Governance Factors
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Questions and Answers

Which of the following is NOT a factor that investors consider when evaluating a company's governance?

  • Shareholder rights
  • Environmental and social issues
  • Employee benefits (correct)
  • Executive pay

    • What is the main responsibility of the board of directors in corporate governance?

  • Overseeing the business operations
  • Implementing policies and codes of conduct
  • Developing corporate governance codes
  • Representing the owners of the company (correct)

    • What is the purpose of corporate governance codes?

  • To ensure transparency and accountability (correct)
  • To address related-party transactions
  • To establish shareholder rights
  • To determine executive pay

    • Why is good corporate governance important for a company?

    <p>To minimize the risk of value destruction</p> Signup and view all the answers

    Which company's collapse led to the dismantling of its auditor, Arthur Andersen?

    <p>Enron</p> Signup and view all the answers

    What were some of the governance failings at Enron?

    <p>Weak oversight of executives</p> Signup and view all the answers

    What was the estimated deficit of HIH when it collapsed?

    <p>AU$5.3bn</p> Signup and view all the answers

    What are the two key concepts reflected in corporate governance standards and investor expectations?

    <p>Accountability and alignment</p> Signup and view all the answers

    Who should senior executives feel accountable to?

    <p>Non-executive directors</p> Signup and view all the answers

    What is the role of the chair of the board?

    <p>Facilitating a balanced debate</p> Signup and view all the answers

    Why is transparent and honest accounting important?

    <p>To hold management and boards to account</p> Signup and view all the answers

    Which country was the first to introduce a formal corporate governance code?

    <p>United Kingdom</p> Signup and view all the answers

    What was the main theme of the Cadbury Committee's report on corporate governance?

    <p>The requirement for accountability and alignment</p> Signup and view all the answers

    Which major world market does not currently have an official corporate governance code?

    <p>United States</p> Signup and view all the answers

    What is the common approach taken by most markets regarding compliance with corporate governance codes?

    <p>Comply or explain</p> Signup and view all the answers

    Which of the following is NOT a key characteristic of effective corporate governance?

    <p>Executive remuneration</p> Signup and view all the answers

    Which of the following is a challenge in the effective delivery of audits?

    <p>Sampling of audit work</p> Signup and view all the answers

    What is the role of auditors in relation to corporate governance?

    <p>Ensuring financial integrity</p> Signup and view all the answers

    Which of the following scandals led to the creation of the Sarbanes-Oxley Act in the USA?

    <p>Enron scandal</p> Signup and view all the answers

    What did the Greenbury Report in the UK focus on?

    <p>Remuneration structures and transparency</p> Signup and view all the answers

    Which legislative change tightened standards for banks and oversight in the USA?

    <p>Dodd-Frank Act</p> Signup and view all the answers

    What did the Olympus scandal reveal about Japanese companies?

    <p>Cultural issues in hiding the truth</p> Signup and view all the answers

    Which of the following best describes the agency problem in corporate governance?

    <p>The interests of professional managers may not align with the interests of the owners</p> Signup and view all the answers

    Why is it difficult to solve the agency problem by simply doing what shareholders instruct?

    <p>Shareholders often have multiple and conflicting messages</p> Signup and view all the answers

    What is the purpose of executive pay structures in corporate governance?

    <p>To align the interests of management with those of the owners</p> Signup and view all the answers

    What is the role of the Audit Committee in corporate governance?

    <p>Overseeing financial reporting, audit, and risk oversight</p> Signup and view all the answers

    Which of the following is NOT a key characteristic of effective corporate governance?

    <p>Shareholder engagement</p> Signup and view all the answers

    What are the main variables influencing best practice in corporate governance?

    <p>Legislation, culture, and interpretation</p> Signup and view all the answers

    What is the role of auditors in relation to corporate governance?

    <p>Assessing the challenges in effective delivery of the audit</p> Signup and view all the answers

    Which of the following scandals involved an electric utility turned energy-trading business that used off-balance-sheet vehicles and aggressive accounting techniques to appear profitable?

    <p>Enron</p> Signup and view all the answers

    What was the estimated deficit of HIH when it collapsed?

    <p>AU$5.3bn</p> Signup and view all the answers

    Which scandal led to the dismantling of its auditor, Arthur Andersen, after some of its staff were discovered to have shredded documents?

    <p>Enron</p> Signup and view all the answers

    What are some of the issues that investors consider when evaluating a company's governance?

    <p>Related-party transactions</p> Signup and view all the answers

    What is the role of the board of directors in corporate governance?

    <p>Representing the owners of the company and holding management accountable</p> Signup and view all the answers

    What is the purpose of corporate governance codes?

    <p>To ensure transparency and accountability</p> Signup and view all the answers

    What is the relationship between good corporate governance and business performance?

    <p>Good corporate governance may lead to strong business performance</p> Signup and view all the answers

    Which of the following is a key element of corporate governance?

    <p>Accountability and alignment</p> Signup and view all the answers

    Who should senior executives feel accountable to in corporate governance?

    <p>Non-executive directors</p> Signup and view all the answers

    What is the role of the chair of the board in corporate governance?

