RCMS Ethics & Corporate Governance 3 — Questions and Answers
Question 1: Which governance structure element ensures that no single individual controls all aspects of a critical business process?
- Dual control authority
- Segregation of duties (Correct answer)
- Management override provision
- Board independence requirement
Correct answer: Segregation of duties
Segregation of duties divides key tasks among multiple people to reduce the risk of error or fraud going undetected.
Question 2: A publicly traded company's board has seven members, five of whom have no material relationship with the company. Under NYSE listing standards, does this board meet the independence requirement?
- No, because at least six of seven must be independent
- Yes, because a majority of directors are independent (Correct answer)
- No, because all directors must be independent
- Yes, but only if the CEO is not a board member
Correct answer: Yes, because a majority of directors are independent
NYSE listing standards require that a majority of board members be independent directors.
Question 3: When a compliance officer faces pressure from management to ignore a regulatory violation to avoid reputational damage, the BEST ethical course of action is to:
- Comply with management's request to protect the company
- Document the pressure and escalate through established reporting channels (Correct answer)
- Anonymously leak the violation to regulators immediately
- Resign from the position to avoid personal liability
Correct answer: Document the pressure and escalate through established reporting channels
The compliance officer should document the pressure and escalate it through proper channels such as the audit committee or ethics hotline.
Question 4: What is the primary distinction between a company's code of ethics and a code of conduct?
- Codes of ethics are legally binding; codes of conduct are aspirational
- Codes of ethics articulate values and principles; codes of conduct specify required behaviors (Correct answer)
- Codes of conduct apply only to executives; codes of ethics apply to all employees
- Codes of ethics are enforced externally; codes of conduct are enforced internally
Correct answer: Codes of ethics articulate values and principles; codes of conduct specify required behaviors
A code of ethics states overarching values and moral principles, while a code of conduct translates those into specific behavioral rules.
Question 5: Under the Federal Sentencing Guidelines, which factor can REDUCE a company's culpability score when a compliance violation is discovered?
- Size of the fine imposed by regulators
- Having an effective compliance and ethics program in place (Correct answer)
- Number of employees affected by the misconduct
- Years the company has been in operation
Correct answer: Having an effective compliance and ethics program in place
The Federal Sentencing Guidelines reduce culpability scores for organizations that had an effective compliance program prior to the offense.
Question 6: A director learns material non-public information about an acquisition target during a board meeting. Trading that company's stock before the announcement is prohibited under which law?
- Sarbanes-Oxley Act Section 404
- Securities Exchange Act Rule 10b-5 insider trading provisions (Correct answer)
- Gramm-Leach-Bliley Act
- USA PATRIOT Act
Correct answer: Securities Exchange Act Rule 10b-5 insider trading provisions
Trading on material non-public information violates Rule 10b-5 under the Securities Exchange Act, which prohibits insider trading.
Question 7: Which of the following is an example of a 'clawback' provision in executive compensation governance?
- A bonus paid when a CEO exceeds revenue targets by 20%
- Recovery of previously paid incentive compensation after a financial restatement (Correct answer)
- Deferred vesting schedule for restricted stock units
- A non-compete agreement triggered upon departure
Correct answer: Recovery of previously paid incentive compensation after a financial restatement
A clawback provision allows a company to recoup previously paid incentive compensation if it was based on misstated financial results.
RCMS Ethics & Corporate Governance 3
Which governance structure element ensures that no single individual controls all aspects of a critical business process?