic override of shareholder returns.

Question 18Corporate Governance Framework and Principles

Which feature best characterises the 'stewardship' role of institutional investors in corporate governance?

  1. Selling shares immediately whenever governance concerns arise
  2. Actively monitoring investee companies and engaging on strategy, performance, and governance Correct answer.
  3. Guaranteeing the investee's share price through market-making
  4. Sitting permanently on the investee's board to direct operations

Explanation

Stewardship involves institutional investors monitoring investee companies and engaging constructively on strategy, performance, risk, capital structure, and governance. It is distinct from guaranteeing prices, taking operational control, or reflexively exiting on concerns, which forfeits influence.

Question 19Corporate Governance Framework and Principles

A company's articles reserve certain decisions to a supermajority of 75% of votes cast. What governance rationale most commonly supports supermajority requirements?

  1. To allow the chair to cast a deciding vote in all circumstances
  2. To protect minority shareholders and constitutional provisions from being altered by a simple majority Correct answer.
  3. To speed up routine decision-making by reducing the number of voters needed
  4. To exempt the company from disclosure obligations

Explanation

Supermajority thresholds are used for significant constitutional or structural changes to ensure that a bare majority cannot impose fundamental alterations on a substantial minority. They protect minority interests and the stability of constitutional arrangements, at the cost of making some decisions harder to pass.

Question 20Corporate Governance Framework and Principles

Which of the following best describes the role of the company secretary in supporting good governance?

  1. Auditing the company's financial statements independently
  2. Setting the company's commercial strategy alongside the CEO
  3. Advising the board on governance matters and ensuring compliance with board procedures Correct answer.
  4. Representing shareholders in negotiations with the board

Explanation

The company secretary supports the chair and board by advising on governance, ensuring information flows, and confirming that board procedures and applicable rules are followed. The role is a governance and compliance support function, not a commercial, audit, or shareholder-representation role.

Question 21Corporate Governance Framework and Principles

A board is evaluating whether a long-serving non-executive director remains independent. Which factor is most likely to undermine that assessment under typical governance codes?

  1. The director has never been employed by the company
  2. The director has served on the board for eleven years Correct answer.
  3. The director attends all board and committee meetings
  4. The director holds no shares in the company

Explanation

Long tenure, commonly beyond nine years, is a recognised factor that may impair independence because familiarity and relationships can blunt challenge. The absence of shares, prior employment, or meeting attendance do not by themselves undermine independence; attendance is generally a positive indicator of engagement.

Question 22Corporate Governance Framework and Principles

In relation to board diversity, which approach best reflects current governance expectations for a listed company?

  1. Adopting a formal diversity policy with measurable objectives and disclosing progress against them Correct answer.
  2. Treating diversity solely as a matter of age and nationality
  3. Delegating diversity targets entirely to the HR function without board oversight
  4. Appointing a single diverse director to satisfy a quota and making no further changes

Explanation

Governance codes expect boards to adopt a formal diversity policy covering gender and other attributes, set measurable objectives, and disclose progress in the annual report. The board retains oversight; delegating targets entirely to HR without board engagement fails the governance expectation.

Question 23Corporate Governance Framework and Principles

A controlling shareholder proposes a transaction with the company on terms that may favour the shareholder. Which governance safeguard is most appropriate?

  1. Relying on the controlling shareholder's assurance that the terms are fair
  2. Deferring the decision indefinitely to avoid conflict
  3. Requiring independent directors to review the transaction, with disclosure and, where required, a minority shareholder vote Correct answer.
  4. Allowing the CEO to approve the transaction without board involvement

Explanation

Related-party transactions involving a controlling shareholder require independent review, typically by independent directors advised separately, together with disclosure and, under listing rules, approval by disinterested shareholders. These safeguards counter the risk that the controller extracts value at the expense of minorities.

Question 24Corporate Governance Framework and Principles

Under the UK Corporate Governance Code, which provision addresses the board's responsibility for establishing the company's purpose, values, and culture?

  1. The board should align culture with the personal preferences of the CEO
  2. The board should set values only after consulting trade unions
  3. The board should establish the company's purpose, values, and strategy, and satisfy itself that these and its culture are aligned Correct answer.
  4. The board should delegate culture-setting to the HR director and review annually

Explanation

The Code's first principle provides that the board should establish the company's purpose, values, and strategy and satisfy itself that these, and its culture, are aligned. All directors must act with integrity and lead by example, so culture is a board-level responsibility rather than a delegated HR task.

