Medium2 marksMultiple Choice

Syllabus B: Organisational structure, culture, governance and sustainabilitySyllabus BCorporate GovernanceNEDs

ACCA · Question 08 · Syllabus B: Organisational structure, culture, governance and sustainability

Section A

Oceanic Legacy is a large, family-owned shipping firm preparing for an IPO. To comply with corporate governance codes, they are appointing Non-Executive Directors (NEDs). Which of the following is the MOST critical requirement for these new NEDs to fulfill their governance role effectively?

Answer options:

They must have previous experience working in the shipping industry.

They must be completely independent of the executive management and the founding family.

They must hold a significant number of shares in Oceanic Legacy to align their interests.

They must take over the daily operational decision-making from the family.

How to approach this question

Recall the primary purpose of an NED in corporate governance: to provide independent oversight and constructive challenge to the executive board.

Full Answer

B.They must be completely independent of the executive management and the founding family.✓ Correct

Corporate governance principles emphasize that Non-Executive Directors (NEDs) must bring independent judgment to bear on issues of strategy, performance, and resources. To do this effectively, especially in a family-owned firm transitioning to public, they must be strictly independent of the executives and founders.

Common mistakes

Assuming NEDs must be industry experts. While beneficial, cross-industry experience is common, but independence is legally/ethically mandatory for governance compliance.

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