CFA Level ICorporate IssuersMedium
Meridian Corp's board of directors consists of nine members: three are independent directors with no material ties to the company, four are affiliated directors (including former executives and a family member of the founder), and two are current company executives, including the CEO who also serves as board chair. Which of the following best characterizes this board structure from a corporate governance perspective?
- AThe board is majority independent, which minimizes conflicts of interest.
- BThe board is majority non-independent, which raises concerns about the board's ability to objectively oversee management.
- CThe composition is balanced and represents best-practice governance.
- DBecause executives hold only two seats, management influence over the board is negligible.
Show answer & explanationAnswer & explanation
Correct answer: B. The board is majority non-independent, which raises concerns about the board's ability to objectively oversee management.
Only 3 of 9 directors (33%) are independent, while 6 of 9 (67%) are affiliated or executive directors, forming a non-independent majority. Combined with CEO/chair duality, this structure weakens the board's capacity to independently monitor and challenge management.
Why the other options are wrong
- A. Independent directors are a minority (3 of 9), not a majority.
- C. This composition, with CEO duality and a non-independent majority, is not considered best practice.
- D. Affiliated directors' ties to management can extend influence well beyond the two executive seats.
Board Independence
The proportion of directors who have no material financial, family, or employment relationship with the company, enabling more objective oversight of management.
- Independent directors lack material ties to the company or its executives
- A majority-independent board is generally viewed as stronger governance practice
- CEO/chair duality can further reduce the board's independence from management
Memory trick: More insiders on the board means less outside watchdog power