CIMA BA4 · Chapter 6
The board of directors and board committees MCQs with Answers
10 multiple-choice questions on The board of directors and board committees for CIMA BA4 Fundamentals of Ethics, Corporate Governance and Business Law. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following is a key role of non-executive directors?
- A) To run the day-to-day operations of the company
- B) To prepare the company's monthly management accounts
- C) To scrutinise and constructively challenge the performance of management
- D) To act as the company's external auditor
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Answer: C) To scrutinise and constructively challenge the performance of management
Non-executive directors contribute an independent view, constructively challenge strategy and scrutinise management performance, as well as overseeing risk, remuneration and appointments. Day-to-day operations and management accounts are executive responsibilities, and external audit must be independent of the board.
Question 2
Why do corporate governance codes recommend that the roles of chair and chief executive should not be held by the same individual?
- A) To avoid unfettered powers of decision being concentrated in one person
- B) To reduce the total salary cost of the board
- C) Because the law prohibits a single person from holding two offices
- D) Because the chief executive must always be a non-executive director
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Answer: A) To avoid unfettered powers of decision being concentrated in one person
Splitting the roles ensures a clear division of responsibility between running the board (chair) and running the business (chief executive), so no one individual has unchecked power. It is a governance recommendation rather than a general legal prohibition, and the chief executive is an executive director.
Question 3
Which board committee normally takes the lead in reviewing the integrity of the financial statements and the relationship with the external auditor?
- A) Remuneration committee
- B) Nomination committee
- C) Audit committee
- D) Executive committee
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Answer: C) Audit committee
The audit committee monitors the integrity of financial statements, reviews internal controls and the internal audit function, and oversees the appointment, independence and effectiveness of the external auditor. Remuneration and nomination committees deal with pay and board appointments respectively.
Question 4
Which of the following would most likely cause a non-executive director to be regarded as NOT independent?
- A) He holds a non-executive role in an unrelated company
- B) He receives a fixed fee for his services as a non-executive director
- C) He has extensive experience in the company's industry
- D) He was an executive employee of the company until two years ago
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Answer: D) He was an executive employee of the company until two years ago
Governance codes treat recent employment by the company as a circumstance likely to impair independence, because the director may be too close to current management; the UK Corporate Governance Code, for example, refers to having been an employee of the company within the last five years. Holding other unrelated roles, receiving a fixed fee and having industry experience do not of themselves impair independence.
Question 5
What is the main purpose of a remuneration committee composed of independent non-executive directors?
- A) To set the pay of all employees in the company
- B) To ensure that no director is involved in deciding his or her own remuneration
- C) To approve the company's annual budget
- D) To appoint the external auditor
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Answer: B) To ensure that no director is involved in deciding his or her own remuneration
A key governance principle is that no director should decide their own pay. The remuneration committee of independent non-executives sets executive director remuneration policy, aiming to link it to long-term performance. Employee pay generally, budgets and auditor appointment are outside its core role.
Question 6
Which of the following is a primary responsibility of the nomination committee?
- A) Leading the process for board appointments and planning succession
- B) Monitoring the effectiveness of the internal audit function
- C) Determining the dividend to be paid to shareholders
- D) Approving the external auditor's fee
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Answer: A) Leading the process for board appointments and planning succession
The nomination committee leads the process for appointments to the board, considers the balance of skills, experience and diversity, and plans orderly succession. Internal audit oversight and auditor fees belong to the audit committee, and dividends are a board decision.
Question 7
Which of the following is generally regarded as good practice for the remuneration of non-executive directors?
- A) Fees reflecting time commitment and responsibilities, without performance-related elements such as share options
- B) Large bonuses linked to annual profit targets
- C) Share options that vest when the share price rises
- D) No payment at all, so that they remain fully independent
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Answer: A) Fees reflecting time commitment and responsibilities, without performance-related elements such as share options
Governance codes recommend that non-executive remuneration reflects time commitment and responsibilities and should not include share options or other performance-related elements, as these could compromise independence. Paying nothing would make it hard to attract capable people and is not required.
Question 8
Why are board evaluations recommended by corporate governance codes?
- A) To determine the market value of the company's shares
- B) To review the performance of the board, its committees and individual directors and identify improvements
- C) To decide which shareholders may vote at the annual general meeting
- D) To replace the need for external audit
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Answer: B) To review the performance of the board, its committees and individual directors and identify improvements
Formal and rigorous evaluation of the board, its committees, the chair and individual directors helps identify weaknesses in composition, skills or processes and supports re-election decisions. It has nothing to do with share valuation, voting rights or external audit.
Question 9
A listed company's audit committee consists of the finance director, the chief executive and one independent non-executive director. Which criticism is most valid?
- A) The committee is too independent, because it should be chaired by the finance director
- B) There is no problem, because the finance director has the most relevant financial expertise
- C) The committee should include the external audit partner as a voting member
- D) The committee lacks independence, because it should be made up of independent non-executive directors
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Answer: D) The committee lacks independence, because it should be made up of independent non-executive directors
Governance codes expect the audit committee of a listed company to comprise independent non-executive directors, at least one with recent and relevant financial experience. Executives on the committee would be overseeing their own work, a self-review problem. The external auditor attends to report but must not be a member, to preserve independence.
Question 10
The senior independent director (SID) of a listed company is most likely to be expected to do which of the following?
- A) Run the company's operations when the chief executive is absent
- B) Chair the audit committee and sign the audit report
- C) Act as a sounding board for the chair and an intermediary for other directors and shareholders when normal channels have failed
- D) Approve all related-party transactions without board involvement
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Answer: C) Act as a sounding board for the chair and an intermediary for other directors and shareholders when normal channels have failed
The SID provides a sounding board for the chair, serves as an intermediary for the other directors and is available to shareholders when contact through the chair or executives has failed or is inappropriate. The SID also typically leads the evaluation of the chair. Running operations, signing audit reports and bypassing the board are not SID functions.