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CMA Sri Lanka SL4 Corporate Governance & Ethics Exam study materials
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CMA Sri Lanka SL4 Corporate Governance & Ethics Exam practice questions

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Question 1Corporate Governance: Concepts, Theories and Frameworks

Which corporate governance theory holds that directors and managers should act as stewards who are intrinsically motivated to serve the organisation's best interests?

  1. Stewardship theory Correct answer.
  2. Resource dependency theory
  3. Agency theory
  4. Stakeholder theory

Explanation

Stewardship theory assumes managers are trustworthy stewards whose satisfaction comes from organisational achievement, so the governance emphasis falls on empowerment and shared goals rather than monitoring. Agency theory instead assumes self-interested actors needing contractual controls.

Question 2Corporate Governance: Concepts, Theories and Frameworks

Under agency theory, which mechanism most directly reduces the agency problem between shareholders and managers?

  1. Publishing a sustainability report
  2. Linking executive remuneration to long-term shareholder value Correct answer.
  3. Rotating the external auditor every year
  4. Increasing the number of social responsibility programmes

Explanation

Agency theory addresses divergence of interests through incentive alignment and monitoring, so pay tied to shareholder value reduces residual loss. The other options address accountability or disclosure but do not align managerial incentives with owners.

Question 3Corporate Governance: Concepts, Theories and Frameworks

In stakeholder theory, the primary purpose of the board is best described as:

  1. Balancing and reconciling the legitimate interests of all affected constituencies Correct answer.
  2. Maximising short-term distributable profit for shareholders
  3. Protecting management from hostile takeovers
  4. Ensuring strict compliance with tax legislation

Explanation

Stakeholder theory treats the firm as a network of relationships and asks directors to weigh the legitimate interests of shareholders, employees, customers, suppliers and community. Profit maximisation for one group is the shareholder-primacy view, not stakeholder theory.

Question 4Corporate Governance: Concepts, Theories and Frameworks

A board recruits a retired central bank governor partly because her network gives the company access to scarce financing and regulatory insight. Which theory best explains this appointment?

  1. Stewardship theory
  2. Legitimacy theory
  3. Resource dependency theory Correct answer.
  4. Transaction cost theory

Explanation

Resource dependency theory views the board as a mechanism for reducing environmental uncertainty by providing access to resources, information and connections. The governor's network is precisely the resource that makes her valuable.

Question 5Corporate Governance: Concepts, Theories and Frameworks

Which concept describes the informal, often unwritten rules and shared understandings that shape how governance actually operates within a company?

  1. The governance culture Correct answer.
  2. The corporate constitution
  3. The delegation matrix
  4. The governance code

Explanation

Governance culture refers to the values, norms and behaviours that determine how formal rules are applied in practice. A written code or constitution provides the formal framework, but culture governs everyday conduct.

Question 6Corporate Governance: Concepts, Theories and Frameworks

Which statement best distinguishes the shareholder (Anglo-American) model of corporate governance from the stakeholder (continental European) model?

  1. The shareholder model requires two-tier boards, while the stakeholder model requires unitary boards
  2. The shareholder model gives primacy to owners' interests and relies heavily on markets for corporate control, while the stakeholder model formally includes employees and other constituencies in governance Correct answer.
  3. The shareholder model forbids institutional investors from voting, while the stakeholder model encourages it
  4. The shareholder model is used only by family firms, while the stakeholder model is used only by listed firms

Explanation

The shareholder model centres on maximising owner value with dispersed ownership and an active market for corporate control, whereas the stakeholder model embeds employee and other interests, often through two-tier boards and co-determination. The other pairings misstate board structures and ownership patterns.

Question 7Corporate Governance: Concepts, Theories and Frameworks

In a two-tier board structure, which body is responsible for appointing and supervising the management board?

  1. The general meeting of creditors
  2. The audit committee
  3. The nomination committee of the management board
  4. The supervisory board Correct answer.

Explanation

In two-tier systems the supervisory board appoints, monitors and can dismiss the management board, and it does not itself run the business. Committees support the supervisory board but do not hold the appointment power as a body.

Question 8Corporate Governance: Concepts, Theories and Frameworks

Which principle of the OECD Principles of Corporate Governance deals with the equitable treatment of all shareholders, including minority and foreign shareholders?

