CFE Corporate Governance 3 — Questions and Answers
Question 1: When a board member sits on the boards of two competing companies, this is known as a:
- Cross-directorship
- Interlocking directorate (Correct answer)
- Competitive conflict
- Dual mandate
Correct answer: Interlocking directorate
An interlocking directorate occurs when a director serves on the boards of competing firms, raising antitrust and conflict-of-interest concerns.
Question 2: Under the FCPA, which of the following is NOT a permissible defense against bribery charges?
- The payment was required by local written law
- The payment was a reasonable bona fide promotional expense
- Competitors in the market routinely make similar payments (Correct answer)
- The payment constituted a facilitating payment for routine government action
Correct answer: Competitors in the market routinely make similar payments
The fact that competitors also pay bribes is not a valid defense under the FCPA; only the local law and facilitating payment defenses are recognized.
Question 3: Which internal control framework is most widely used by U.S. public companies for SOX Section 404 compliance?
- COBIT
- ISO 31000
- COSO Internal Control — Integrated Framework (Correct answer)
- NIST Cybersecurity Framework
Correct answer: COSO Internal Control — Integrated Framework
The COSO Internal Control — Integrated Framework is the standard used by most U.S. public companies to assess and report on internal controls under SOX 404.
Question 4: A board that rubber-stamps all management proposals without independent scrutiny is exhibiting:
- Sound fiduciary oversight
- Board capture (Correct answer)
- Active stewardship
- Effective risk governance
Correct answer: Board capture
Board capture describes a situation where management effectively controls the board, undermining independent oversight.
Question 5: Which of the following best describes the concept of 'tone at the top' in corporate governance?
- The formality of written ethics policies distributed to employees
- The ethical climate established by senior leadership through their actions and decisions (Correct answer)
- Mandatory ethics training programs for all staff
- The severity of penalties imposed for policy violations
Correct answer: The ethical climate established by senior leadership through their actions and decisions
Tone at the top refers to the ethical environment senior leaders create through their own behavior, which shapes organizational culture more than written policies alone.
Question 6: Which duty requires corporate directors to act in the best interest of the corporation rather than for personal gain?
- Duty of care
- Duty of loyalty (Correct answer)
- Duty of disclosure
- Duty of candor
Correct answer: Duty of loyalty
The duty of loyalty requires directors to put the corporation's interests above their own personal interests and to avoid conflicts of interest.
Question 7: An independent director is best described as someone who:
- Has served on the board for more than ten years
- Has no material relationship with the company outside the directorship (Correct answer)
- Owns a significant equity stake in the company
- Was nominated by the founding family of the corporation
Correct answer: Has no material relationship with the company outside the directorship
Independence requires the absence of material relationships (financial, personal, or professional) that could compromise a director's objective judgment.
CFE Corporate Governance 3
When a board member sits on the boards of two competing companies, this is known as a: