Business Ethics Now Andrew Ghillyer 5e - Test Bank

Business Ethics Now Andrew Ghillyer 5e - Test Bank   Instant Download - Complete Test Bank With Answers     Sample Questions Are Posted Below   Chapter 05 Corporate Governance   True / False Questions 1. Management consulting is the system by which business organizations are directed and controlled. True    False   2. The stakeholders of …

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Business Ethics Now Andrew Ghillyer 5e – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 05

Corporate Governance

 

True / False Questions

1. Management consulting is the system by which business organizations are directed and controlled.

True    False

 

2. The stakeholders of a company include its customers, its vendor partners, state and local entities, and the community in which it conducts its business operations.

True    False

 

3. Corporate transparency is concerned with how well an organization meets its obligations to its stakeholders.

True    False

 

4. The board members of a company are not accountable to the company and its shareholders.

True    False

 

5. Corporate governance does not impact the efficiency of financial markets.

True    False

 

6. A board of directors is a group of individuals who oversee the governance of an organization.

True    False

 

7. Creditors, suppliers, and professional consultants represent the inside members of a board of directors.

True    False

 

8. Members of a board of directors are not eligible to be a part of the audit committee of an organization.

True    False

 

9. The strategic business unit of an organization is responsible for monitoring the financial policies and procedures of the organization.

True    False

 

10. Independent or outside directors are not eligible to be a part of the compensation committee of an organization.

True    False

 

11. The main responsibility of the auditing committee of an organization is to set the compensation for all the employees of the organization, including its outside contractors.

True    False

 

12. Typically, the compensation package of a CEO and other senior executives of an organization consists of a base salary and stock options but does not include any performance bonus or other perks.

True    False

 

13. The corporate governance committee of an organization is staffed by members of the board of directors and specialists.

True    False

 

14. The corporate governance committee of a company oversees compliance with its internal code of ethics as well as any federal and state regulations on corporate conduct.

True    False

 

15. The Cadbury report, established by Sir Adrian Cadbury in 1992 to address financial aspects of corporate governance, dealt exclusively with external governance.

True    False

 

16. The King Report on Corporate Governance of 1994 incorporated a code of corporate practices and conduct that looked beyond the corporation itself, taking into account its impact on the larger community.

True    False

 

17. The King I report, established by Mervyn King in 1994, failed to recognize the involvement of all the corporation’s stakeholders in the efficient and appropriate operation of an organization.

True    False

 

18. The King II report, released by the committee formed by Mervyn King, formally recognized the need to move the stakeholder model forward and to consider a triple bottom line instead of a single bottom line of profitability.

True    False

 

19. The triple bottom line proposed by the King II report, released by the committee formed by Mervyn King, recognizes the economic, environmental, and social aspects of a company’s activities.

True    False

 

20. The King II report emphasized the need for companies to adopt an exclusive approach to corporate governance instead of an inclusive one.

True    False

 

21. The Cadbury report, established by Sir Adrian Cadbury in 1992 to address financial aspects of corporate governance, argued for a guideline of “comply or else,” which required companies to abide by a set of operating standards or face stiff financial penalties.

True    False

 

22. The “comply or else” guideline gave companies the flexibility to comply with governance standards or explain their noncompliance in their corporate documents.

True    False

 

23. The “comply or explain” guideline proved to be an effective deterrent to corporate financial scandals.

True    False

 

24. The “comply or explain” methodology refers to the set of guidelines that requires companies to abide by a set of operating standards or face stiff financial penalties.

True    False

 

25. The “comply or else” methodology is more aggressive than the “comply or explain” methodology.

True    False

 

26. The Sarbanes-Oxley Act of 2002 incorporates the “comply or else” approach to corporate governance.

True    False

 

27. By merging the roles of the chief executive officer and the chairperson of the board of an organization, the oversight provided by the board of directors is magnified.

True    False

 

28. The argument in favor of merging the roles of the chairperson of the board and the chief executive officer of an organization is one of efficiency.

True    False

 

29. By permitting one individual to function as both the chief executive officer of a company and the chairperson of its board, the board is given the benefit of leadership from someone who is in touch with the inner workings of the organization.

True    False

 

30. The board of directors of an organization can secure its independence by permitting one individual to function as both the chief executive officer of the organization and the chairperson of its board.

True    False

 

31. By permitting one individual to function as both the chief executive officer of a company and the chairperson of its board, the power of the stockholders is maximized.

True    False

 

32. The CRAFTED principles of governance, offered by the European business school INSEAD, recommend creating a culture and climate of consistency in an organization.

True    False

 

33. If the board of directors is to serve its purpose in setting the operational tone for an organization, it should be comprised of members who represent professional conduct in their own organizations.

True    False

 

34. Running a small company does not require a constant evaluation of risk-versus-reward scenarios.

True    False

 

35. In his Harvard Business Review article, Walter Salmon recommends that a good board comprises three or more outside directors for every insider.

True    False

 

36. Ethical misconduct is possible even if a board of directors passes all the criteria established by Walter Salmon.

True    False

 

37. The ethical conduct of a business can be influenced by the individual personalities involved.

True    False

 

38. Having all the effective mechanisms listed on the corporate governance checklist in place ensures completely effective corporate governance.

True    False

 

39. One of the flaws in the board of directors of Enron was that many of the directors were affiliated with organizations that benefited directly from the company’s operations.

True    False

 

40. Studies show that a commitment to good corporate governance makes a company both more attractive to investors and lenders and more profitable.