  1. The equitable treatment of shareholders Correct answer.
  2. Disclosure and transparency
  3. The rights of shareholders
  4. The responsibilities of the board

Explanation

The OECD Principles contain a dedicated principle on equitable treatment, covering minority protection and prohibition of abusive related-party dealings. The other named principles cover separate areas such as rights, disclosure and board duties.

Question 9Corporate Governance: Concepts, Theories and Frameworks

A company's controlling family uses a chain of holding companies to hold 30 per cent of the equity but exercises 65 per cent of the votes. This arrangement is best described as:

  1. A co-determination arrangement with employee representation
  2. A dual-class share structure with equal voting rights
  3. A pyramidal ownership structure creating a divergence between cash-flow rights and control rights Correct answer.
  4. A dispersed ownership structure typical of the shareholder model

Explanation

Pyramids allow a controlling party to lever voting control beyond its economic stake, separating cash-flow rights from control rights and raising expropriation risk for minorities. A dual-class structure would instead rest on differentiated share classes rather than a chain of holdings.

Question 10Corporate Governance: Concepts, Theories and Frameworks

Which of the following best describes the principal-agent relationship in a listed company?

  1. Regulators (principals) delegate law-making to directors (agents)
  2. Employees (principals) delegate governance to trade unions (agents)
  3. Shareholders (principals) delegate decision-making to directors and managers (agents) Correct answer.
  4. Creditors (principals) delegate auditing to shareholders (agents)

Explanation

The agency relationship arises where owners entrust the running of the company to managers, creating scope for divergent interests and information asymmetry. Monitoring and incentive mechanisms exist to control the resulting agency costs.

Question 11Corporate Governance: Concepts, Theories and Frameworks

A director of a subsidiary votes to approve a supply contract between that subsidiary and another company in which she holds a 20 per cent shareholding. Under sound governance practice she should:

  1. Declare her interest, withdraw from the discussion and abstain from voting Correct answer.
  2. Refer the matter to the external auditor for approval
  3. Vote in favour because the contract is commercially beneficial
  4. Abstain from voting but remain present and participate in the debate

Explanation

A conflict of interest should be disclosed and the conflicted director should recuse herself from both deliberation and decision, so the remaining directors decide impartially. Merely abstaining while shaping the debate does not remove the influence of the conflict.

Question 12Corporate Governance: Concepts, Theories and Frameworks

Which statement best captures the meaning of 'comply or explain' in a principles-based governance code?

  1. Companies must explain their business strategy before they can comply with the code
  2. Companies either comply with code provisions or give reasoned explanation for departure, allowing flexibility Correct answer.
  3. Companies may choose whether to comply with the law or explain why they did not
  4. Companies must comply with every provision or face automatic delisting

Explanation

Comply or explain allows a listed company to depart from a code provision provided it discloses and justifies the departure, so the market judges the explanation. It preserves flexibility while maintaining transparency and accountability.

Question 13Corporate Governance: Concepts, Theories and Frameworks

A board has a majority of independent non-executive directors but the chairman is also the chief executive. Which governance concern is most directly raised?

  1. Excessive board size
  2. Insufficient industry expertise on the board
  3. Over-reliance on external auditors
  4. Concentration of power and reduced board independence in oversight Correct answer.

Explanation

Combining the chair and chief executive roles concentrates power and can impair the board's ability to challenge management objectively. Separating the roles, or appointing a strong senior independent director, is the usual mitigation.

Question 14Corporate Governance: Concepts, Theories and Frameworks

Which of the following is a characteristic of a 'controlling shareholder' that distinguishes it from a dispersed shareholder base?

  1. It cannot receive dividends while it holds control
  2. It is prohibited from appointing directors
  3. It must always be an institutional investor
  4. It holds sufficient voting power to determine the outcome of shareholder resolutions Correct answer.

Explanation

A controlling shareholder can carry ordinary resolutions and therefore shape board composition and strategy, which raises distinct minority-protection concerns. Control does not remove the right to appoint directors or to receive dividends.

