Best Practices Composition of the Board

CFA Level II Corporate Finance
#1

Topic Test question I am having a hard time interpreting. Below is the relevant part of the vignette.

  1. The CEO will no longer be the chairman of the board.

  2. The retired original founder of Restar will become the chairman of the board.

  3. The board will now have a majority of members that are independent.

Which changes to the board of directors is least consistent with best practices in the composition of a board?

A. Specific choice of the new chairman of the board

B. Change in the composition of the board membership

C. Change regarding the CEO

I thought the answer was B because the board should be comprised of entirely independent board members, but that is incorrect.

Reasoning Provided: Based on best practices, the chairman of a board should not be a senior executive from the firm.

I can’t tell from the reasoning provided but is this saying that the retired founder shouldn’t be the chairman of the board? Based on the little information provided I assumed the founder being chairman was fine due to him being retired and the fact that the CEO was stepping down from chairman of the board was a best practice. That leaves the makeup of the board being the least consistent with best practices. Is anyone else looking at this in a different way?

#2

Change in board membership so majority of board are independent is a good governance practice.

That the CEO should NOT be chairman of the board is also good governance practice.

So least consistent would be the Restar Chairmen (Specific choice of New chairman)

#3

Agree with CP. It’s best to answer this question by elimination. Founder could be close associate of the CEO. It’s a layer of uncertainty from the Corp Gov angle. It’s more difficult to pick issue(s) with the other two choices.

#4

I doubt this solution, the requirement of good governance is 75%+ boards should be independent not just majority. And chairman should not be the CEO or somebody connected to company, RETIRED founder hence can be the chairman IMO.