True    False

 

 

Multiple Choice Questions

41. Corporate governance is the process by which _____.

A. the revenue assets of a business are fixed

 

B. corporations are nationalized by the government

 

C. the government is monitored by corporations

 

D. corporations are directed and controlled

 

42. Setting up a governance system that allows organizations to be directed and controlled:

A. leads to underpinning the integrity and efficiency of financial markets.

 

B. weakens a company’s potential and makes it less attractive to investors.

 

C. paves way for financial difficulties and incidents of fraud.

 

D. makes managers and board members less accountable to shareholders.

 

43. If the corporate governance in an organization is poor, it _____.

A. weakens the company’s potential and makes it less attractive to investors

 

B. forces the board of directors to be accountable to the senior executives against their will

 

C. leads to employees taking control of their own decisions without consulting their managers

 

D. results in underpinning the integrity and efficiency of financial markets

 

44. The board of directors of a company:

A. is not accountable to the company’s stakeholders.

 

B. should ideally be elected by the CEO.

 

C. oversees the governance of the organization.

 

D. should ideally have less power than the CEO.

 

45. The inside members of a company’s board of directors:

A. typically have no direct connection with the company.

 

B. hold managerial positions within the company.

 

C. comprise the company’s creditors and suppliers.

 

D. include the external consultants used by the company.

 

46. Identify a feature of the outside members of an organization’s board of directors.

A. They are not permitted to have financial connections to the organization.

 

B. They have less importance than the inside members in the decision-making process.

 

C. They are the ones who make all the major organizational decisions without consulting the inside members.

 

D. They may comprise the company’s creditors, suppliers, or consultants.

 

47. One of the responsibilities of the audit committee of a company is to:

A. elect members of the company’s board of directors.

 

B. manage the company’s leadership pipeline.

 

C. monitor the company’s accounting policies and procedures.

 

D. elect members of the corporate governance committee.

 

48. Catherine, a board member of Clayton Inc., is also part of an operating committee that is responsible for overseeing the accounting policies of the company. This committee is known as the _____.

A. business sales unit

 

B. audit committee

 

C. human resourcing unit

 

D. marketing committee

 

49. The _____ of a company is an operating committee responsible for determining the salaries, bonuses, and perks for the CEO and other senior executives.

A. credit committee

 

B. business sales unit

 

C. compensation committee

 

D. quality assurance unit

 

50. Which of the following is true of the compensation committee of a company?

A. It sets the compensation for all the employees of the company.

 

B. It cannot be staffed by individuals on the company’s board of directors.

 

C. It cannot be staffed by independent or outside directors of the company.

 

D. It oversees the salaries and bonuses of the senior executives only.

 

51. Identify a true statement about the corporate governance committee of a company.

A. It monitors the ethical performance of the corporation.

 

B. It does not oversee compliance with the company’s internal code of ethics.

 

C. It is in charge of setting the compensation packages of all the senior executives.

 

D. It does not include the employees of the company.

 

52. One of the primary responsibilities of an organization’s _____ is to ensure compliance with the company’s internal code of ethics.

A. business sales unit

 

B. quality assurance unit

 

C. corporate governance committee

 

D. proposal committee

 

53. The Cadbury report, established by Sir Adrian Cadbury in 1992 to address financial aspects of corporate governance, addressed:

A. the cultural aspects of a company’s activities.

 

B. the financial aspects of corporate governance.

 

C. the need to consider the triple bottom line.

 

D. the failings of the “comply or explain” policy.

 

54. The main focus of the Cadbury report, established by Sir Adrian Cadbury in 1992 to address financial aspects of corporate governance, was on _____.

A. external governance

 

B. corporate social responsibility

 

C. internal governance

 

D. recruiting policy

 

55. The Cadbury report, established by Sir Adrian Cadbury in 1992 to address financial aspects of corporate governance, recommended:

A. adopting a Code of Best Practice to achieve high standards of corporate behavior.

 

B. considering the environmental and social aspects of an organization’s activities.

 

C. formally recognizing all the stakeholders of an organization.

 

D. considering a company’s impact on the larger community.

 

56. A feature of the King I report on corporate governance, established by Mervyn King in 1994, is that _____.

A. it was inclusive of the recruiting policies of an organization

 

B. it limited its scope to internal corporate governance

 

C. it limited its scope to financial and regulatory accountability

 

D. it considered the impact of corporations’ on the larger community

 

57. The King II report, released by the committee formed by Mervyn King, on corporate governance:

A. strongly advocated that companies follow the traditional, single bottom line of profitability.

 

B. did not look beyond companies or take their impact upon the larger community into account.

 

C. formally recognized the economic, environmental, and social aspects of a company’s activities.

 

D. did not recognize the involvement of a corporation’s stakeholders in the efficient operation of an organization.

 

58. One of the common characteristics of the King I and King II reports on corporate governance was that _____.

A. they both limited their scope to the financial and regulatory accountability of corporations

 

B. they both advocated following the traditional, single bottom line of profitability

 

C. they both rejected the triple bottom line suggested by the Cadbury approach

 

D. they both incorporated a code of corporate practices that looked beyond corporations

 

59. Which of the following is true of the “comply or explain” approach to corporate governance?

A. It set stiff financial penalties for companies that refused to abide by the operational standards.

 

B. It gave companies the flexibility to comply with the governance standards or justify why they didn’t in their corporate documents.

 

C. It was extremely explicit when it came to defining what would be acceptable explanations for noncompliance.

 

D. It proved to be an effective deterrent to financial scandals and reduced the incidence of unethical behavior in corporations.

 

60. The “comply or explain” approach to corporate governance was problematic because _____.

A. it did not take into consideration the remuneration packages provided to the employees of a company

 

B. its stringent measures to deny flexibility to comply with governance standards caused organization-wide friction

 

C. its definition of what constitutes an acceptable explanation for not complying was vague

 

D. it expected corporations to abide by an extremely rigid set of operating standards

 

61. The _____ of 2002 incorporates the “comply or else” approach to corporate governance.

A. Sarbanes-Oxley Act

 

B. Comstock Act

 

C. Multi-divisional Form Act

 

D. Trade Act

 

62. Which of the following is true of the “comply or else” approach to corporate governance?

A. It set stiff financial penalties for companies that refused to abide by the operational standards.

 

B. It gave companies the flexibility to comply with the standards or explain why they didn’t in their corporate documents.