Question 15Corporate Governance: Concepts, Theories and Frameworks

Legitimacy theory is most useful in explaining why a company:

  1. Voluntarily discloses environmental and social information to maintain social acceptance Correct answer.
  2. Appoints directors solely for their technical skills
  3. Maximises profit regardless of social expectations
  4. Reduces its board size to lower costs

Explanation

Legitimacy theory holds that organisations seek to operate within the bounds of social norms and values, so they disclose information to demonstrate congruence with societal expectations. Where legitimacy is threatened, disclosure can be used to repair it.

Question 16Corporate Governance: Concepts, Theories and Frameworks

Which of the following best describes the role of the audit committee within the governance framework?

  1. It sets the remuneration of the chief executive
  2. It approves the company's strategic business plan
  3. It manages the company's day-to-day internal control operations
  4. It oversees financial reporting, internal control and the relationship with external auditors Correct answer.

Explanation

The audit committee provides independent oversight of the integrity of financial reporting, the effectiveness of internal control and the independence of external audit. Management retains responsibility for operating controls and preparing accounts.

Question 17Corporate Governance: Concepts, Theories and Frameworks

A nomination committee is composed of the chairman, the chief executive and one independent director. Which criticism is most valid?

  1. It duplicates the functions of the audit committee
  2. It cannot lawfully consider succession planning
  3. It lacks sufficient independence because executive directors dominate the appointment process Correct answer.
  4. It has too many independent directors to be effective

Explanation

Nomination committees should be constituted with a majority of independent directors so that board appointments are not controlled by executives. Including the chief executive alongside the chairman with only one independent member undermines that safeguard.

Question 18Corporate Governance: Concepts, Theories and Frameworks

Under a principles-based approach, how is a governance code typically enforced?

  1. Through revocation of the company's trading licence
  2. Through criminal prosecution of directors for each breach of a code provision
  3. Through automatic fines levied by the stock exchange on non-compliant issuers
  4. Through disclosure, market scrutiny and shareholder engagement rather than direct legal sanction for code departures Correct answer.

Explanation

Principles-based codes rely on transparency and market discipline, with shareholders and proxy advisers scrutinising explanations for non-compliance. Legal sanctions generally attach to statutory duties rather than to code provisions themselves.

Question 19Corporate Governance: Concepts, Theories and Frameworks

Which of the following best expresses the 'enlightened shareholder value' position?

  1. Directors should give employees voting control over board decisions
  2. Directors should ignore stakeholders entirely and focus on quarterly earnings
  3. Directors may pursue any stakeholder interest even where it destroys shareholder value
  4. Directors should pursue long-term shareholder value, recognising that this requires attention to employees, customers and reputation Correct answer.

Explanation

Enlightened shareholder value retains shareholder value as the objective but requires directors to consider long-term relationships and wider factors as means to that end. It is often reflected in statutory duties to have regard to employees, suppliers and the community.

Question 20Corporate Governance: Concepts, Theories and Frameworks

Which of the following is an example of a rules-based governance regime characteristic?

  1. Voluntary guidelines with no reporting obligation
  2. Prescriptive mandatory requirements with detailed disclosure obligations and specific sanctions Correct answer.
  3. Reliance on shareholder activism alone to enforce standards
  4. Flexible principles allowing companies to deviate with an explanation

Explanation

Rules-based regimes, such as the Sarbanes-Oxley approach, impose detailed mandatory requirements backed by specific legal sanctions. Principles-based regimes instead rely on flexibility and explanation.

Question 21Corporate Governance: Concepts, Theories and Frameworks

Which statement about the separation of ownership and control is most accurate?

  1. It applies only to private family companies
  2. It eliminates agency costs because managers own the shares they manage
  3. It creates scope for agency costs because owners do not directly manage the business Correct answer.
  4. It removes the need for a board of directors

Explanation

Berle and Means observed that dispersed ownership leaves control in the hands of managers whose interests may diverge from owners', generating monitoring and bonding costs. The board and disclosure exist partly to mitigate this separation.

Question 22Corporate Governance: Concepts, Theories and Frameworks

A regulator argues that governance failures in a bank threaten depositors and the wider financial system, justifying stricter board fitness requirements than for other companies. Which rationale does this reflect?

  1. Resource dependency theory
  2. Stewardship theory
  3. Shareholder primacy
  4. Systemic importance and the public interest rationale for regulation Correct answer.

Explanation

Banks and other systemically important institutions attract heightened governance regulation because failures impose costs on depositors, taxpayers and the wider economy. This public interest rationale justifies requirements beyond those applied to ordinary companies.

