Ethics and Corporate Governance in Finance Flashcards

The Foreign Corrupt Practices Act (FCPA) prohibits U.S. companies and individuals from:

Answer: Paying bribes to foreign government officials to obtain or retain business

The FCPA prohibits U.S. persons and businesses from bribing foreign government officials to gain or maintain a business advantage, applying both domestically and to overseas operations.

A staggered board (classified board) structure means that:

Answer: Directors are divided into classes with only a portion elected each year, making rapid board changes difficult

A staggered board divides directors into classes with terms of two or three years so only a fraction stand for election each year, making hostile takeovers more difficult.

What is the primary purpose of a company's proxy statement (Form DEF 14A)?

Answer: To inform shareholders about matters to be voted on at the annual meeting and disclose executive compensation

A proxy statement informs shareholders of agenda items for the annual meeting—such as director elections and say-on-pay votes—and provides mandated disclosures including executive compensation.

Under the 'business judgment rule,' courts will generally not second-guess a board's business decision if:

Answer: Directors acted on an informed basis, in good faith, and in the honest belief it was in the company's best interest

The business judgment rule protects directors from liability for honest mistakes if they acted on an informed basis, in good faith, and with a reasonable belief that the decision was in the best interest of the corporation.

A CFO who accelerates revenue recognition into the current quarter to meet analyst expectations, without a legitimate business reason, is most likely violating:

Answer: Generally Accepted Accounting Principles (GAAP) and potentially SEC fraud regulations

Artificially accelerating revenue recognition without a valid basis violates GAAP and can constitute securities fraud under SEC regulations, exposing the CFO to civil and criminal liability.

The Securities and Exchange Commission (SEC) plays which primary role in U.S. corporate governance?

Answer: Enforcing federal securities laws, regulating disclosures, and protecting investors from fraud

The SEC enforces federal securities laws, requires transparent financial disclosures from public companies, and investigates and prosecutes securities fraud to protect investors.

A dual-class share structure raises corporate governance concerns primarily because it:

Answer: Allows founders or insiders to retain voting control disproportionate to their economic ownership

Dual-class shares give certain shareholders (typically founders) superior voting rights, allowing them to control corporate decisions even when they own a minority economic stake, limiting shareholder accountability.