 

C. Its definition of what would be an acceptable explanation for not complying was not clear.

 

D. It was not incorporated into the Sarbanes-Oxley Act of 2002—which governs ethical behavior in corporations.

 

63. In what way did the “comply or else” approach differ from the “comply or explain” approach to corporate governance?

A. Unlike “comply or else,” the “comply or explain” approach penalized companies that don’t conform to regulations heavily.

 

B. Unlike “comply or explain,” the “comply or else” approach did not offer corporations an easy way to avoid conforming to the operating standards.

 

C. Unlike “comply or explain,” the “comply or else” approach had a vague definition for what constitutes an acceptable explanation for noncompliance.

 

D. Unlike “comply or else,” the “comply or explain” approach was successful in discouraging unethical behavior in corporations.

 

64. Merging the roles of the chief executive officer and the chairperson of the board of an organization is advantageous because _____.

A. the power of the stockholders and the independence of the board are increased

 

B. the power vested in external public shareholders is decreased

 

C. the checks that the board set in place against unethical behavior become more effective

 

D. the board is led by someone familiar with the inner workings of the organization

 

65. Which of the following is an effect of merging the roles of the chief executive officer and the chairperson of the board?

A. The power of the stockholders is maximized.

 

B. The oversight provided by the board is increased.

 

C. The independence of the board is compromised.

 

D. The influence of the CEO is minimized.

 

66. The merging of the roles of the chief executive officer and the chairperson of a board is inadvisable because _____.

A. the independence of the board is maximized

 

B. the financial goals of a company takes utmost importance

 

C. the power of the chief executive officer decreases

 

D. the power of the stockholders is minimized

 

67. Which of the following is true of the CRAFTED principles of governance?

A. It recommends creating a culture of consistency, accountability, and responsibility.

 

B. It considers only the financial profitability of all operational actions.

 

C. It favors a tight information flow managed by a company’s senior executive leaders.

 

D. It approves of selecting members of a board by trading professional favors.

 

68. Which of the following actions is a step toward running a company successfully?

A. Merging the roles of the chief executive officer and the chairperson of the board

 

B. Liberating the chief executive officer from constraints laid by the board members

 

C. Evaluating risk-versus-reward scenarios frequently, regardless of the company’s size

 

D. Reducing the board’s independence and decreasing the power of stockholders

 

69. Which of the following principles should a company follow for effective corporate governance?

A. The appointments to the board of directors should always be done on the basis of quid pro quo agreements.

 

B. The board of directors and the CEO should work together when evaluating risk-versus-reward scenarios.

 

C. The board of directors should consist solely of members who have direct connections to the company.

 

D. The roles of the chairperson of the board and that of the chief executive officer should be merged.

 

70. Walter Salmon’s checklist to assess the quality of the board recommends:

A. following an exclusive rather than an inclusive approach.

 

B. the consideration of a single bottom line of profitability.

 

C. that the roles of employees in senior positions must be increased.

 

D. that there be three or more outside directors for every insider.

 

71. Which of the following is true of ethical misconduct?

A. It can occur even if all the checks governing a board of directors is in place.

 

B. It cannot be influenced by the personalities of individual board members.

 

C. It is least likely to occur when a CEO has more authority than board members.

 

D. It is barred effectively by the “comply or explain” approach to corporate governance.

 

72. The fiduciary responsibility of a manager is ultimately based on his or her _____.

A. educational background

 

B. work experience

 

C. charisma

 

D. trust

 

73. Which of the following is true of managers in an organization with good corporate governance?

A. They must be nominated by the compensation committee.

 

B. They should fulfill a fiduciary responsibility to the owners.

 

C. They must consider only the single bottom line of profitability.

 

D. They should follow an exclusive, rather than an internal, approach.

 

74. A commitment to good corporate governance:

A. necessitates decreasing the independence of a board.

 

B. often affects a company’s public image adversely.

 

C. means adopting the “comply or explain” approach.

 

D. makes a company more attractive to investors.

 

75. Which of the following checks, when in place, reduces the risk of fraud or unethical behavior in a corporation?

A. The participants of the governance process must be made accountable effectively.

 

B. The roles of the chief executive officer and the chairperson of the board must be merged.

 

C. The authority of the chief executive officer should be absolute and unchallenged.

 

D. The company should follow the “comply or explain” approach to governance.

 

76. _____ is about the way in which boards oversee the running of a company by its man­agers and how board members are, in turn, account­able to shareholders and the company.

A. Management consulting

 

B. Corporate governance

 

C. Corporate transparency

 

D. Management education

 

77. The _____ of an organization is staffed by members of the board of directors plus independent or outside directors.

A. editorial committee

 

B. human resources team

 

C. accounting team

 

D. audit committee

 

78. The Cadbury report, established to address financial aspects of corporate governance, argued for a guideline of _____, which gave companies the flexibility to act in accordance with governance standards or clarify why they do not in their corporate documents.

A. basic limiting principle

 

B. comply or else

 

C. comply or explain

 

D. maximum power principle

 

79. The first step in a policy of disregarding the corpo­rate governance model is the decision to:

A. merge the roles of chief executive offi­cer (CEO) and chairperson of the board into one indi­vidual.

 

B. nominate a compensation committee by the board of directors of an organization.

 

C. reach out to consultants to find new solutions on maximizing the effectiveness of corporate governance.

 

D. elect an auditing committee to oversee the financial reporting processes of an organization by the chief executive offi­cer (CEO).

 

80. If the board of an organization is to serve its purpose in setting the operational tone for the organization, it should be composed of members who:

A. represent professional conduct in their own organizations.

 

B. are opposed to the practice of utilitarianism.

 

C. support a decentralized model of corporate management.

 

D. are more likely to take risks in high-risk situations.

 

 

Fill in the Blank Questions

81. _____ is the process by which organizations are directed and controlled.