Question 23Corporate Governance: Concepts, Theories and Frameworks

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

  1. A requirement that all directors hold the same professional qualification
  2. A focus on achieving a mix of skills, experience, gender and background on the board to improve decision quality Correct answer.
  3. A preference for appointing directors who live near the company's head office
  4. A rule that directors must be drawn only from the controlling family

Explanation

Board diversity concerns the mix of skills, experience, perspectives and demographic characteristics that improves challenge and decision-making. Many codes require a diversity policy and disclosure of progress against it.

Question 24Corporate Governance: Concepts, Theories and Frameworks

A company states in its annual report that it complied with all code provisions, but the same report discloses that the audit committee met only once and had no independent members. Why is this a governance concern?

  1. Because audit committees are prohibited from meeting more than once
  2. Because compliance statements are irrelevant to investors
  3. Because formal compliance with code provisions may coexist with substantive governance weaknesses, so substance must be assessed alongside the statement Correct answer.
  4. Because independent members are not permitted on audit committees

Explanation

Governance assessment must look beyond box-ticking to whether the arrangements actually function, which is the substance-over-form principle. A bare compliance statement does not cure an ineffective or non-independent audit committee.

Question 25Corporate Governance: Concepts, Theories and Frameworks

Which of the following best describes the principal purpose of the UK Corporate Governance Code's provisions on board leadership?

  1. To transfer decision-making authority to the external auditor
  2. To guarantee that the company never makes a loss
  3. To require all directors to be full-time executives
  4. To ensure the board provides effective leadership within a framework of prudent and effective controls that enables risk to be assessed and managed Correct answer.

Explanation

The leadership principle links effective entrepreneurship with prudent controls so that risk is assessed and managed rather than avoided. It does not promise profitability and does not shift authority to auditors.

Question 26Corporate Governance: Concepts, Theories and Frameworks

Which theory of corporate governance holds that managers should balance the interests of shareholders, employees, customers, suppliers and the community because the firm depends on these groups for its survival?

  1. Stakeholder theory Correct answer.
  2. Transaction cost theory
  3. Resource dependence theory
  4. Agency theory

Explanation

Stakeholder theory asserts that the firm has obligations to all groups affected by its activities, not only shareholders, because their contributions are essential to long-term success. Agency theory, by contrast, focuses on aligning managers with shareholder interests.

Question 27Corporate Governance: Concepts, Theories and Frameworks

A governance code states that the board should include at least half independent non-executive directors. A company complies by appointing five independent directors out of nine. Which concept does this illustrate?

  1. Substantive compliance with the spirit of the code
  2. Box-ticking compliance with a numerical threshold Correct answer.
  3. Non-compliance requiring a formal explanation
  4. Voluntary disclosure beyond code requirements

Explanation

Meeting a specified numerical ratio is box-ticking compliance: the company satisfies the literal threshold without demonstrating that independence genuinely informs board behaviour. Codes increasingly warn against this approach because form is not substance.

Question 28Corporate Governance: Concepts, Theories and Frameworks

Which governance mechanism is most directly designed to reduce the agency problem between shareholders and managers in a listed company?

  1. Publishing a sustainability report
  2. Appointing independent non-executive directors to the board Correct answer.
  3. Increasing the number of board meetings
  4. Adopting a longer financial reporting calendar

Explanation

Independent non-executive directors monitor management on behalf of shareholders, providing a check on executive discretion and reducing information asymmetry. This monitoring role is the core governance response to the agency problem.

Question 29Corporate Governance: Concepts, Theories and Frameworks

In a jurisdiction where shares are widely dispersed, a hostile takeover bid is often described as a governance mechanism. Which statement best explains its disciplinary effect?

  1. It allows the target board to entrench itself against shareholder pressure.
  2. It removes the need for independent directors on the target board.
  3. It enables shareholders to replace underperforming managers through a change of control. Correct answer.
  4. It guarantees that the bidder will improve operating performance after acquisition.

Explanation

The market for corporate control disciplines managers because poor performance makes a firm a takeover target, and a successful bid typically leads to replacement of incumbent management. The threat alone can align managerial behaviour with shareholder value.