Question 25Corporate Governance Framework and Principles

A board is assessing whether to adopt a 'comply or explain' statement that departs from a code provision on board independence. Which explanation would best satisfy the spirit of the regime?

  1. A statement that the company has considered the provision and prefers a different approach
  2. A statement that the provision is not applicable because the company is profitable
  3. A reasoned account of the company's circumstances, the alternative arrangements adopted, and why they achieve the provision's objective Correct answer.
  4. A statement that the departure will be reconsidered at an unspecified future date

Explanation

A meaningful explanation must be specific and reasoned, setting out the company's particular circumstances, the alternative arrangements it has adopted, and how those arrangements meet the underlying objective of the provision. Vague statements of preference or profitability do not enable shareholders to evaluate the departure.

Question 26Corporate Governance Framework and Principles

A newly incorporated public company is drafting its governance architecture and wants to distinguish the board's accountability to shareholders from its duty to consider employees, customers and creditors. Which principle best captures this dual orientation?

  1. Shareholder primacy, under which any stakeholder consideration is prohibited unless it increases short-term profit
  2. Managerial discretion, under which directors may ignore both shareholders and stakeholders if they act in good faith
  3. Stakeholder absolutism, under which shareholder returns are legally subordinated to every stakeholder group
  4. Enlightened shareholder value, under which directors pursue shareholder value while having regard to wider stakeholder and long-term factors Correct answer.

Explanation

Enlightened shareholder value treats shareholder value as the objective but requires directors to weigh long-term consequences, stakeholder interests and reputation when pursuing it. This is reflected in statutory duties to promote the success of the company for members' benefit while having regard to employees, suppliers, customers, community and the environment. The principle reconciles accountability to owners with responsible consideration of affected parties.

Question 27Corporate Governance Framework and Principles

A board is mapping its governance framework and wants to place the concepts of accountability, transparency, fairness and responsibility. Which statement correctly describes how these principles operate together?

  1. They are legally binding statutory duties in identical form across every jurisdiction
  2. They are mutually reinforcing: transparency enables accountability, and fairness constrains how responsibility is exercised Correct answer.
  3. They are alternatives, so a company may adopt transparency while deliberately rejecting accountability
  4. They apply only to charitable entities, since commercial companies are governed solely by profit maximisation

Explanation

The core governance principles are interdependent rather than substitutable: disclosure makes accountability possible, fairness shapes decisions affecting stakeholders, and responsibility requires ethical conduct and correction of failures. Together they support trust and long-term value creation. No single principle operates in isolation from the others.

Question 28Corporate Governance Framework and Principles

A director of a listed company holds shares in a supplier that the company is about to select for a major contract. Under conflict-of-interest rules, what is the director's proper course of action?

  1. Continue participating fully, because a shareholding in a supplier is a personal investment rather than an interest
  2. Declare the interest to the board, withdraw from deliberations and voting, and ensure the register of interests is updated Correct answer.
  3. Vote in favour of the contract but disclose the holding only after the board has approved it
  4. Resign from the board immediately, since any personal shareholding automatically disqualifies a director

Explanation

Conflict-of-interest rules require prompt disclosure, recusal from discussion and decision-making, and recording of the interest in the company's register. This protects the integrity of board decisions and preserves the director's duty to act in the company's interests. Resignation is not automatically required, and disclosure after the vote defeats the purpose.

Question 29Corporate Governance Framework and Principles

A company's governance policy states that the board should provide a balanced and understandable assessment of the company's position and prospects. Which governance principle does this policy most directly implement?

  1. Board independence
  2. Shareholder activism
  3. Transparency and disclosure Correct answer.
  4. Delegation of authority

Explanation

Requiring a balanced and understandable assessment of position and prospects is a transparency and disclosure obligation, ensuring users of reports are not misled. It underpins accountability to shareholders and other stakeholders. Delegation, independence and activism concern different governance mechanisms.

Question 30Corporate Governance Framework and Principles

A board is designing a governance structure for a group with a parent company and several subsidiaries. Which arrangement best reflects sound governance of the group?

