1
Module 3: Governance Concepts (KE Questions) 2. Which of the following non-executive directors is most
likely to be considered as ‘independent’?
1. Sally is the CEO of Entity A and she is currently
considering two tender applications from competing A. A director who was previously employed with the
suppliers. company 6 years ago.
B. A director who holds significant shares in the entity for
Supplier A offers a lower rate than Supplier B. However, the past 10 years.
Supplier B is a more established business with extensive C. A director who held a contract as a major supplier for the
experience. The CEO of Supplier A is Sally’s brother-in-law. entity two years ago.
D. A director who was on the board for 11 years since the
Sally decides to award the tender to Supplier A on the basis date of his first election.
that its quoted rates were lower.
Answer:
If there were subsequently negative outcomes relating to the A. A director who was previously employed with the company
contract with Supplier A, would Sally be able to rely on the 6 years ago.
Business Judgment Rule? The UK FRC code provides guidance for the consideration of
director independence. One of the factors is whether a director
A. Yes, because she acted in good faith and in the best was employed within the past five years. The first option relates to
interests of the company. a director who was employed 6 years ago and so this would mean
B. No, because there is a conflict of interest as she is that such a director is likely to be considered as independent.
related to the CEO of Supplier A.
C. No, because she was not appropriately informed about All the other options relate to situation where the director's
experience and qualifications of Supplier A. independence would be questioned.
D. Yes, because a reasonable third person would also likely
award the contract to the supplier with a lowest rates. Module: 3 > Part: D > 3.11 ASX Corporate Governance Council's
Principles and Recommendations and Appendix 3.1 -
Answer: Understanding the UK FRC Corporate Governance Code > Also
B. No, because there is a conflict of interest as she is related refer to: Module 3 Part A - 3.2 Directors and Other Officers -
to the CEO of Supplier A. Director Independence (Page 128) > Page: 181,200
B is correct because in order for a director to rely on the business
judgment rule (found in section 180(2)), all of the following criteria 3. Dion is not an employee of Entity A but serves as a director
must be satisfied: - the director acted in good faith; - there was no on the board. He does not have significant relationships with
conflict of interest; - the director was appropriately informed; and - the other directors of the company. Dion holds 30 per cent of
a reasonably informed third person would have acted in the same Entity A’s shares. Other than this, he does not have a material
way. business relationship with Entity A.
The fact that Sally is related to the CEO of Supplier A means that Which of the following best describes Dion?
she has a conflict of interest and she should not have been
involved in the decision-making process. Thus, she fails this A. Executive director
criterion and cannot rely on this. B. Independent director
C. Non-independent director
Note that rules like this are often called safe-harbor rules (review D. Non-independent non-executive director
the video in guided learning for more information on this). There is
also another safe-harbor rule specifically linked to insolvent Answer:
trading. Safe harbor is the general name for rules that provide D. Non-independent non-executive director
protection. The fact that Dion is not employed with Entity A but is a director on
the board makes him a non-executive director. However, Dion
Module: 3 > Part: A > 3.2 Directors and other officers > Page: 122 holds 30 per cent of Entity A's shares which is very significant and
thus, he is not independent. Accordingly, the best description for
Dion is a non-independent non-executive director.
Module: 3 > Part: A > 3.2 Directors and other officers > Page: 127-
128
Module 3: Governance Concepts (KE Questions) 2. Which of the following non-executive directors is most
likely to be considered as ‘independent’?
1. Sally is the CEO of Entity A and she is currently
considering two tender applications from competing A. A director who was previously employed with the
suppliers. company 6 years ago.
B. A director who holds significant shares in the entity for
Supplier A offers a lower rate than Supplier B. However, the past 10 years.
Supplier B is a more established business with extensive C. A director who held a contract as a major supplier for the
experience. The CEO of Supplier A is Sally’s brother-in-law. entity two years ago.
D. A director who was on the board for 11 years since the
Sally decides to award the tender to Supplier A on the basis date of his first election.
that its quoted rates were lower.
Answer:
If there were subsequently negative outcomes relating to the A. A director who was previously employed with the company
contract with Supplier A, would Sally be able to rely on the 6 years ago.
Business Judgment Rule? The UK FRC code provides guidance for the consideration of
director independence. One of the factors is whether a director
A. Yes, because she acted in good faith and in the best was employed within the past five years. The first option relates to
interests of the company. a director who was employed 6 years ago and so this would mean
B. No, because there is a conflict of interest as she is that such a director is likely to be considered as independent.
related to the CEO of Supplier A.
C. No, because she was not appropriately informed about All the other options relate to situation where the director's
experience and qualifications of Supplier A. independence would be questioned.
D. Yes, because a reasonable third person would also likely
award the contract to the supplier with a lowest rates. Module: 3 > Part: D > 3.11 ASX Corporate Governance Council's
Principles and Recommendations and Appendix 3.1 -
Answer: Understanding the UK FRC Corporate Governance Code > Also
B. No, because there is a conflict of interest as she is related refer to: Module 3 Part A - 3.2 Directors and Other Officers -
to the CEO of Supplier A. Director Independence (Page 128) > Page: 181,200
B is correct because in order for a director to rely on the business
judgment rule (found in section 180(2)), all of the following criteria 3. Dion is not an employee of Entity A but serves as a director
must be satisfied: - the director acted in good faith; - there was no on the board. He does not have significant relationships with
conflict of interest; - the director was appropriately informed; and - the other directors of the company. Dion holds 30 per cent of
a reasonably informed third person would have acted in the same Entity A’s shares. Other than this, he does not have a material
way. business relationship with Entity A.
The fact that Sally is related to the CEO of Supplier A means that Which of the following best describes Dion?
she has a conflict of interest and she should not have been
involved in the decision-making process. Thus, she fails this A. Executive director
criterion and cannot rely on this. B. Independent director
C. Non-independent director
Note that rules like this are often called safe-harbor rules (review D. Non-independent non-executive director
the video in guided learning for more information on this). There is
also another safe-harbor rule specifically linked to insolvent Answer:
trading. Safe harbor is the general name for rules that provide D. Non-independent non-executive director
protection. The fact that Dion is not employed with Entity A but is a director on
the board makes him a non-executive director. However, Dion
Module: 3 > Part: A > 3.2 Directors and other officers > Page: 122 holds 30 per cent of Entity A's shares which is very significant and
thus, he is not independent. Accordingly, the best description for
Dion is a non-independent non-executive director.
Module: 3 > Part: A > 3.2 Directors and other officers > Page: 127-
128