Question 30Corporate Governance: Concepts, Theories and Frameworks

Which of the following best describes the 'enlightened shareholder value' approach to directors' duties?

  1. Directors should treat all stakeholder groups as having equal voting rights in board decisions.
  2. Directors should pursue shareholder value while having regard to stakeholders and long-term consequences. Correct answer.
  3. Directors must prioritise the interests of employees over shareholders in all decisions.
  4. Directors should maximise short-term profit irrespective of environmental or social effects.

Explanation

Enlightened shareholder value requires directors to promote the success of the company for the benefit of shareholders, while considering stakeholders, long-term consequences and the company's reputation. It is a stakeholder-aware form of shareholder primacy, not a rejection of it.

Question 31Corporate Governance: Concepts, Theories and Frameworks

A company's board charter states that the board may delegate any matter to management except matters reserved by law or the constitution. Which governance principle does this reflect?

  1. The board's role is limited to compliance with statutory filing obligations.
  2. The board retains ultimate responsibility while delegating operational authority. Correct answer.
  3. The board must obtain shareholder approval for every operational decision.
  4. The board has abdicated its oversight role to management.

Explanation

Boards commonly reserve certain matters for decision and delegate the rest to management, while remaining accountable for the company's overall direction. Delegation of authority does not transfer ultimate responsibility.

Question 32Corporate Governance: Concepts, Theories and Frameworks

Which of the following is the clearest example of a governance failure arising from a conflict of interest at board level?

  1. A board discloses directors' shareholdings in the annual report.
  2. A board appoints an independent director who has no prior relationship with the company.
  3. A board engages an external consultant to review its effectiveness.
  4. A chief executive chairs the remuneration committee that sets her own pay. Correct answer.

Explanation

A chief executive setting her own remuneration through chairing the remuneration committee is a direct conflict of interest that undermines independent oversight of executive pay. Governance codes typically require the remuneration committee to be independent and free from executive influence.

Question 33Corporate Governance: Concepts, Theories and Frameworks

Which statement best captures the difference between a 'comply or explain' code and a statutory rules-based regime?

  1. A comply-or-explain code applies only to private companies, while rules-based regimes apply to listed companies.
  2. A comply-or-explain code is enforced by shareholders alone, while rules-based regimes are enforced by auditors.
  3. A comply-or-explain code imposes criminal penalties for deviation, while rules-based regimes do not.
  4. A comply-or-explain code allows deviation with reasoned explanation, while rules-based regimes mandate prescribed conduct. Correct answer.

Explanation

Under comply or explain, a company may depart from a code provision if it provides a reasoned explanation to shareholders, whereas rules-based regimes require prescribed conduct backed by legal sanction. The distinction lies in flexibility and the role of disclosure rather than in the identity of the enforcer.

Question 34Corporate Governance: Concepts, Theories and Frameworks

A nominee director is appointed to a subsidiary board by the parent company. In carrying out her duties, which approach is most consistent with good governance?

  1. Act solely in the interests of the parent company that appointed her.
  2. Resign whenever a transaction between parent and subsidiary is discussed.
  3. Act in the interests of the subsidiary while managing any conflict transparently. Correct answer.
  4. Defer all decisions to the subsidiary's managing director.

Explanation

A director owes duties to the company on whose board she sits, so a nominee must act in that company's interests and handle parent-subsidiary conflicts through disclosure and abstention where appropriate. Blind loyalty to the appointer can breach fiduciary duty.

Question 35Corporate Governance: Concepts, Theories and Frameworks

Which of the following best explains why 'board independence' is considered a governance safeguard?

  1. Independent directors are less likely to be captured by management and can challenge executive proposals objectively. Correct answer.
  2. Independent directors are legally liable for all company debts.
  3. Independent directors bring external expertise that always improves profitability.
  4. Independent directors replace the need for an external audit.

Explanation

Independence reduces the risk that directors will be unduly influenced by management or by a controlling shareholder, enabling more objective challenge and monitoring. The value lies in the quality of oversight, not in a guarantee of financial results.

Question 36Corporate Governance: Concepts, Theories and Frameworks

A company has a large controlling shareholder that appoints most of the board. Which governance risk is most characteristic of this ownership structure?

  1. Insufficient access to equity capital markets.
  2. Agency costs arising from a dispersed shareholder base.
  3. Excessive managerial autonomy from shareholder oversight.
  4. Expropriation of minority shareholders through related-party transactions. Correct answer.

