CEP Governance Structures & Ethical Practices 4 — Questions and Answers
Question 1: The Sarbanes-Oxley Act (SOX) Section 302 requires which of the following in US public companies?
- Annual ESG disclosure in the proxy statement
- CEO and CFO personal certification of financial report accuracy (Correct answer)
- Mandatory board diversity targets
- Quarterly sustainability audits
Correct answer: CEO and CFO personal certification of financial report accuracy
SOX Section 302 requires CEOs and CFOs to personally certify the accuracy and completeness of financial reports filed with the SEC.
Question 2: Which concept describes the risk that a company's governance decisions may create short-term profits but long-term ESG liabilities?
- Greenwashing
- Short-termism (Correct answer)
- Regulatory arbitrage
- Agency problem
Correct answer: Short-termism
Short-termism occurs when governance incentives prioritize immediate financial gains over sustainable long-term value creation, often at the expense of ESG performance.
Question 3: What is the role of an ESG ratings agency in corporate governance?
- To audit financial statements for compliance
- To provide independent assessments of companies' ESG performance for investors (Correct answer)
- To set binding ESG standards for regulators
- To certify ESG reports as GAAP-compliant
Correct answer: To provide independent assessments of companies' ESG performance for investors
ESG ratings agencies like MSCI and Sustainalytics provide independent assessments of corporate ESG performance to help investors make informed decisions.
Question 4: A board lacks members with climate science or environmental expertise when overseeing a carbon-intensive company. This represents what governance gap?
- Board size deficiency
- Competency misalignment or skills gap (Correct answer)
- Independence deficit
- Compensation misalignment
Correct answer: Competency misalignment or skills gap
A competency or skills gap occurs when the board lacks expertise relevant to the material risks the company faces, such as climate risk for energy companies.
Question 5: What does 'shareholder primacy' theory hold as the primary duty of corporate governance?
- Balancing the interests of all stakeholders equally
- Maximizing long-term shareholder value above all other considerations (Correct answer)
- Ensuring regulatory compliance across all jurisdictions
- Prioritizing employee welfare in business decisions
Correct answer: Maximizing long-term shareholder value above all other considerations
Shareholder primacy theory, associated with Milton Friedman, holds that management's primary duty is to maximize returns for shareholders.
Question 6: Under the UK Corporate Governance Code, what is the recommended minimum proportion of independent non-executive directors on the board of a FTSE 350 company?
- One-quarter
- One-third
- Half (Correct answer)
- Two-thirds
Correct answer: Half
The UK Corporate Governance Code recommends that at least half of the board (excluding the chair) should comprise independent non-executive directors for FTSE 350 companies.
Question 7: Which best describes 'stewardship' in the context of institutional investor governance?
- Managing a company's day-to-day environmental operations
- Active engagement by investors to influence corporate behavior on ESG issues (Correct answer)
- Preparation of sustainability reports for regulatory submission
- Board oversight of environmental compliance programs
Correct answer: Active engagement by investors to influence corporate behavior on ESG issues
Stewardship refers to institutional investors actively engaging with companies through voting, dialogue, and escalation to promote better long-term governance and ESG practices.
CEP Governance Structures & Ethical Practices 4
The Sarbanes-Oxley Act (SOX) Section 302 requires which of the following in US public companies?