  1. The parent board delegates all governance oversight to subsidiary management and reviews nothing
  2. Subsidiary boards report only to their own shareholders and never to the parent's audit committee
  3. Each subsidiary board operates without reference to group standards, since separate legal entities owe no reporting to the parent
  4. The parent board sets group-wide governance standards and receives assurance that subsidiary boards operate consistently with them Correct answer.

Explanation

Group governance requires the parent board to set standards and obtain assurance that subsidiaries comply, while respecting separate legal personality. This allows consistent risk and control oversight across the group. Complete autonomy or full delegation would leave the parent board unable to discharge its oversight responsibilities.

Question 31Corporate Governance Framework and Principles

A non-executive director is asked to chair the audit committee while also serving on the remuneration committee and holding a paid advisory contract with a major customer of the company. Which concern is most significant for governance?

  1. Serving on two committees is prohibited for all non-executive directors
  2. Committee membership automatically confers executive authority on the director
  3. The paid advisory contract may compromise independence and weaken the credibility of committee oversight Correct answer.
  4. Chairing the audit committee requires the director to be a former finance director of the company

Explanation

A material paid relationship with a customer creates a potential conflict that can undermine the director's independence and the perceived objectivity of committee oversight. Independence is assessed on substance, including commercial relationships. Committee roles and executive authority do not follow automatically from appointment.

Question 32Corporate Governance Framework and Principles

A company's board wants its governance framework to address the 'tone at the top'. Which action most directly establishes that tone?

  1. The company adopts a code of conduct identical to a competitor's without board discussion
  2. The board delegates all ethics matters to the internal audit function without receiving reports
  3. Directors visibly model ethical conduct and hold management accountable for embedding the code of conduct throughout the organisation Correct answer.
  4. The company publishes its code of conduct on the website but does not train staff or monitor breaches

Explanation

Tone at the top is set by visible board and executive behaviour and by consistent accountability for embedding standards. Publication alone, delegation without reporting, or copying another company's code does not demonstrate leadership commitment. Behavioural signals and monitoring are what give the code credibility.

Question 33Corporate Governance Framework and Principles

A board is reviewing its schedule of matters reserved for the board. Which item is most appropriate to reserve to the board rather than delegate to management?

  1. Routine processing of customer invoices
  2. Selection of office stationery suppliers within the approved budget
  3. Approval of the annual budget and material capital expenditure above a defined threshold Correct answer.
  4. Scheduling of routine staff training sessions

Explanation

Matters reserved for the board typically include strategy, budgets, material capital commitments, acquisitions, risk appetite and financial reporting. These decisions carry significant consequences and require board accountability. Operational matters within approved budgets are properly delegated to management.

Question 34Corporate Governance Framework and Principles

A shareholder wishes to challenge a board decision to award a large termination payment to a departing executive. Which governance mechanism most directly enables shareholders to hold the board to account for the payment?

  1. The nomination committee's discretion to reduce directors' fees
  2. The company secretary's power to overturn the payment unilaterally
  3. The remuneration report and remuneration policy being put to a shareholder vote at the general meeting Correct answer.
  4. The audit committee's authority to dismiss the executive retrospectively

Explanation

Shareholder votes on the remuneration report and, where applicable, the binding remuneration policy are the principal accountability mechanism for executive pay. They allow shareholders to express approval or disapproval and to influence future policy. Other committees and officers do not hold this power.

Question 35Corporate Governance Framework and Principles

A board is considering whether to adopt a formal board evaluation process. Which design feature best supports meaningful evaluation?

  1. A questionnaire completed anonymously by management about individual directors and filed without discussion
  2. A structured process, internally facilitated annually and externally facilitated periodically, with findings reported to the board and acted upon Correct answer.
  3. An external review conducted once at incorporation and never repeated
  4. An informal discussion held only when a director raises a concern

Explanation

Effective board evaluation is structured, regular and acted upon, with independent external facilitation at intervals to challenge established patterns. Findings should be discussed by the board and translated into actions. Informal, one-off or purely management-driven exercises provide little assurance.

Question 36Corporate Governance Framework and Principles

A company is preparing its annual report and wishes to explain how it has applied a governance code. Which approach best reflects the spirit of 'apply and explain' as distinct from a purely box-ticking exercise?

