RCMS Ethics & Corporate Governance 5 — Questions and Answers
Question 1: Which of the following scenarios best illustrates a 'related-party transaction' requiring board-level disclosure?
- A company buys office supplies from a national retailer at standard rates
- A company awards a consulting contract to a firm owned by the CEO's spouse (Correct answer)
- A company purchases a subsidiary's products at intercompany transfer prices
- A company grants stock options to employees at fair market value
Correct answer: A company awards a consulting contract to a firm owned by the CEO's spouse
A contract with a firm owned by the CEO's spouse is a related-party transaction because it involves a director's family member and creates a potential conflict.
Question 2: Under the concept of 'stakeholder theory,' corporate governance should primarily serve:
- Shareholders exclusively, as the owners of the corporation
- All parties affected by the company's operations, including employees, customers, and communities (Correct answer)
- Creditors and debt holders as the highest-priority claimants
- Regulators and government agencies that oversee the industry
Correct answer: All parties affected by the company's operations, including employees, customers, and communities
Stakeholder theory holds that companies owe duties not only to shareholders but to all groups affected by their business activities.
Question 3: An employee's manager directs them to falsify safety inspection records to avoid a costly shutdown. The employee's BEST first step under an ethical compliance framework is to:
- Comply to protect their job while planning to resign later
- Refuse and report the instruction through the ethics hotline or escalation chain (Correct answer)
- Falsify the records but document the manager's instruction
- Confront the manager publicly in a team meeting
Correct answer: Refuse and report the instruction through the ethics hotline or escalation chain
Refusing to falsify records and reporting the instruction through proper channels is the correct ethical and compliance response.
Question 4: What is the purpose of an annual 'ethics attestation' that employees sign each year?
- To waive the employee's right to report violations externally
- To confirm the employee has read the code of conduct and disclosed any known conflicts or violations (Correct answer)
- To certify the company's financial statements are accurate
- To authorize the company to conduct background investigations
Correct answer: To confirm the employee has read the code of conduct and disclosed any known conflicts or violations
Ethics attestations confirm that employees have reviewed policies and require them to disclose any conflicts of interest or known violations.
Question 5: Which of the following BEST describes the 'business judgment rule' in corporate law?
- Directors must personally guarantee company debts if they make poor decisions
- Courts will generally not second-guess informed, good-faith business decisions made by directors (Correct answer)
- The CEO has sole authority to override board decisions in urgent situations
- Shareholders can sue directors for any business loss exceeding 5% of company value
Correct answer: Courts will generally not second-guess informed, good-faith business decisions made by directors
The business judgment rule is a legal presumption that protects directors from personal liability for informed, good-faith decisions made in the company's interest.
Question 6: A compliance program's effectiveness assessment should include which of the following elements?
- Only the number of disciplinary actions taken against employees
- Testing of controls, employee surveys, root cause analysis of incidents, and training completion metrics (Correct answer)
- A review of competitor compliance programs for benchmarking only
- Annual certification by the external auditor that no violations occurred
Correct answer: Testing of controls, employee surveys, root cause analysis of incidents, and training completion metrics
An effective compliance program assessment combines quantitative metrics, control testing, cultural surveys, and root cause analyses to evaluate real-world effectiveness.
Question 7: When a compliance officer disagrees with legal counsel's opinion that a questionable practice is permissible, the MOST appropriate action is to:
- Accept legal counsel's opinion without question since they are the legal expert
- Document the disagreement, seek a second legal opinion if warranted, and escalate to leadership if the risk remains unresolved (Correct answer)
- Immediately report the practice to regulators to avoid personal liability
- Override legal counsel and stop the practice unilaterally
Correct answer: Document the disagreement, seek a second legal opinion if warranted, and escalate to leadership if the risk remains unresolved
The compliance officer should document the concern, consider seeking additional legal opinions, and escalate through governance channels if the risk is unresolved.
RCMS Ethics & Corporate Governance 5
Which of the following scenarios best illustrates a 'related-party transaction' requiring board-level disclosure?