________________________________________

 

82. The involvement of individual shareholders as owners of an organization helps increase the _____ of managers.

________________________________________

 

83. A board of directors is a group of individuals, elected by the vote of _____ at the annual general meeting, who oversee the governance of an organization.

________________________________________

 

84. A _____ is elected by the owners of a company to represent their interests in the effective running of the company.

________________________________________

 

85. _____ members of a board of directors hold management positions in a company.

________________________________________

 

86. The _____ committee of an organization is responsible for monitoring the financial policies and procedures of the organization.

________________________________________

 

87. The primary responsibility of the _____ committee of an organization is to oversee the compensation packages for the senior executives of the organization.

________________________________________

 

88. The corporate governance committee of an organization oversees compliance with the company’s internal _____ as well as any federal and state regulations on corporate conduct.

________________________________________

 

89. The focus of the _____ report, established in 1992, on corporate governance was on internal governance.

________________________________________

 

90. The _____ report, released by the committee formed by Mervyn King, formally recognized the need to move the stakeholder model forward and consider a triple bottom line as opposed to the traditional single bottom line of profitability.

________________________________________

 

91. The King II report, released by the committee formed by Mervyn King, recommended moving beyond the traditional single bottom line of _____.

________________________________________

 

92. The triple bottom line advocated by the King II report, released by the committee formed by Mervyn King, recognizes the economic, environmental, and _____ aspects of a company’s activities.

________________________________________

 

93. The “_____” approach to corporate governance gave companies the flexibility to comply with governance standards or explain their noncompliance in their corporate documents.

________________________________________

 

94. The Sarbanes-Oxley Act of 2002 incorporates the “_____” approach to corporate governance.

________________________________________

 

95. The “_____” approach to corporate governance requires companies to abide by a set of operating standards or face stiff financial penalties.

________________________________________

 

96. The argument in favor of merging the roles of the CEO and chairperson is one of _____.

________________________________________

 

97. INSEAD, the European business school, offers the _____ principles of corporate governance.

________________________________________

 

98. _____ recommended a checklist of 22 questions to assess the quality of boards of directors in his Harvard Business Review article.

________________________________________

 

99. Running a company of any size effectively requires the board of directors to work with the _____, making constant evaluations of risk-versus-reward scenarios.

________________________________________

 

100. Corporate governance is about managers fulfilling a _____ responsibility to the owners of their companies.

________________________________________

 

 

Essay Questions

101. What is corporate governance? Why it is important?

 

 

 

 

102. What roles do the audit committee and the compensation committee of an organization play in ensuring good governance?

 

 

 

 

103. In what way did the King I approach on corporate governance differ from the Cadbury approach?

 

 

 

 

104. Explain the “comply or explain” guideline. Why did the “comply or else” policy come into force?

 

 

 

 

105. Does a commitment to good corporate governance affect a company’s profitability?

 

 

 

 

Chapter 05 Corporate Governance Answer Key

True / False Questions

1. Management consulting is the system by which business organizations are directed and controlled.

FALSE

Corporate governance is the system by which business organizations are directed and controlled.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Explain the term corporate governance.
 

 

2. The stakeholders of a company include its customers, its vendor partners, state and local entities, and the community in which it conducts its business operations.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Explain the term corporate governance.
 

 

3. Corporate transparency is concerned with how well an organization meets its obligations to its stakeholders.

FALSE

Corporate governance is concerned with how well an organization meets its obligations to its stakeholders.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Explain the term corporate governance.
 

 

4. The board members of a company are not accountable to the company and its shareholders.

FALSE

The board members of a company are not accountable to the company and its shareholders.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Explain the term corporate governance.
 

 

5. Corporate governance does not impact the efficiency of financial markets.

FALSE

Good corporate governance plays a vital role in underpinning the integrity and efficiency of financial markets.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Explain the term corporate governance.
 

 

6. A board of directors is a group of individuals who oversee the governance of an organization.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

7. Creditors, suppliers, and professional consultants represent the inside members of a board of directors.

FALSE

The inside members of a board of directors hold management positions in a company. Outside members may have direct connections to the company as creditors, suppliers, customers, or professional consultants.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

8. Members of a board of directors are not eligible to be a part of the audit committee of an organization.

FALSE

The audit committee of an organization is staffed by members of the board of directors plus independent or outside directors.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

9. The strategic business unit of an organization is responsible for monitoring the financial policies and procedures of the organization.

FALSE

The audit committee of an organization is responsible for monitoring the financial policies and procedures of the organization.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

10. Independent or outside directors are not eligible to be a part of the compensation committee of an organization.

FALSE

The compensation committee of an organization is staffed by members of the board of directors plus independent or outside directors.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

11. The main responsibility of the auditing committee of an organization is to set the compensation for all the employees of the organization, including its outside contractors.

FALSE

The compensation committee of an organization is responsible for setting the compensation for the CEO and other senior executives. Compensation policies for the employees of the corporation are left to the management team to oversee.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

12. Typically, the compensation package of a CEO and other senior executives of an organization consists of a base salary and stock options but does not include any performance bonus or other perks.

FALSE

Typically, the compensation package of a CEO and other senior executives of an organization consists of a base salary, stock options, performance bonus, and other perks.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

13. The corporate governance committee of an organization is staffed by members of the board of directors and specialists.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

14. The corporate governance committee of a company oversees compliance with its internal code of ethics as well as any federal and state regulations on corporate conduct.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

15. The Cadbury report, established by Sir Adrian Cadbury in 1992 to address financial aspects of corporate governance, dealt exclusively with external governance.

FALSE

The Cadbury report on corporate governance focused on internal governance.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Explain the significance of the “King I” and “King II” reports.
 

