ACCA AS Ethics and Corporate Governance 2 — Questions and Answers
Question 1: Which of the following is a primary function of an audit committee in a listed company?
- Setting executive remuneration packages
- Overseeing the integrity of financial reporting and reviewing internal controls (Correct answer)
- Approving major capital expenditure projects
- Managing the company's day-to-day operational risk
Correct answer: Overseeing the integrity of financial reporting and reviewing internal controls
The audit committee oversees financial reporting integrity, reviews internal controls, and manages the relationship with external and internal auditors.
Question 2: A remuneration committee in a listed UK company is primarily responsible for:
- Determining the pay of non-executive directors only
- Setting remuneration policy and packages for executive directors to attract, retain, and motivate them (Correct answer)
- Administering the company's employee pension scheme
- Approving all salary increases across the entire organisation
Correct answer: Setting remuneration policy and packages for executive directors to attract, retain, and motivate them
The remuneration committee sets executive director remuneration policy and specific packages to ensure alignment with shareholder interests and avoid conflicts of interest.
Question 3: Which corporate governance theory holds that managers act as trustworthy stewards of corporate assets and naturally align their interests with shareholders?
- Agency theory
- Stewardship theory (Correct answer)
- Stakeholder theory
- Transaction cost theory
Correct answer: Stewardship theory
Stewardship theory holds that managers are intrinsically motivated to act in the best interests of the organisation and its owners, viewing themselves as stewards rather than self-interested agents.
Question 4: What is the primary purpose of a nomination committee on a listed company board?
- Nominating the external auditors for shareholder approval at the AGM
- Leading the process for board appointments and succession planning (Correct answer)
- Setting the agenda and business for the annual general meeting
- Approving all senior management promotions below board level
Correct answer: Leading the process for board appointments and succession planning
The nomination committee leads board appointment processes, evaluates board composition, and oversees succession planning to ensure the board has the right mix of skills and experience.
Question 5: Under the UK Corporate Governance Code, which combination of roles should NOT be held by the same individual?
- Chief Executive Officer and Chief Financial Officer
- Chair and Chief Executive Officer (Correct answer)
- Senior Independent Director and Non-Executive Director
- Chief Financial Officer and Head of Internal Audit
Correct answer: Chair and Chief Executive Officer
The UK Corporate Governance Code explicitly requires separation of the chair and CEO roles to avoid inappropriate concentration of power and ensure effective board accountability.
Question 6: 'Tunnelling' in the context of corporate governance refers to:
- Whistleblowers using confidential channels to report misconduct
- The transfer of assets or profits from a company to its controlling shareholders at the expense of minority shareholders (Correct answer)
- Secret arrangements between board members to manipulate share prices
- Moving corporate headquarters to low-tax jurisdictions
Correct answer: The transfer of assets or profits from a company to its controlling shareholders at the expense of minority shareholders
Tunnelling is the expropriation of minority shareholder value through the extraction of resources from a company by its controlling shareholders for personal gain.
Question 7: In the context of UK corporate governance, institutional investors such as pension funds and insurance companies are significant because:
- They are prohibited from voting at company AGMs under the Companies Act 2006
- They hold large concentrated shareholdings and can exert significant influence over board accountability (Correct answer)
- They are exempt from all disclosure requirements under FCA rules
- They are required by law to vote against all executive pay resolutions
Correct answer: They hold large concentrated shareholdings and can exert significant influence over board accountability
Institutional investors hold large pooled investments and, through the UK Stewardship Code, are encouraged to engage actively with companies to promote good governance and long-term value creation.
ACCA AS Ethics and Corporate Governance 2
Which of the following is a primary function of an audit committee in a listed company?