  1. Explain only departures, treating compliant provisions as requiring no description
  2. List each code provision and state only whether it was complied with, without commentary
  3. Describe the governance practices actually adopted and explain how they achieve the code's underlying principles Correct answer.
  4. Apply every provision literally regardless of whether it fits the company's circumstances

Explanation

'Apply and explain' asks companies to describe the practices they actually use and show how those practices deliver the principles, which requires substantive narrative rather than a compliance list. It accommodates proportionality and company-specific context. A bare compliance list or mechanical application defeats the approach.

Question 37Corporate Governance Framework and Principles

A board is establishing a risk committee in a regulated financial institution. Which responsibility belongs properly to that committee rather than to the audit committee?

  1. Approving the appointment of the chief financial officer
  2. Selecting the external auditor and agreeing the audit fee
  3. Overseeing the enterprise-wide risk appetite framework and the identification of principal risks Correct answer.
  4. Reviewing the integrity of the interim financial statements

Explanation

A dedicated risk committee focuses on the risk appetite framework, principal and emerging risks, and the adequacy of risk management, complementing the audit committee's financial reporting role. Auditor selection and financial statement integrity belong to audit committee remit. Executive appointments are board or nomination committee matters.

Question 38Corporate Governance Framework and Principles

A controlling shareholder proposes that the company acquire a business it owns at a valuation supported only by the shareholder's own adviser. The independent directors must respond. Which course best satisfies governance expectations?

  1. Refer the decision to the executive management team, which reports to the controlling shareholder
  2. Form a committee of independent directors, appoint independent advisers, and ensure the transaction is approved by disinterested shareholders Correct answer.
  3. Accept the valuation because the controlling shareholder has the greatest economic stake in the outcome
  4. Proceed without disclosure on the basis that related-party transactions are private commercial matters

Explanation

Related-party transactions with a controlling shareholder require independent oversight, independent advice and, typically, approval by shareholders without a conflict of interest. These safeguards protect minority shareholders and test the terms at arm's length. Relying on the proponent's adviser or on management reporting to that shareholder undermines independence.

Question 39Corporate Governance Framework and Principles

A board is reviewing whether its governance framework genuinely supports challenge. Which combination of features is most likely to produce effective constructive challenge?

  1. A chair who invites dissent, sufficient independent non-executives with relevant expertise, timely papers, and minutes that record dissenting views Correct answer.
  2. Long, dense board papers circulated at the start of each meeting to maximise reading time in the room
  3. A culture in which disagreement is treated as disloyalty and concerns are raised only after meetings
  4. A dominant chief executive who sets the agenda and a board composed mainly of executives who report to that chief executive

Explanation

Constructive challenge depends on behavioural and structural conditions: an inclusive chair, a critical mass of independent and competent non-executives, adequate information in advance, and records that capture dissent. These elements together allow the board to test management's proposals. Executive dominance, late papers and conformity pressure suppress challenge.

Question 40Corporate Governance Framework and Principles

A company operates in a jurisdiction where the governance code is not mandatory but must be reported against. Its board decides to depart from a provision on board independence because of a controlling shareholder structure. What makes the departure defensible?

  1. Silence on the departure, on the basis that codes are guidance rather than requirements
  2. A specific explanation of why the provision is not met, the alternative safeguards adopted, and the period for which the departure is expected to continue Correct answer.
  3. A statement that the controlling shareholder supports the departure and therefore no explanation is needed
  4. A general statement that the company values independence without addressing the specific provision

Explanation

A defensible departure requires a specific explanation of the circumstances, the alternative arrangements that mitigate the concern, and an indication of when the position will be reviewed. This gives shareholders enough information to assess the choice. Vague assurances, silence or shareholder endorsement without reasoning do not meet the reporting expectation.

Question 41Board Structure, Roles and Responsibilities

Under the UK Corporate Governance Code, who is responsible for leading the board and ensuring its effectiveness on all aspects of its role?

  1. The company secretary
  2. The senior independent director
  3. The chair Correct answer.
  4. The chief executive officer

Explanation

The Code assigns board leadership and effectiveness monitoring to the chair, who sets the agenda and ensures directors receive timely information. The CEO runs the executive business, while the senior independent director and company secretary have distinct supporting roles.

Question 42Board Structure, Roles and Responsibilities

Which board committee is normally responsible for reviewing the integrity of financial statements and the effectiveness of internal controls?

