CFE Corporate Governance 2 — Questions and Answers
Question 1: Which board committee is primarily responsible for overseeing the internal audit function and financial reporting integrity?
- Compensation committee
- Audit committee (Correct answer)
- Nominating committee
- Risk committee
Correct answer: Audit committee
The audit committee oversees internal audit, external audit relationships, and financial reporting to ensure integrity.
Question 2: Under the Sarbanes-Oxley Act, the CEO and CFO must certify financial statements under which section?
- Section 201
- Section 301
- Section 302 (Correct answer)
- Section 404
Correct answer: Section 302
Section 302 of SOX requires the CEO and CFO to personally certify the accuracy of financial reports.
Question 3: A 'say-on-pay' vote allows shareholders to express their opinion on which corporate matter?
- Executive compensation packages (Correct answer)
- Dividend distribution policies
- Board director elections
- External auditor selection
Correct answer: Executive compensation packages
Say-on-pay votes are non-binding shareholder votes on executive compensation arrangements.
Question 4: Which concept describes the separation of the roles of board chair and chief executive officer?
- Dual mandate
- Leadership duality
- Board independence
- Leadership separation (Correct answer)
Correct answer: Leadership separation
Leadership separation (splitting the chair and CEO roles) is considered a best practice for strengthening board oversight.
Question 5: The 'business judgment rule' protects directors from liability when they:
- Make decisions that benefit only majority shareholders
- Act on informed, good-faith business decisions (Correct answer)
- Prioritize personal gain in arm's-length transactions
- Delegate all decisions to management without review
Correct answer: Act on informed, good-faith business decisions
The business judgment rule shields directors who act in good faith, on an informed basis, and in the honest belief that the action is in the best interest of the company.
Question 6: Which governance mechanism best addresses the principal-agent problem between shareholders and management?
- Increasing the number of board meetings
- Aligning executive pay with long-term shareholder value (Correct answer)
- Reducing the external auditor's scope
- Consolidating decision-making authority in the CEO
Correct answer: Aligning executive pay with long-term shareholder value
Equity-based compensation and long-term incentives align management interests with shareholder interests, mitigating the principal-agent conflict.
Question 7: A 'poison pill' defense mechanism is designed to protect a company against:
- Internal financial fraud by executives
- Hostile takeover attempts (Correct answer)
- Regulatory non-compliance penalties
- Employee whistleblower claims
Correct answer: Hostile takeover attempts
A poison pill (shareholder rights plan) dilutes a hostile acquirer's stake, making a takeover prohibitively expensive.
CFE Corporate Governance 2
Which board committee is primarily responsible for overseeing the internal audit function and financial reporting integrity?