Explanation

Where control is concentrated, the principal conflict shifts from shareholders versus managers to controlling versus minority shareholders, with related-party transactions and tunnelling as key risks. Governance safeguards therefore focus on minority protection and related-party approval.

Question 37Corporate Governance: Concepts, Theories and Frameworks

Which of the following is the primary purpose of the OECD Principles of Corporate Governance?

  1. To regulate cross-border mergers and acquisitions.
  2. To prescribe a single mandatory board structure for all member countries.
  3. To set accounting standards for listed companies.
  4. To provide a reference framework for policymakers to assess and improve their governance systems. Correct answer.

Explanation

The OECD Principles are non-binding reference principles intended to help governments and regulators evaluate and develop their corporate governance frameworks. They are not a mandatory model law or a substitute for accounting standards.

Question 38Corporate Governance: Concepts, Theories and Frameworks

A board committee reviews the company's financial statements and meets the external auditor without management present. Which governance function does this describe?

  1. The remuneration committee linking pay to performance.
  2. The nomination committee exercising its appointment role.
  3. The audit committee exercising independent oversight of financial reporting. Correct answer.
  4. The risk committee setting the company's risk appetite.

Explanation

Independent oversight of financial reporting, including private access to the external auditor, is a core audit committee function. This structure strengthens the reliability of financial information and auditor independence.

Question 39Corporate Governance: Concepts, Theories and Frameworks

A regulator argues that a bank's governance failures could destabilise the financial system and therefore imposes statutory governance requirements beyond the general code. Which rationale best explains this intervention?

  1. Banks are inherently less profitable than other companies.
  2. Systemic risk externalities justify stricter rules for financial institutions. Correct answer.
  3. Shareholders of banks are unable to vote at general meetings.
  4. The general code does not apply to any financial institution.

Explanation

Because bank failures can impose costs on depositors, taxpayers and the wider economy, systemic externalities justify more prescriptive governance requirements. This is a public-interest rationale that supplements shareholder-focused governance.

Question 40Corporate Governance: Concepts, Theories and Frameworks

A director of a listed company becomes aware that the company plans a major acquisition that will materially affect its share price. She buys shares before the announcement. Which governance principle does her conduct most directly breach?

  1. The principle of board diversity.
  2. The principle of equitable treatment of shareholders and the prohibition on insider trading. Correct answer.
  3. The principle of shareholder engagement.
  4. The principle of corporate social responsibility.

Explanation

Trading on material non-public information breaches the equitable treatment of shareholders, which requires that all shareholders have equal access to information and that insiders not exploit informational advantages. Insider trading laws reinforce this principle.

Question 41Board Structure, Composition and Effectiveness

Under the CMA Sri Lanka Code of Best Practice, which committee of the board is primarily responsible for nominating new directors and evaluating board effectiveness?

  1. The Nominations Committee Correct answer.
  2. The Risk Management Committee
  3. The Related Party Transactions Review Committee
  4. The Audit Committee

Explanation

The Nominations Committee is charged with identifying and recommending candidates for board appointment and with reviewing the composition, balance and performance of the board. It also oversees succession planning for directors and senior management. The other committees serve distinct oversight functions.

Question 42Board Structure, Composition and Effectiveness

Which concept describes the independence of mind a director must display when assessing matters objectively, free from undue influence by management or a dominant shareholder?

  1. Collective responsibility
  2. Board diversity
  3. Executive accountability
  4. Independence of judgement Correct answer.

Explanation

Independence of judgement refers to a director's ability to form objective views and exercise unbiased judgement in board deliberations. It is distinct from the formal status of being an independent non-executive director, since a director may hold that title yet still be swayed. Governance codes emphasise that independence must be demonstrated in conduct, not merely declared.

Question 43Board Structure, Composition and Effectiveness

A board has nine directors. To satisfy a typical best-practice expectation that at least one-third of the board be independent non-executive directors, what is the minimum number of independent directors required?

  1. Five
  2. Three Correct answer.
  3. Two
  4. Four

Explanation

One-third of nine directors is three, so a minimum of three independent non-executive directors satisfies the benchmark. The calculation should be rounded up where the total does not divide evenly. This ensures independent voices can influence deliberations meaningfully.