    <p>All of the above</p> Signup and view all the answers

    Why is transparent and honest accounting important in corporate governance?

    <p>To hold management and boards accountable</p> Signup and view all the answers

    Which of the following scandals led to pressure for heightened standards of corporate governance and for both board and auditor independence across Europe?

    <p>The Ahold scandal</p> Signup and view all the answers

    Which legislative change tightened standards for, and oversight of, banks?

    <p>The Dodd-Frank Act</p> Signup and view all the answers

    Which of the following scandals revealed long-running market deceit in Japanese companies?

    <p>The Olympus scandal</p> Signup and view all the answers

    Which of the following legislative changes lifted expectations for greater integrity in financial reporting and created the Public Company Accounting Oversight Board (PCAOB)?

    <p>The Sarbanes-Oxley Act</p> Signup and view all the answers

    Which of the following is NOT a role of the Nominations Committee?

    <p>Delivering a proper alignment of interests through executive pay</p> Signup and view all the answers

    What is the purpose of executive pay structures in corporate governance?

    <p>To align the interests of management with those of the owners</p> Signup and view all the answers

    What is the main focus of the Audit Committee in corporate governance?

    <p>Overseeing financial reporting and the audit</p> Signup and view all the answers

    What is the purpose of corporate governance codes?

    <p>To formalize corporate governance and develop standards</p> Signup and view all the answers

    Which of the following countries has a two-tier board system?

    <p>Germany</p> Signup and view all the answers

    Which country does NOT currently have an official corporate governance code?

    <p>United States</p> Signup and view all the answers

    Which of the following is the correct statement regarding the Cadbury Committee's recommendations?

    <p>The committee proposed that every public company should have an audit committee that meets at least twice a year.</p> Signup and view all the answers

    Which of the following is NOT a characteristic of the Cadbury Code model of recommendations?

    <p>The USA is the only major world market without a corporate governance code.</p> Signup and view all the answers

    True or false: Corporate governance is the process and structure for overseeing the business and management of a company.

    <p>True</p> Signup and view all the answers

    True or false: The role of the board of directors in corporate governance has become more important as companies have grown and ownership has become more dispersed.

    <p>True</p> Signup and view all the answers

    True or false: Good corporate governance should lead to strong business performance and long-term prosperity.

    <p>True</p> Signup and view all the answers

    True or false: Investors judge a company's governance based on the quality and thoughtfulness of the people on the board.

    <p>True</p> Signup and view all the answers

    Enron collapsed due to weak oversight of its executives by non-executive directors.

    <p>True</p> Signup and view all the answers

    The collapse of Enron led to the dismantling of its auditor, Arthur Andersen.

    <p>True</p> Signup and view all the answers

    HIH collapsed because it had insufficient assets to cover its liabilities.

    <p>True</p> Signup and view all the answers

    True or false: Corporate governance focuses primarily on accountability and alignment.

    <p>True</p> Signup and view all the answers

    True or false: The chair of the board should ideally be an independent non-executive director.

    <p>True</p> Signup and view all the answers

    True or false: Transparent and honest accounting is crucial for holding management and boards accountable.

    <p>True</p> Signup and view all the answers

    True or false: The agency problem is a result of the separation of ownership and control.

    <p>True</p> Signup and view all the answers

    True or false: The main reasons for the lack of implementation or upholding of effective corporate governance include board structure, diversity, effectiveness, and independence; executive remuneration, performance metrics, and key performance indicators (KPIs); reporting and transparency; financial integrity and capital allocation; and business ethics.

    <p>True</p> Signup and view all the answers

    True or false: The role of auditors in relation to corporate governance includes ensuring the independence of audit firms and addressing conflicts of interest; auditor rotation; sampling of audit work and technological disruption; auditor reports; auditor liability; and internal audit.

    <p>True</p> Signup and view all the answers

    True or false: Governance issues can have material impacts on potential investment opportunities, including public finance initiatives; companies; infrastructure/private finance vehicles; and societal impact.

    <p>True</p> Signup and view all the answers

    True or false: The agency problem arises when the interests of professional managers align with the interests of the owners of the business.

    <p>False</p> Signup and view all the answers

    True or false: Directors have a duty under company law to care for the success of the shareholders directly.

    <p>False</p> Signup and view all the answers

    True or false: The major focus of executive pay structures is to create a balanced compensation package that includes performance-related remuneration based on short-term goals.

    <p>False</p> Signup and view all the answers

    True or false: The Nominations Committee is responsible for overseeing financial reporting and the audit.

    <p>False</p> Signup and view all the answers

    True or false: The Cadbury Committee was created in response to the Caparo and Polly Peck scandals.

    <p>True</p> Signup and view all the answers

    True or false: The Cadbury Code model of recommendations is followed throughout most of the world.

    <p>True</p> Signup and view all the answers

    True or false: The USA is the only major world market without an official corporate governance code.

    <p>True</p> Signup and view all the answers

    True or false: Most markets adopt the language of 'comply or explain' in their corporate governance codes.

    <p>True</p> Signup and view all the answers

    True or false: The Greenbury Report revised the UK's corporate governance code in 1995 to increase transparency over pay levels at newly privatized utilities?