 

16. The King Report on Corporate Governance of 1994 incorporated a code of corporate practices and conduct that looked beyond the corporation itself, taking into account its impact on the larger community.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03 Explain the significance of the “King I” and “King II” reports.
 

 

17. The King I report, established by Mervyn King in 1994, failed to recognize the involvement of all the corporation’s stakeholders in the efficient and appropriate operation of an organization.

FALSE

The King I report recognized the involvement of all the corporation’s stakeholders—the shareholders, customers, employees, vendor partners, and the community in which the corporation operates—in the efficient and appropriate operation of an organization.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Explain the significance of the “King I” and “King II” reports.
 

 

18. The King II report, released by the committee formed by Mervyn King, formally recognized the need to move the stakeholder model forward and to consider a triple bottom line instead of a single bottom line of profitability.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Explain the significance of the “King I” and “King II” reports.
 

 

19. The triple bottom line proposed by the King II report, released by the committee formed by Mervyn King, recognizes the economic, environmental, and social aspects of a company’s activities.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03 Explain the significance of the “King I” and “King II” reports.
 

 

20. The King II report emphasized the need for companies to adopt an exclusive approach to corporate governance instead of an inclusive one.

FALSE

The King II report emphasized the need for companies to adopt an inclusive approach to corporate governance instead of an exclusive one.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03 Explain the significance of the “King I” and “King II” reports.
 

 

21. The Cadbury report, established by Sir Adrian Cadbury in 1992 to address financial aspects of corporate governance, argued for a guideline of “comply or else,” which required companies to abide by a set of operating standards or face stiff financial penalties.

FALSE

The Cadbury report argued for a guideline of “comply or explain” which gave companies the flexibility to comply with governance standards or explain why they do not in their corporate documents.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

22. The “comply or else” guideline gave companies the flexibility to comply with governance standards or explain their noncompliance in their corporate documents.

FALSE

The “comply or explain” guideline gave companies the flexibility to comply with governance standards or explain their noncompliance in their corporate documents.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

23. The “comply or explain” guideline proved to be an effective deterrent to corporate financial scandals.

FALSE

The “comply or explain” guideline was followed by a series of financial scandals which led critics to argue that it offered no real deterrent to corporations.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

24. The “comply or explain” methodology refers to the set of guidelines that requires companies to abide by a set of operating standards or face stiff financial penalties.

FALSE

The “comply or else” methodology refers to the set of guidelines that requires companies to abide by a set of operating standards or face stiff financial penalties.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

25. The “comply or else” methodology is more aggressive than the “comply or explain” methodology.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

26. The Sarbanes-Oxley Act of 2002 incorporates the “comply or else” approach to corporate governance.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

27. By merging the roles of the chief executive officer and the chairperson of the board of an organization, the oversight provided by the board of directors is magnified.

FALSE

By merging the roles of the chief executive officer and the chairperson of the board of an organization, the oversight provided by the board of directors is lost.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

28. The argument in favor of merging the roles of the chairperson of the board and the chief executive officer of an organization is one of efficiency.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

29. By permitting one individual to function as both the chief executive officer of a company and the chairperson of its board, the board is given the benefit of leadership from someone who is in touch with the inner workings of the organization.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

30. The board of directors of an organization can secure its independence by permitting one individual to function as both the chief executive officer of the organization and the chairperson of its board.

FALSE

By permitting one individual to function as both the chief executive officer of an organization and the chairperson of its board, the independence of the board is compromised.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

31. By permitting one individual to function as both the chief executive officer of a company and the chairperson of its board, the power of the stockholders is maximized.

FALSE

By permitting one individual to function as both the chief executive officer of a company and the chairperson of its board, the power of the stockholders is minimized.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

32. The CRAFTED principles of governance, offered by the European business school INSEAD, recommend creating a culture and climate of consistency in an organization.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

33. If the board of directors is to serve its purpose in setting the operational tone for an organization, it should be comprised of members who represent professional conduct in their own organizations.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

34. Running a small company does not require a constant evaluation of risk-versus-reward scenarios.

FALSE

Running a company of any size requires constant evaluation of risk-versus-reward scenarios.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

35. In his Harvard Business Review article, Walter Salmon recommends that a good board comprises three or more outside directors for every insider.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

36. Ethical misconduct is possible even if a board of directors passes all the criteria established by Walter Salmon.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

37. The ethical conduct of a business can be influenced by the individual personalities involved.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

38. Having all the effective mechanisms listed on the corporate governance checklist in place ensures completely effective corporate governance.

FALSE

Having all the effective mechanisms in place does not necessarily ensure effective corporate governance.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

39. One of the flaws in the board of directors of Enron was that many of the directors were affiliated with organizations that benefited directly from the company’s operations.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

40. Studies show that a commitment to good corporate governance makes a company both more attractive to investors and lenders and more profitable.

TRUE

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

Multiple Choice Questions

41. Corporate governance is the process by which _____.

A. the revenue assets of a business are fixed

 

B. corporations are nationalized by the government

 

C. the government is monitored by corporations

 

D. corporations are directed and controlled

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 Explain the term corporate governance.
 

 

42. Setting up a governance system that allows organizations to be directed and controlled:

A. leads to underpinning the integrity and efficiency of financial markets.

 

B. weakens a company’s potential and makes it less attractive to investors.

 

C. paves way for financial difficulties and incidents of fraud.

 

D. makes managers and board members less accountable to shareholders.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 Explain the term corporate governance.
 

 

43. If the corporate governance in an organization is poor, it _____.

A. weakens the company’s potential and makes it less attractive to investors

 

B. forces the board of directors to be accountable to the senior executives against their will

 

C. leads to employees taking control of their own decisions without consulting their managers

 

D. results in underpinning the integrity and efficiency of financial markets

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 Explain the term corporate governance.
 