Question 44Board Structure, Composition and Effectiveness

Which statement best describes the governance principle of the separation of the roles of chairperson and chief executive officer?

  1. It guarantees that the company will avoid all conflicts of interest among directors
  2. It transfers responsibility for strategy formulation from the board to the chairperson
  3. It prevents concentration of power in one individual and strengthens board oversight of management Correct answer.
  4. It removes the need for independent non-executive directors on the board

Explanation

Separating the chair and CEO roles ensures that the person leading the board is distinct from the person running the business, preserving an effective check on management. This division supports objective oversight and clearer accountability. It does not eliminate conflicts entirely nor reduce the need for independent directors.

Question 45Board Structure, Composition and Effectiveness

What is the principal purpose of a board charter?

  1. To record the minutes of each board meeting
  2. To list the company's principal competitors and market position
  3. To document the board's role, authority, composition and operating procedures Correct answer.
  4. To set the annual remuneration of the external auditor

Explanation

A board charter is a formal document defining the board's responsibilities, delegated authority, composition and meeting protocols. It clarifies the boundary between board oversight and management execution. It is a governance instrument rather than a record of proceedings or a commercial analysis.

Question 46Board Structure, Composition and Effectiveness

Which of the following best describes the role of a non-executive director on a listed company board?

  1. To represent the interests of a single major shareholder exclusively
  2. To provide independent oversight and challenge management on strategy and performance Correct answer.
  3. To prepare the company's statutory financial statements
  4. To manage the day-to-day operations of a business division

Explanation

Non-executive directors contribute independent perspective, scrutinise management performance and participate in key board decisions without executive operational duties. They are expected to act in the interests of the company as a whole. Executive functions and financial statement preparation rest with management.

Question 47Board Structure, Composition and Effectiveness

Why do governance codes recommend that boards conduct regular performance evaluations of the board, its committees and individual directors?

  1. To identify weaknesses and drive continuous improvement in board effectiveness Correct answer.
  2. To replace the need for an annual audit of the financial statements
  3. To satisfy a legal requirement that guarantees higher share prices
  4. To determine the dividend policy for the coming year

Explanation

Board evaluation is a developmental tool that surfaces gaps in skills, processes and dynamics so that composition and practices can be improved. It supports accountability and continuous enhancement of board performance. It is not a substitute for audit nor a mechanism for setting distributions.

Question 48Board Structure, Composition and Effectiveness

A director is appointed to fill a casual vacancy between annual general meetings. Under typical governance practice, what must happen at the next general meeting?

  1. The director automatically serves the full remaining term without shareholder approval
  2. The director must resign immediately after the meeting concludes
  3. The director must retire and seek election or re-election by shareholders Correct answer.
  4. The director's appointment must be ratified only by the Audit Committee

Explanation

Directors appointed to fill casual vacancies are generally required to retire and offer themselves for election at the next general meeting so that shareholders can confirm the appointment. This preserves shareholder authority over board membership. Appointment by the board alone is treated as interim.

Question 49Board Structure, Composition and Effectiveness

Which factor would most likely undermine a director's claim to be independent?

  1. Having previously worked for an unrelated company in a different industry
  2. Holding a professional qualification in accounting
  3. Residing in a different province from the company's head office
  4. Having served on the board for more than nine consecutive years Correct answer.

Explanation

Long tenure is widely recognised as a threat to independence because familiarity and personal relationships can erode objectivity over time. Many codes specify a tenure threshold beyond which independence is presumed compromised. Qualifications, residence and prior unrelated employment do not ordinarily affect independence.

Question 50Board Structure, Composition and Effectiveness

The board of a listed company wishes to strengthen its oversight of financial reporting and internal control. Which committee structure is most appropriate?

  1. An Audit Committee composed mainly of independent non-executive directors with financial expertise Correct answer.
  2. A committee composed exclusively of executive directors chaired by the finance director
  3. A committee chaired by the chief executive officer with management as members
  4. A committee of major shareholders convened before each annual general meeting

Explanation

An Audit Committee drawn mainly from independent non-executive directors, with relevant financial experience, provides objective scrutiny of reporting and controls. Independence from management is essential to effective challenge. Committees dominated by executives or management cannot provide that oversight.