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

Explanation

The audit committee oversees financial reporting integrity, internal control and the external audit relationship. Nomination deals with board composition and remuneration with pay, so neither covers financial statement review.

Question 43Board Structure, Roles and Responsibilities

What is the principal purpose of separating the roles of chair and chief executive officer?

  1. To prevent an excessive concentration of decision-making power in one person Correct answer.
  2. To satisfy the requirement for a majority of independent directors
  3. To guarantee that the board always approves management proposals
  4. To reduce the total remuneration paid to senior leaders

Explanation

Separation of chair and CEO prevents one individual from both running the business and leading the board that monitors it, preserving effective oversight. It does not by itself ensure independence of the wider board or control remuneration levels.

Question 44Board Structure, Roles and Responsibilities

A director who is a former employee of the company and receives a consultancy fee is best described as which of the following?

  1. Executive director
  2. Independent non-executive director
  3. Senior independent director
  4. Non-independent non-executive director Correct answer.

Explanation

A former employee with an ongoing consultancy relationship has material connections to the company and cannot be treated as independent, yet does not hold an executive management post. Such a director is therefore a non-independent non-executive.

Question 45Board Structure, Roles and Responsibilities

In a unitary board structure, which statement best describes the collective responsibility of directors?

  1. Non-executive directors are responsible only for monitoring, not for strategy
  2. Directors share collective responsibility for the board's decisions, even where they dissented Correct answer.
  3. Only executive directors carry legal responsibility for board decisions
  4. Each director is liable only for decisions in their own functional area

Explanation

The unitary board acts collectively, and all directors share responsibility for its decisions regardless of individual dissent or functional background. Executive and non-executive directors alike contribute to strategy and oversight.

Question 46Board Structure, Roles and Responsibilities

What is the main function of the nomination committee?

  1. Determining the company's risk appetite statement
  2. Approving the annual budget and capital expenditure
  3. Setting the remuneration of the external auditor
  4. Recommending candidates for board appointment and overseeing succession planning Correct answer.

Explanation

The nomination committee leads the process for board appointments, evaluates the balance of skills and oversees succession planning for the board and senior management. Audit, remuneration and risk matters belong to other committees or the full board.

Question 47Board Structure, Roles and Responsibilities

Which individual normally acts as the formal channel of communication between the board and shareholders on governance matters?

  1. The head of investor relations
  2. The chair of the board Correct answer.
  3. The chair of the audit committee
  4. The chief financial officer

Explanation

The chair is expected to maintain dialogue with shareholders and communicate governance concerns to the board. Investor relations supports engagement but is not the formal governance channel.

Question 48Board Structure, Roles and Responsibilities

Which document typically sets out the division of responsibilities between the chair, chief executive and other board roles?

  1. The annual report's remuneration report
  2. The schedule of matters reserved for the board
  3. The internal audit charter
  4. The board role-description statement or governance framework Correct answer.

Explanation

A written statement of role descriptions and the division of responsibilities clarifies who does what at the top of the company. The schedule of reserved matters covers decision authority, while the remuneration report and audit charter address different topics.

Question 49Board Structure, Roles and Responsibilities

A board has twelve directors, of whom the chair, three committee chairs and five other directors are independent. The CEO and CFO are the only executives. How should the board describe its independence position?

  1. At least half the board is independent, consistent with the usual recommendation Correct answer.
  2. Fully independent, because no director has a commercial relationship
  3. Non-compliant, because executives sit on the board at all
  4. Non-compliant, because the chair is counted as independent

Explanation

Nine of twelve directors are independent, comfortably exceeding the recommendation that at least half the board excluding the chair be independent. The presence of two executives is normal and does not breach the standard.

Question 50Board Structure, Roles and Responsibilities

A non-executive director becomes concerned that the CEO is withholding information from the board. Which action is most consistent with the director's duties?

  1. Discuss the concern only with the external auditor
  2. Resign immediately to avoid association with the conduct
  3. Raise the concern privately with the chair and, if unresolved, with the senior independent director Correct answer.
  4. Wait until the next annual general meeting to raise it with shareholders

Explanation

A director should escalate information-flow concerns through the chair and, where that is inappropriate, the senior independent director. Resignation or external escalation should not be a first step while internal channels remain available.