StudyHub Corporate governance mcq

1. Lynne is the finance director of ABC Company and a non-executive director of DEF Company. She serves on the remuneration committee and the risk committee of DEF Company.

Rodney is the chief executive officer of DEF Company and a non-executive director of ABC Company. He is a member of ABC Company’s audit committee and remuneration committee.

Which of the following statements is correct in relation to recognised best practice in corporate governance?

A.Lynne should not be a member of the risk committee as she is a non-executive director and will know nothing about operational risks

B.Rodney should not be a non-executive director of any company as he is DEF Company’s chief executive officer

C.Neither Lynne nor Rodney should be members of the respective remuneration committees

D.Neither Lynne nor Rodney should serve on any more than one standing committee
The correct answer is C.

Answer. Rodney as the chief executive officer and Lynne as the finance director would have their pay determined by a remuneration committee. This situation should preclude them from serving as members of each other’s company’s remuneration committees. The reason for this is that the situation becomes a ‘cross directorship’ where objectivity is threatened and there is a potential self-interest and familiarity threat as either or both might be inclined to promote each other’s financial interests as members of committees responsible for considering director remuneration.

Distractor A is incorrect because all board committees should include non-executive directors, and some committees should be composed entirely of non-executive directors.

Distractor B is incorrect because a chief executive officer is not prohibited from serving as a non-executive director of another company, and this is borne out in practice in many large companies.

Distractor D is the most difficult to eliminate, as some companies do try to spread the workload of directors by restricting the number of committees on which each individual serves. However, there is no legal restriction, and no universally accepted best practice, so for many companies the size of the board will mean that some non-executive directors will have to be members of more than one committee.

I could not understand the answer. I selected D as I don’t see why both can’t be members of remuneration committee of each other’s company. They do not appear to have close connection to the company nor does the question hints to collusion or relationship between them.