    <p>True</p> Signup and view all the answers

    True or false: The Sarbanes-Oxley Act in the USA was established in response to the Enron, Tyco, and WorldCom scandals in 2002?

    <p>True</p> Signup and view all the answers

    True or false: The Olympus scandal in Japan revealed long-running market deceit and led to heightened standards of corporate governance in the country?

    <p>True</p> Signup and view all the answers

    True or false: The 2010 Dodd-Frank Act in the USA tightened standards for, and oversight of, banks in response to the financial crisis of 2008?

    <p>True</p> Signup and view all the answers

    True or false: Corporate governance frameworks include roles and responsibilities, systems and processes, and shareholder engagement.

    <p>True</p> Signup and view all the answers

    True or false: Effective corporate governance includes characteristics such as board structure, diversity, effectiveness, and independence.

    <p>True</p> Signup and view all the answers

    True or false: Auditors play a role in corporate governance and face challenges such as conflicts of interest and auditor liability.

    <p>True</p> Signup and view all the answers

    True or false: Corporate governance focuses on two key concepts: accountability and alignment.

    <p>True</p> Signup and view all the answers

    True or false: The chair of the board should ideally be an independent non-executive director.

    <p>True</p> Signup and view all the answers

    True or false: Transparent and honest accounting is crucial for holding management and boards accountable.

    <p>True</p> Signup and view all the answers

    True or false: The agency problem is a consequence of the separation of ownership and control in corporations.

    <p>True</p> Signup and view all the answers

    True or false: The Cadbury Committee was established after the Carillion's failure.

    <p>True</p> Signup and view all the answers

    True or false: The Cadbury Committee proposed that every public company should have an audit committee.

    <p>True</p> Signup and view all the answers

    True or false: The USA is the only major world market without an official corporate governance code.

    <p>True</p> Signup and view all the answers

    True or false: The Cadbury Code model is followed throughout most of the world.

    <p>True</p> Signup and view all the answers

    True or false: Corporate governance is the process and structure for overseeing the business and management of a company.

    <p>True</p> Signup and view all the answers

    True or false: The role of the board of directors has become less important as companies have grown in scale and complexity.

    <p>False</p> Signup and view all the answers

    True or false: Good corporate governance should lead to strong business performance and long-term prosperity.

    <p>True</p> Signup and view all the answers

    True or false: Investors judge a company's governance based on the quality of its policies and processes, as well as the people on the board.

    <p>True</p> Signup and view all the answers

    True or false: The agency problem arises when the interests of managers align with the interests of the owners of the business.

    <p>False</p> Signup and view all the answers

    True or false: The duty of directors under company law is to prioritize the success of the shareholders directly.

    <p>False</p> Signup and view all the answers

    True or false: Executive pay structures aim to align the interests of management with those of the owners.

    <p>True</p> Signup and view all the answers

    True or false: The three key committees of the board are the Nominations Committee, the Audit Committee, and the Remuneration Committee.

    <p>True</p> Signup and view all the answers

    Enron used off-balance-sheet vehicles and aggressive accounting techniques to appear profitable.

    <p>True</p> Signup and view all the answers

    The collapse of Enron led to the dismantling of its auditor, Arthur Andersen.

    <p>True</p> Signup and view all the answers

    The HIH scandal was caused by under-reserving and aggressive insurance practices.

    <p>True</p> Signup and view all the answers

    True or false: The Greenbury Report revised the UK's corporate governance code in 1995 to increase transparency over remuneration structures.

    <p>True</p> Signup and view all the answers

    True or false: The Sarbanes-Oxley Act in the USA was established in response to the Enron, Tyco, and WorldCom scandals to ensure greater integrity in financial reporting.

    <p>True</p> Signup and view all the answers

    True or false: The Olympus scandal in Japan revealed long-running market deceit and led to heightened standards of corporate governance in the country.

    <p>True</p> Signup and view all the answers

    True or false: The financial crisis of 2008 led to the creation of stewardship codes in the UK and tightened standards for banks through the Dodd-Frank Act in the USA.

    <p>True</p> Signup and view all the answers

    Study Notes

    Corporate Governance: Accountability and Alignment

    • Corporate governance is the process and structure for overseeing the business and management of a company.
    • The role of the board of directors has become more important as companies have grown and ownership has become more dispersed.
    • Good corporate governance practices are essential for the effectiveness of the board.
    • Investors expect companies to disclose their corporate governance structures and processes.
    • Investors consider various governance issues when evaluating a company, such as shareholder rights, executive pay, audit practices, and board independence.
    • Corporate governance is about people and processes, and it involves developing an appropriate culture that supports strong business performance.
    • Board members are supported by processes to exercise their responsibilities effectively.
    • Investors judge a company's governance based on the quality of its policies and processes and the people on the board.
    • Corporate governance systems provide insight into accountability mechanisms and decision-making processes.
    • Accountability and alignment are key concepts in corporate governance.
    • Board structure, independence of directors, and diversity are important for accountability.
    • Transparent and honest accounting, as well as independent audits, are crucial for accountability.

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