Corporate Governance Corporate Governance 5 — Questions and Answers
Question 1: What is the primary purpose of a board's 'Risk Committee' in modern corporate governance?
- To manage day-to-day operational risks on behalf of the CEO
- To provide board-level oversight of enterprise risk management frameworks and material risks (Correct answer)
- To set the company's insurance policy limits and deductibles
- To approve all capital expenditures above a set threshold
Correct answer: To provide board-level oversight of enterprise risk management frameworks and material risks
A board Risk Committee oversees the company's enterprise risk management (ERM) framework and ensures the board is informed of significant risks to the business.
Question 2: Which governance failure is most commonly associated with the collapse of Enron in 2001?
- Overly restrictive executive compensation policies
- Board members failing to question management's use of off-balance-sheet entities and conflicts of interest (Correct answer)
- Excessive shareholder rights that prevented management from making strategic decisions
- A lack of any internal audit function
Correct answer: Board members failing to question management's use of off-balance-sheet entities and conflicts of interest
Enron's board approved special purpose entities that obscured debt and enabled conflicts of interest, representing a fundamental failure of board oversight.
Question 3: Under Delaware law, the duty of loyalty requires that directors:
- Prioritize creditors over shareholders in all decisions
- Put the interests of the corporation and shareholders above their own personal interests (Correct answer)
- Remain loyal to the founding management team in contested takeovers
- Avoid all business relationships with companies in the same industry
Correct answer: Put the interests of the corporation and shareholders above their own personal interests
The duty of loyalty requires directors to subordinate their personal interests to those of the corporation and its shareholders, especially in conflict-of-interest situations.
Question 4: A 'golden leash' arrangement in the context of activist investing refers to:
- Excessive CEO severance packages tied to long tenure
- An activist investor compensating director nominees separately beyond what the company pays (Correct answer)
- A long-term retention agreement for the board chair
- A performance-based restricted stock grant with a 10-year vesting cliff
Correct answer: An activist investor compensating director nominees separately beyond what the company pays
A golden leash occurs when an activist investor pays its own director nominees additional compensation, creating potential loyalty to the activist rather than all shareholders.
Question 5: The 'say-on-golden-parachute' vote required by Dodd-Frank applies specifically to:
- Annual executive pay decisions for current leadership
- Compensation arrangements triggered by merger or acquisition transactions (Correct answer)
- Severance packages for directors removed without cause
- Bonus plans for employees below the executive level
Correct answer: Compensation arrangements triggered by merger or acquisition transactions
Dodd-Frank requires companies seeking shareholder approval of M&A transactions to disclose and allow a separate advisory shareholder vote on change-in-control compensation arrangements.
Question 6: Which of the following best describes the governance concept of 'majority voting' for director elections, as opposed to 'plurality voting'?
- Directors are elected by a simple coin flip if votes are tied
- A director must receive more than 50% of votes cast to be elected or to hold their seat (Correct answer)
- Shareholders may cast fractional votes proportional to share ownership
- The board chair's vote counts double in uncontested elections
Correct answer: A director must receive more than 50% of votes cast to be elected or to hold their seat
Under majority voting, a director in an uncontested election must receive more than 50% of votes cast; failure to do so typically requires the director to tender their resignation.
Question 7: What is the primary role of proxy advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis?
- They manage shareholder voting on behalf of retail investors automatically
- They provide institutional investors with voting recommendations and analysis on shareholder meeting agenda items (Correct answer)
- They serve as government regulators overseeing proxy statement disclosures
- They negotiate directly with boards on executive pay packages
Correct answer: They provide institutional investors with voting recommendations and analysis on shareholder meeting agenda items
Proxy advisory firms analyze shareholder meeting proposals and provide institutional investors with voting recommendations on matters like director elections, executive pay, and shareholder proposals.
Corporate Governance Corporate Governance 5
What is the primary purpose of a board's 'Risk Committee' in modern corporate governance?