 

44. The board of directors of a company:

A. is not accountable to the company’s stakeholders.

 

B. should ideally be elected by the CEO.

 

C. oversees the governance of the organization.

 

D. should ideally have less power than the CEO.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

45. The inside members of a company’s board of directors:

A. typically have no direct connection with the company.

 

B. hold managerial positions within the company.

 

C. comprise the company’s creditors and suppliers.

 

D. include the external consultants used by the company.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

46. Identify a feature of the outside members of an organization’s board of directors.

A. They are not permitted to have financial connections to the organization.

 

B. They have less importance than the inside members in the decision-making process.

 

C. They are the ones who make all the major organizational decisions without consulting the inside members.

 

D. They may comprise the company’s creditors, suppliers, or consultants.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

47. One of the responsibilities of the audit committee of a company is to:

A. elect members of the company’s board of directors.

 

B. manage the company’s leadership pipeline.

 

C. monitor the company’s accounting policies and procedures.

 

D. elect members of the corporate governance committee.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

48. Catherine, a board member of Clayton Inc., is also part of an operating committee that is responsible for overseeing the accounting policies of the company. This committee is known as the _____.

A. business sales unit

 

B. audit committee

 

C. human resourcing unit

 

D. marketing committee

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

49. The _____ of a company is an operating committee responsible for determining the salaries, bonuses, and perks for the CEO and other senior executives.

A. credit committee

 

B. business sales unit

 

C. compensation committee

 

D. quality assurance unit

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

50. Which of the following is true of the compensation committee of a company?

A. It sets the compensation for all the employees of the company.

 

B. It cannot be staffed by individuals on the company’s board of directors.

 

C. It cannot be staffed by independent or outside directors of the company.

 

D. It oversees the salaries and bonuses of the senior executives only.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

51. Identify a true statement about the corporate governance committee of a company.

A. It monitors the ethical performance of the corporation.

 

B. It does not oversee compliance with the company’s internal code of ethics.

 

C. It is in charge of setting the compensation packages of all the senior executives.

 

D. It does not include the employees of the company.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

52. One of the primary responsibilities of an organization’s _____ is to ensure compliance with the company’s internal code of ethics.

A. business sales unit

 

B. quality assurance unit

 

C. corporate governance committee

 

D. proposal committee

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

53. The Cadbury report, established by Sir Adrian Cadbury in 1992 to address financial aspects of corporate governance, addressed:

A. the cultural aspects of a company’s activities.

 

B. the financial aspects of corporate governance.

 

C. the need to consider the triple bottom line.

 

D. the failings of the “comply or explain” policy.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Explain the significance of the “King I” and “King II” reports.
 

 

54. The main focus of the Cadbury report, established by Sir Adrian Cadbury in 1992 to address financial aspects of corporate governance, was on _____.

A. external governance

 

B. corporate social responsibility

 

C. internal governance

 

D. recruiting policy

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03 Explain the significance of the “King I” and “King II” reports.
 

 

55. The Cadbury report, established by Sir Adrian Cadbury in 1992 to address financial aspects of corporate governance, recommended:

A. adopting a Code of Best Practice to achieve high standards of corporate behavior.

 

B. considering the environmental and social aspects of an organization’s activities.

 

C. formally recognizing all the stakeholders of an organization.

 

D. considering a company’s impact on the larger community.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Explain the significance of the “King I” and “King II” reports.
 

 

56. A feature of the King I report on corporate governance, established by Mervyn King in 1994, is that _____.

A. it was inclusive of the recruiting policies of an organization

 

B. it limited its scope to internal corporate governance

 

C. it limited its scope to financial and regulatory accountability

 

D. it considered the impact of corporations’ on the larger community

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Explain the significance of the “King I” and “King II” reports.
 

 

57. The King II report, released by the committee formed by Mervyn King, on corporate governance:

A. strongly advocated that companies follow the traditional, single bottom line of profitability.

 

B. did not look beyond companies or take their impact upon the larger community into account.

 

C. formally recognized the economic, environmental, and social aspects of a company’s activities.

 

D. did not recognize the involvement of a corporation’s stakeholders in the efficient operation of an organization.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Explain the significance of the “King I” and “King II” reports.
 

 

58. One of the common characteristics of the King I and King II reports on corporate governance was that _____.

A. they both limited their scope to the financial and regulatory accountability of corporations

 

B. they both advocated following the traditional, single bottom line of profitability

 

C. they both rejected the triple bottom line suggested by the Cadbury approach

 

D. they both incorporated a code of corporate practices that looked beyond corporations

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Explain the significance of the “King I” and “King II” reports.
 

 

59. Which of the following is true of the “comply or explain” approach to corporate governance?

A. It set stiff financial penalties for companies that refused to abide by the operational standards.

 

B. It gave companies the flexibility to comply with the governance standards or justify why they didn’t in their corporate documents.

 

C. It was extremely explicit when it came to defining what would be acceptable explanations for noncompliance.

 

D. It proved to be an effective deterrent to financial scandals and reduced the incidence of unethical behavior in corporations.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

60. The “comply or explain” approach to corporate governance was problematic because _____.

A. it did not take into consideration the remuneration packages provided to the employees of a company

 

B. its stringent measures to deny flexibility to comply with governance standards caused organization-wide friction

 

C. its definition of what constitutes an acceptable explanation for not complying was vague

 

D. it expected corporations to abide by an extremely rigid set of operating standards

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

61. The _____ of 2002 incorporates the “comply or else” approach to corporate governance.

A. Sarbanes-Oxley Act

 

B. Comstock Act

 

C. Multi-divisional Form Act

 

D. Trade Act

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

62. Which of the following is true of the “comply or else” approach to corporate governance?

A. It set stiff financial penalties for companies that refused to abide by the operational standards.

 

B. It gave companies the flexibility to comply with the standards or explain why they didn’t in their corporate documents.

