Corporate Governance And Ethics 4 — Questions and Answers
Question 1: A company that voluntarily discloses negative environmental data alongside positive results is BEST demonstrating:
- Compliance with SEC mandatory disclosure rules
- Balanced and transparent stakeholder reporting (Correct answer)
- A strategy to preempt regulatory penalties
- Marketing designed to attract ESG investors only
Correct answer: Balanced and transparent stakeholder reporting
Voluntarily disclosing both positive and negative information reflects a commitment to transparency and builds credibility with stakeholders.
Question 2: Which of the following BEST illustrates a 'related-party transaction' that requires heightened governance scrutiny?
- A company purchasing office supplies from a large retail chain
- A CEO awarding a supply contract to a company owned by their spouse (Correct answer)
- Paying dividends to all common shareholders equally
- Hiring an independent external auditor
Correct answer: A CEO awarding a supply contract to a company owned by their spouse
Related-party transactions involve a company doing business with an insider or their affiliates, creating significant conflict-of-interest risks that require board oversight.
Question 3: The 'say on pay' provisions introduced by the Dodd-Frank Act give shareholders the right to:
- Set exact salary figures for named executive officers
- Cast a non-binding advisory vote on executive compensation packages (Correct answer)
- Remove directors who approve excessive pay
- File lawsuits directly against compensation committee members
Correct answer: Cast a non-binding advisory vote on executive compensation packages
Say on pay votes are advisory and non-binding, giving shareholders a formal voice on executive compensation without overriding board authority.
Question 4: Which type of board structure separates the roles of CEO and board chair to enhance independence?
- Unitary board
- Two-tier board
- Lead independent director structure
- Separated leadership structure (Correct answer)
Correct answer: Separated leadership structure
A separated leadership structure explicitly assigns the CEO and board chairperson roles to different individuals, reducing concentration of power and improving oversight.
Question 5: An ethics officer (Chief Ethics and Compliance Officer) is MOST effective when they report directly to:
- The CFO to align compliance with financial controls
- The CEO only, to maximize operational integration
- The board or audit committee, ensuring independence from management (Correct answer)
- The General Counsel to unify legal and ethics functions
Correct answer: The board or audit committee, ensuring independence from management
Direct reporting to the board or audit committee ensures the ethics officer has independence from the management whose conduct they may need to scrutinize.
Question 6: Insider trading is PRIMARILY a violation of which core corporate governance principle?
- Stewardship and accountability
- Fairness and equal treatment of shareholders (Correct answer)
- Sustainability and long-term value creation
- Transparency in financial disclosures
Correct answer: Fairness and equal treatment of shareholders
Insider trading violates the fairness principle by giving certain shareholders an unfair informational advantage over others in the market.
Question 7: A company with a strong ethical culture would MOST likely respond to discovering an employee fraud by:
- Quietly terminating the employee to avoid reputational damage
- Investigating, disciplining appropriately, and disclosing as required by law (Correct answer)
- Transferring the employee to another department
- Allowing the employee to repay losses and continue employment
Correct answer: Investigating, disciplining appropriately, and disclosing as required by law
An ethical organization responds to fraud through proper investigation, proportionate consequences, and required legal disclosures rather than concealment.
Corporate Governance And Ethics 4
A company that voluntarily discloses negative environmental data alongside positive results is BEST demonstrating: