CME Professional Ethics & Governance 2 — Questions and Answers
Question 1: A board director owns stock in a company that is bidding on a contract with the organization. What is the MOST appropriate immediate action?
- Vote against the contract to avoid any appearance of bias
- Disclose the conflict and recuse herself from the vote (Correct answer)
- Sell the stock before the vote takes place
- Delegate the decision to a subordinate manager
Correct answer: Disclose the conflict and recuse herself from the vote
Disclosing the conflict and recusing oneself from the decision is the standard governance response to a director conflict of interest.
Question 2: Which governance principle holds that management is accountable to shareholders and other stakeholders for organizational outcomes?
- Transparency
- Accountability (Correct answer)
- Stewardship
- Fairness
Correct answer: Accountability
Accountability is the governance principle requiring that those entrusted with authority answer for their decisions and outcomes to principals.
Question 3: An executive discovers that a prior quarterly report contained a material error that benefited the company's stock price. The BEST ethical course of action is to:
- Correct the error quietly in the next quarterly filing
- Immediately disclose the error to regulators and the board (Correct answer)
- Consult legal counsel before deciding whether disclosure is required
- Monitor the situation to determine if the error had lasting impact
Correct answer: Immediately disclose the error to regulators and the board
Material misstatements in public filings require prompt disclosure to regulators and the board under securities law and ethical obligations.
Question 4: The 'tone at the top' concept in organizational ethics primarily refers to:
- The ethical standards written into the corporate code of conduct
- Senior leadership's visible behavior setting the cultural standard for integrity (Correct answer)
- The ethics training program delivered to new employees
- Regulatory compliance requirements imposed by external authorities
Correct answer: Senior leadership's visible behavior setting the cultural standard for integrity
Tone at the top describes how senior leaders' own conduct and stated values shape the organization's ethical culture more than written policies.
Question 5: A company's audit committee is BEST described as serving which primary function?
- Setting executive compensation levels
- Overseeing financial reporting integrity and internal controls (Correct answer)
- Approving major strategic acquisitions
- Managing day-to-day compliance training programs
Correct answer: Overseeing financial reporting integrity and internal controls
The audit committee provides board-level oversight of financial reporting, external auditors, and internal control systems.
Question 6: Under the stakeholder theory of governance, management's primary obligation is to:
- Maximize short-term shareholder returns above all other considerations
- Balance the interests of shareholders, employees, customers, communities, and other affected parties (Correct answer)
- Follow the directives of the largest institutional shareholders
- Comply strictly with government regulations and nothing more
Correct answer: Balance the interests of shareholders, employees, customers, communities, and other affected parties
Stakeholder theory holds that corporations owe duties to all parties materially affected by their decisions, not shareholders alone.
Question 7: Which of the following BEST illustrates a breach of the duty of loyalty for a corporate officer?
- Making a business decision that later proves unprofitable
- Steering a contract to a supplier in which the officer has an undisclosed ownership interest (Correct answer)
- Disagreeing with the board's strategic direction in a board meeting
- Hiring a qualified candidate who is a personal acquaintance
Correct answer: Steering a contract to a supplier in which the officer has an undisclosed ownership interest
Directing corporate business to a personally owned supplier without disclosure is a classic self-dealing breach of the duty of loyalty.
CME Professional Ethics & Governance 2
A board director owns stock in a company that is bidding on a contract with the organization.
What is the MOST appropriate immediate action?