 

C. Its definition of what would be an acceptable explanation for not complying was not clear.

 

D. It was not incorporated into the Sarbanes-Oxley Act of 2002—which governs ethical behavior in corporations.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

63. In what way did the “comply or else” approach differ from the “comply or explain” approach to corporate governance?

A. Unlike “comply or else,” the “comply or explain” approach penalized companies that don’t conform to regulations heavily.

 

B. Unlike “comply or explain,” the “comply or else” approach did not offer corporations an easy way to avoid conforming to the operating standards.

 

C. Unlike “comply or explain,” the “comply or else” approach had a vague definition for what constitutes an acceptable explanation for noncompliance.

 

D. Unlike “comply or else,” the “comply or explain” approach was successful in discouraging unethical behavior in corporations.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

64. Merging the roles of the chief executive officer and the chairperson of the board of an organization is advantageous because _____.

A. the power of the stockholders and the independence of the board are increased

 

B. the power vested in external public shareholders is decreased

 

C. the checks that the board set in place against unethical behavior become more effective

 

D. the board is led by someone familiar with the inner workings of the organization

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

65. Which of the following is an effect of merging the roles of the chief executive officer and the chairperson of the board?

A. The power of the stockholders is maximized.

 

B. The oversight provided by the board is increased.

 

C. The independence of the board is compromised.

 

D. The influence of the CEO is minimized.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

66. The merging of the roles of the chief executive officer and the chairperson of a board is inadvisable because _____.

A. the independence of the board is maximized

 

B. the financial goals of a company takes utmost importance

 

C. the power of the chief executive officer decreases

 

D. the power of the stockholders is minimized

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

67. Which of the following is true of the CRAFTED principles of governance?

A. It recommends creating a culture of consistency, accountability, and responsibility.

 

B. It considers only the financial profitability of all operational actions.

 

C. It favors a tight information flow managed by a company’s senior executive leaders.

 

D. It approves of selecting members of a board by trading professional favors.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

68. Which of the following actions is a step toward running a company successfully?

A. Merging the roles of the chief executive officer and the chairperson of the board

 

B. Liberating the chief executive officer from constraints laid by the board members

 

C. Evaluating risk-versus-reward scenarios frequently, regardless of the company’s size

 

D. Reducing the board’s independence and decreasing the power of stockholders

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

69. Which of the following principles should a company follow for effective corporate governance?

A. The appointments to the board of directors should always be done on the basis of quid pro quo agreements.

 

B. The board of directors and the CEO should work together when evaluating risk-versus-reward scenarios.

 

C. The board of directors should consist solely of members who have direct connections to the company.

 

D. The roles of the chairperson of the board and that of the chief executive officer should be merged.

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

70. Walter Salmon’s checklist to assess the quality of the board recommends:

A. following an exclusive rather than an inclusive approach.

 

B. the consideration of a single bottom line of profitability.

 

C. that the roles of employees in senior positions must be increased.

 

D. that there be three or more outside directors for every insider.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

71. Which of the following is true of ethical misconduct?

A. It can occur even if all the checks governing a board of directors is in place.

 

B. It cannot be influenced by the personalities of individual board members.

 

C. It is least likely to occur when a CEO has more authority than board members.

 

D. It is barred effectively by the “comply or explain” approach to corporate governance.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

72. The fiduciary responsibility of a manager is ultimately based on his or her _____.

A. educational background

 

B. work experience

 

C. charisma

 

D. trust

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

73. Which of the following is true of managers in an organization with good corporate governance?

A. They must be nominated by the compensation committee.

 

B. They should fulfill a fiduciary responsibility to the owners.

 

C. They must consider only the single bottom line of profitability.

 

D. They should follow an exclusive, rather than an internal, approach.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

74. A commitment to good corporate governance:

A. necessitates decreasing the independence of a board.

 

B. often affects a company’s public image adversely.

 

C. means adopting the “comply or explain” approach.

 

D. makes a company more attractive to investors.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

75. Which of the following checks, when in place, reduces the risk of fraud or unethical behavior in a corporation?

A. The participants of the governance process must be made accountable effectively.

 

B. The roles of the chief executive officer and the chairperson of the board must be merged.

 

C. The authority of the chief executive officer should be absolute and unchallenged.

 

D. The company should follow the “comply or explain” approach to governance.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

76. _____ is about the way in which boards oversee the running of a company by its man­agers and how board members are, in turn, account­able to shareholders and the company.

A. Management consulting

 

B. Corporate governance

 

C. Corporate transparency

 

D. Management education

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Explain the term corporate governance.
 

 

77. The _____ of an organization is staffed by members of the board of directors plus independent or outside directors.

A. editorial committee

 

B. human resources team

 

C. accounting team

 

D. audit committee

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

78. The Cadbury report, established to address financial aspects of corporate governance, argued for a guideline of _____, which gave companies the flexibility to act in accordance with governance standards or clarify why they do not in their corporate documents.

A. basic limiting principle

 

B. comply or else

 

C. comply or explain

 

D. maximum power principle

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03 Explain the significance of the “King I” and “King II” reports.
 

 

79. The first step in a policy of disregarding the corpo­rate governance model is the decision to:

A. merge the roles of chief executive offi­cer (CEO) and chairperson of the board into one indi­vidual.

 

B. nominate a compensation committee by the board of directors of an organization.

 

C. reach out to consultants to find new solutions on maximizing the effectiveness of corporate governance.

 

D. elect an auditing committee to oversee the financial reporting processes of an organization by the chief executive offi­cer (CEO).

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

80. If the board of an organization is to serve its purpose in setting the operational tone for the organization, it should be composed of members who:

A. represent professional conduct in their own organizations.

 

B. are opposed to the practice of utilitarianism.

 

C. support a decentralized model of corporate management.

 

D. are more likely to take risks in high-risk situations.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

Fill in the Blank Questions

81. _____ is the process by which organizations are directed and controlled.

