CCCP Corporate Governance & Ethical Practices 3 — Questions and Answers
Question 1: The 'duty of loyalty' requires corporate directors to:
- Attend all board meetings without exception
- Prioritize the corporation's interests over their personal interests (Correct answer)
- Disclose all board deliberations to shareholders quarterly
- Maintain confidentiality about competitors' practices
Correct answer: Prioritize the corporation's interests over their personal interests
The duty of loyalty obligates directors to act in the corporation's best interest and avoid self-dealing or conflicts of interest.
Question 2: A compliance officer discovers that a senior vice president has been submitting fraudulent expense reports. The MOST appropriate immediate action is to:
- Confront the SVP directly before escalating to avoid false accusations
- Consult with HR and legal counsel, then follow the incident response protocol (Correct answer)
- Anonymously report the issue to the external auditor
- Issue a company-wide reminder about expense reporting policies
Correct answer: Consult with HR and legal counsel, then follow the incident response protocol
Proper incident response requires coordination with HR and legal counsel to ensure legal obligations are met and the investigation is protected.
Question 3: Which body has primary responsibility for overseeing a public company's financial reporting integrity?
- The compensation committee
- The nominating and governance committee
- The audit committee (Correct answer)
- The executive committee
Correct answer: The audit committee
The audit committee is responsible for overseeing financial reporting, internal controls, and the relationship with external auditors.
Question 4: A 'clawback' policy in executive compensation is designed to:
- Recover compensation paid based on subsequently restated financial results (Correct answer)
- Prevent executives from selling shares during blackout periods
- Require board approval before bonuses are paid
- Cap total annual compensation at a fixed multiple of median worker pay
Correct answer: Recover compensation paid based on subsequently restated financial results
Clawback policies allow companies to recoup incentive pay when financial results that triggered the pay are later found to be inaccurate.
Question 5: Under Sarbanes-Oxley Section 302, the CEO and CFO must certify that:
- The company has zero material weaknesses in internal controls
- They have reviewed the report and it does not contain materially false statements (Correct answer)
- All board members have read and approved the financial statements
- External auditors have confirmed accuracy of all disclosures
Correct answer: They have reviewed the report and it does not contain materially false statements
SOX 302 requires the CEO and CFO to personally certify that the quarterly or annual report does not contain material misstatements.
Question 6: An ethics hotline is MOST valuable as a compliance tool when it:
- Is managed exclusively by the internal audit team
- Guarantees complete anonymity and protects reporters from retaliation (Correct answer)
- Requires reporters to provide their name for follow-up purposes
- Is available only to employees in senior management roles
Correct answer: Guarantees complete anonymity and protects reporters from retaliation
Anonymity and non-retaliation protections are essential for employees to feel safe reporting misconduct without fear of reprisal.
Question 7: The concept of 'stakeholder capitalism' differs from traditional shareholder primacy by arguing that corporations should:
- Maximize quarterly earnings per share as the sole objective
- Balance the interests of shareholders, employees, customers, communities, and suppliers (Correct answer)
- Transfer decision-making authority from boards to employee councils
- Eliminate dividends and reinvest all profits into ESG initiatives
Correct answer: Balance the interests of shareholders, employees, customers, communities, and suppliers
Stakeholder capitalism holds that companies create long-term value by considering the interests of all stakeholders, not only shareholders.
CCCP Corporate Governance & Ethical Practices 3
The 'duty of loyalty' requires corporate directors to: