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Question 1

Board Director’s duties (4) - obligation to the law

Answer 1

1) Fiduciary Duty
2) Duty of Care
3) Duty of Loyalty
4) Duty of Candor

Question 2

Board Director’s duties - Fiduciary Duty (3)

Answer 2

1) Must act in the interest of the corporation
2) Duty to protect shareholder interest of shareholders above their own interest and must avoid conflict interest
3) A duty of “fair treat” for stakeholderinterest of harm

Question 3

Board of Director’s duties - Duty of Care

Answer 3

Must make decision with due deliberations (get info + discuss)

Question 4

Board of Director’s duties - Duty of Loyalty

Answer 4

Must place the interest of shareholders above their own interest and must avoid conflict of interest

Question 5

Board of Director’s duties - Duty of Candor

Answer 5

Must ensure shareholders are adequately and timely informed

Question 6

Board of Directors - responsibilities

Answer 6

Responsibilities of the board of directors should be explicit and not ambiguous

Question 7

Board of Directors - Responsibilities outlined in the CFA

Answer 7

1) Establish corporate values and govt structure
2) Ensure compliance with legal and regulatory obligations
3) Establish long term strategies
4) Hire CEO, and establish a compensation package, periodically evaluate the performance
5) Ensure to be informed and have enough information to make a decision and manage

Question 8

Independence of Board Members - Criteria for an Independent Director

Answer 8

No martial business or other relationship.

Question 9

Independence of Board Members - Criteria for an Independent Director (4)

Answer 9

1) The firm ( including management, former executives/ employees, and their family
2) Whoever can exert significant influence on Management
3) Firm advisory (external auditors)
4) Who ever has cross relationship with the firm

Question 10

Independence of Board Members - Criteria for Nonindependent Director (2)

Answer 10

1) A director who is neither an Executive Director nor an independent Director
2) At minimum a board would require to have a majority of independent to be viewed as independed

Question 11

Independence of Board Members - other consideration to qualify the independence of the board (4)

Answer 11

1) Is the chairperson an independent director or not
2) If the chairperson is not, has a ‘Lead Independent Director ‘ be designated and how often do they meet themselves
3)Has Committees only made-up of Independent Directors be formed with specific and exclusive responsibilities;
4)Has the Board and its Committees authority to hire
independent consultants.

Question 12

Board of Directors - Elections (4)

Answer 12

1) One share/ one vote - majority wins - positive
2) Dual class shares (one share = 1 vote while another = 10 votes) negative
3) Majority voting - Shareholder vote for one candidate at a time and needs a majority for elected (positve)
4) Cumulative voting - Each shareholder gets a number of votes that reflect its number of shares, the number of Directors & voting power.
▪ A shareholder can choose to cast all its vote for one Board candidate or spread them around

Question 13

Board of Directors - Terms and sizes (2)

Answer 13

Annual Elections (+)
-All director positions are subject to annual elections
-Term is therefore one year
- Possible to changle all directors
Staggered Elections (-)
-The term is for multiple years
-Impossible to change all directors at once
-Per chosen term, a certain proportion of director positions are subject to annual elections on a rotation basis (e.g. one third)

Question 14

Board of Directors - Terms and sizes - Annual elections (3)

Answer 14

Annual Elections (+)

• All director positions are subject to annual elections
• Term is therefore one year
• Possible to change all director

Question 15

Board of Directors - Terms and sizes - Staggered elections (3)

Answer 15

• The term is for multiple years
• Impossible to change all directors at once
• Per chosen term, a certain proportion of director positions are subject to annual elections on a rotation basis (e.g. one third)

Question 16

Board of Directors - Nominations Committee

Answer 16

Roles and Responsibilities
● Recruitment of new Board Members.
▪ Qualification and experience are relevant to the firm’s needs.
● Establish succession plans for Management and the Board.
● Manage the evaluation process of Management and Board.
● US: Develop governance standards of the firm.

Question 17

Board of Directors - Nominations Committee - Areas of concern

Answer 17

Potential areas of concerns
● The extent to which Board Members sit on multiple boards and their attendance record (‘busy boards’).
● The extent to which senior executives sit on each other’s
boards (‘interlocked boards’).
● Is the Board really overseeing Management (‘captured board’)

Question 18

Board of Directors - Roles and Responsibilities - Compensation committee

Answer 18

● Ensure that the incentives provided to Management (i.e.
compensation and other rewards) are structured and
calibrated in a way to enhance the firm profitability and value.
● Ensure that remuneration packages offered to Management are commensurate with responsibilities & firm performance.
● Develop performance goals for Management and monitor actual performance relative to targets.
● Establish mechanisms to recover incentive awards if earned by Management through fraud.
● Oversee compensation of nonexecutive employees.
● Hire consultants as needed.

Question 19

Board of Directors - Roles and Responsibilities - Audit committee

Answer 19

Roles and Responsibilities
● Ensure that financial information reported to Shareholders is complete, accurate, reliable, relevant, and timely.
● Ensure financial statements are prepared according to the relevant accounting standards and that the regulatory
disclosure requirements are complied with.
● Select and supervise the independent external auditors, and ensure the external audit is conducted in accordance with the relevant audit standards.
● Monitor the internal control processes.
● Oversee the performance of the internal audit function.
● Oversee compliance, ethics and whistleblower hotlines.

Question 20

Board of Directors - Roles and Responsibilities - Internal Controls

Answer 20

Any organization requires ‘internal controls’ in place to ensure that its resources are utilized toward its goals in an efficient manner (rather than lost, misappropriated or squandered).

Question 21

Board of Directors - Roles and Responsibilities - Internal Controls - Transaction Level

Answer 21

Transaction-level: mechanisms to ensure proper transactions
● E.g. goods provided to a client are invoiced and payment
obtained while goods or services received trigger a supplier
the invoice which is verified before being paid.

Question 22

Board of Directors - Roles and Responsibilities - Internal Controls (2)

Answer 22

1) Transaction level

2) Organizational level

Question 23

Board of Directors - Roles and Responsibilities - Internal Controls - Organizational Level

Answer 23

Organizational level: to ensure proper reporting and compliance
● E.g. all activities of the firm are properly and timely reported
in its financial statements.

Question 24

Board of Directors - Internal control: Authorities

Answer 24

Mechanism is ‘designed’
● M&A and budget: in the statutes of the company
● Transactions limits: decided by the Board of Directors

Question 25

Internal Audits

Answer 25

The internal audit function nowadays typically reports directly to the Audit Committee of the Board of Directors.

Question 26

Internal Audit (6)

Answer 26

● Sometimes mandated by regulations (e.g. banks)
● Monitors the quality/comprehensiveness of internal control
● Verifies that internal control mechanisms are complied with
● Assess the quality of risk management and corporate governance
● Occasionally discovers fraud through its audits
● Submits reports + recommendations to the Audit Committee
● Follow-up corrective action by management

Question 27

Dual-class Shares (1) Advantages(3)

Answer 27

-Can raise capital while minimizing loss of control;
● Facilitate intergenerational control from founder to heirs;
● Facilitate compliance with Canadian ownership requirements.

Question 28

Dual Class shares disadvantages

Answer 28

Disadvantages (for the owners of single-vote or no-vote shares)
● Controlling shareholders can extract private benefits and
excessive compensation (another layer of agency problems).

Question 29

Dual Class shares defninition

Answer 29

Equal economic interest in the firm (e.g. same dividends), but
unequal voting rights (e.g. Google, Facebook, Bombardier).