Corporate governance

 

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Explain the term corporate governance.
 

 

82. The involvement of individual shareholders as owners of an organization helps increase the _____ of managers.

accountability

 

Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 Explain the term corporate governance.
 

 

83. A board of directors is a group of individuals, elected by the vote of _____ at the annual general meeting, who oversee the governance of an organization.

shareholders

 

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

84. A _____ is elected by the owners of a company to represent their interests in the effective running of the company.

board of directors

 

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

85. _____ members of a board of directors hold management positions in a company.

Inside

 

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

86. The _____ committee of an organization is responsible for monitoring the financial policies and procedures of the organization.

audit

 

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

87. The primary responsibility of the _____ committee of an organization is to oversee the compensation packages for the senior executives of the organization.

compensation

 

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

88. The corporate governance committee of an organization oversees compliance with the company’s internal _____ as well as any federal and state regulations on corporate conduct.

code of ethics

 

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

89. The focus of the _____ report, established in 1992, on corporate governance was on internal governance.

Cadbury

 

Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Explain the significance of the “King I” and “King II” reports.
 

 

90. The _____ report, released by the committee formed by Mervyn King, formally recognized the need to move the stakeholder model forward and consider a triple bottom line as opposed to the traditional single bottom line of profitability.

King II

 

Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Explain the significance of the “King I” and “King II” reports.
 

 

91. The King II report, released by the committee formed by Mervyn King, recommended moving beyond the traditional single bottom line of _____.

profitability

 

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

92. The triple bottom line advocated by the King II report, released by the committee formed by Mervyn King, recognizes the economic, environmental, and _____ aspects of a company’s activities.

social

 

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03 Explain the significance of the “King I” and “King II” reports.
 

 

93. The “_____” approach to corporate governance gave companies the flexibility to comply with governance standards or explain their noncompliance in their corporate documents.

comply or explain

 

Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

94. The Sarbanes-Oxley Act of 2002 incorporates the “_____” approach to corporate governance.

comply or else

 

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

95. The “_____” approach to corporate governance requires companies to abide by a set of operating standards or face stiff financial penalties.

comply or else

 

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

96. The argument in favor of merging the roles of the CEO and chairperson is one of _____.

efficiency

 

Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

97. INSEAD, the European business school, offers the _____ principles of corporate governance.

CRAFTED

 

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

98. _____ recommended a checklist of 22 questions to assess the quality of boards of directors in his Harvard Business Review article.

Walter Salmon

 

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

99. Running a company of any size effectively requires the board of directors to work with the _____, making constant evaluations of risk-versus-reward scenarios.

chief executive officer

 

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

100. Corporate governance is about managers fulfilling a _____ responsibility to the owners of their companies.

fiduciary

 

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

Essay Questions

101. What is corporate governance? Why it is important?

Corporate governance is the process by which organizations are directed and controlled. It is concerned with how well organizations meet their obligations to their stakeholders. It ensures the accountability of managers to board members, and in turn, the accountability of board members to shareholders. Good corporate governance plays a vital role in underpinning the integrity and efficiency of financial markets. Poor corporate governance weakens a company’s potential and at worst can pave the way for financial difficulties and even fraud. If companies are well governed, they will usually outperform other companies and will be able to attract investors whose support can finance further growth.

 

Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 Explain the term corporate governance.
 

 

102. What roles do the audit committee and the compensation committee of an organization play in ensuring good governance?

The audit committee of an organization is an operating committee staffed by members of the board of directors plus independent or outside directors. The committee is responsible for monitoring the financial policies and procedures of the organization—specifically the accounting policies, internal controls, and the hiring of external auditors.
The compensation committee of an organization is an operating committee staffed by members of the board of directors plus independent or outside directors. The committee is responsible for setting the compensation for the CEO and other senior executives. Typically, this compensation will consist of a base salary, performance bonus, stock options, and other perks.

 

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance committees.
 

 

103. In what way did the King I approach on corporate governance differ from the Cadbury approach?

In contrast to Cadbury’s focus on internal governance, the King I report “incorporated a code of corporate practices and conduct that looked beyond the corporation itself, taking into account its impact on the larger community.” It went beyond the financial and regulatory accountability upon which the Cadbury report had focused and took a more integrated approach to the topic of corporate governance, recognizing the involvement of all the corporation’s stakeholders—the shareholders, customers, employees, vendor partners, and the community in which the corporation operates— in the efficient and appropriate operation of the organization.

 

Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Explain the significance of the “King I” and “King II” reports.
 

 

104. Explain the “comply or explain” guideline. Why did the “comply or else” policy come into force?

The guideline of “comply or explain” gave companies the flexibility to comply with governance standards or explain why they did not in their corporate documents (annual reports, for example). The vagueness of what would constitute an acceptable explanation for not complying, combined with the ease with which such explanations could be buried in the footnotes of an annual report, raised concerns that comply or explain really wouldn’t do much for corporate governance. The string of financial scandals that followed the report led many critics to argue that “comply or explain” offered no real deterrent to corporations. The answer, they argued, was to move to a more aggressive approach of comply or else, where failure to comply would result in stiff financial penalties. The Sarbanes-Oxley Act of 2002 came into force and incorporated this approach.

 

Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else.”
 

 

105. Does a commitment to good corporate governance affect a company’s profitability?

A commitment to good corporate governance makes a company both more attractive to investors and lenders and more profitable. A Deutsche Bank study of Standard & Poor’s 500 firms showed that companies with strong or improving corporate governance outperform those with poor or deteriorating governance practices. A Harvard-Wharton study showed that U.S.-based firms with better governance have faster sales growth and were more profitable than their peers. In a 2002 McKinsey survey, institutional investors said they would pay premiums to own well-governed companies.

 

Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
 

 

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