CH11 QB Governance and ethics

Question 1

Which three of the following attributes are identified by the Institute of Business Ethics as
being typical of ethical business leaders?
A Fair mindedness
B Honesty
C Ability to listen
D Empathy
E Accountability

Answer 1

A,B,C
Empathy and accountability were not among the attributes identified by the Institute of
Business Ethics. The other two were courage and openness. SAMPLE PAPER

Question 2

In a market-based financial system, the financial system will be characterised by:
A comparatively more government regulation than a bank-based system
B comparatively less close relationships between banks and businesses than in a bankbased system
C comparatively more risk averse households than in a bank-based system
D households with less access to investment in physical assets than in a bank-based
system

Answer 2

B Options A, C and D are all characteristics of bank-based financial systems

Question 3

In the country of Zanadu, the population has a risk seeking attitude towards financial
matters. Zanadu’s financial system is likely to be:
A a market-based system
B a stakeholder system
C a bank-based system
D a public policy system

Answer 3

A Household preference for equity (more risk) rather than bank deposits (less risk) means
that equity finance in a market-based system is likely to dominate the financing of
businesses. SAMPLE PAPE

Question 4

Under a unitary board structure, a company’s board of directors is responsible for both
management of the business and reporting to:
A the non-executive directors
B the supervisory board
C the company’s employees
D the company’s shareholders

Answer 4

D The reporting responsibility is to shareholders (D), not to other directors (A) nor to
employees (C). Under a unitary board structure there would not be a supervisory board
(B).

Question 5

In both bank-based and market-based financial systems, financial intermediation is of
increased importance because of its ability to address the market imperfection of:
A monopoly
B asymmetric information
C trade barriers
D tariffs and quotas

Answer 5

B Financial intermediation overcomes the problem of asymmetric information associated
with direct financing

Question 6

The agency problem is behind the need for sound corporate governance. The 'principal' in
this agency relationship is:
A customers as a body
B shareholders as a body
C managers as a body
D directors as a body

Answer 6

B The separation of ownership and control creates a situation where directors act as the
agents of owners (shareholders), who are, therefore, collectively the principal.

Question 7

A consultant has made the following statements, which he maintains are drawn from the
definition of corporate governance in the OECD’s Principles of Corporate Governance.
Statement (1) Corporate governance comprises the practices and procedures for ensuring
that a company is run in such a way that it achieves its objectives.
Statement (2) Corporate governance is a set of relationships between a company’s
management, its board, its shareholders and other stakeholders.
Identify whether each statement matches the definition.
A Statement (1) matches; Statement (2) does not match
B Statement (1) does not match; Statement (2) does not match
C Statement (1) matches; Statement (2) matches
D Statement (1) does not match; Statement (2) matches

Answer 7

D
Corporate governance comprises the practices and procedures for
ensuring that a company is run in such a way that it achieves its
objectives.
Does not match
Corporate governance is a set of relationships between a
company’s management, its board, its shareholders and other
stakeholders.
Matches
Statement (1) fails to specify that corporate governance also covers how objectives are
set.

Question 8

Different corporate governance systems reflect different ways in which companies are
managed and controlled by different board structures. The following statements have been
made about the structure of a board of directors.
Statement (1) In the UK and Germany there is a unitary board system.
Statement (2) A two-tier system comprises a management board and a supervisory board.
Identify whether each statement is true or false.
A Statement (1) true; Statement (2) false
B Statement (1) false; Statement (2) false
C Statement (1) true; Statement (2) true
D Statement (1) false; Statement (2) true

Answer 8

D The first statement is false – Germany has a two-tier system comprising a management
board and a supervisory board,

Question 9

Which of the following is one of the five OECD Principles of Corporate Governance?
A Promote transparent and fair financial reporting
B Support the rights of stakeholders
C Treat major shareholders equitably
D Ensure real time, accurate disclosure and transparency

Answer 9

B Principle IV covers supporting the rights of stakeholders in corporate governance
(Option B), including the importance of creating sustainable and financially sound
companies that in turn create wealth and jobs. Option A should read ‘transparent and
fair markets, and the efficient allocation of resources’ (Principle I), not efficient financial
reporting. Option C should read ‘all shareholders’, not just major shareholders
(Principle II). Option D should read ‘timely’ rather than real time (Principle V).

Question 10

The following statements have been made about ethical audits and corporate
responsibility.
Statement (1) An ethical audit is a process which measures both the internal and external
consistency of a company’s values base.
Statement (2) How far an organisation protects stakeholders with which it has contractual
relationships is a measure of its corporate responsibility.
Identify whether each statement is true or false.
A Statement (1) true; Statement (2) false
B Statement (1) false; Statement (2) false
C Statement (1) true; Statement (2) true
D Statement (1) false; Statement (2) true

Answer 10

A The first statement is true as set out by the International Society of Business, Economics
and Ethics. The second statement is false – corporate responsibility is measured by how
far the organisation protects the interests of those with whom it has non-contractual
relationships, such as the public at large.

Question 11

The principal factor affecting the nature of business ethics over time is:
A the expectations of society
B the values of senior management
C company policies
D government regulation

Answer 11

A Corporate ethics are principally affected by society’s expectations.

Question 12

A financial system comprises which three of the following?
A Governance structures
B Intermediaries
C Securities
D Markets
E Regulators

Answer 12

B,C,D
Options B, C and D all relate to a generic financial system. Governance structures and
regulators may or may not exist within a particular system, but they are by no means
basic elements of it.

Question 13

The ability of markets to allocate resources efficiently within a financial system is often
restricted by market imperfections.
Which three of the following are market imperfections associated with financial markets?
A Lack of codes of practice
B Information asymmetry
C Transaction costs
D Lack of regulation
E Insider dealing

Answer 13

B,C,E
The lack of codes of practice and regulation contributes to rather than restricts the
efficiency of financial markets in resource allocation.

Question 14

The body responsible for promoting high standards of corporate governance in the UK is the:
A FRC
B OECD
C CCAB
D Bank of England

Answer 14

A The OECD (B) produced its Principles of Corporate Governance, but it does not have
UK responsibility for the promotion of high standards of corporate governance. The
CCAB (C) and the Bank of England (D) have no such responsibility

Question 15

Woolmer plc adopts corporate responsibility as a key element in its strategies. This will
mean that the company seeks to:
A meet the minimum obligations it owes to stakeholders
B exceed the minimum obligations it owes to stakeholders
C meet the minimum obligations it owes to shareholders
D exceed the minimum obligations it owes to shareholders

Answer 15

B Rather than simply doing the minimum required, the company will want to exceed it, in
relation to all stakeholders and not merely shareholders.

Question 16

In seeking to address the problem of the separation of ownership and control, corporate
governance attempts to align the interests of which two of the following stakeholders?
A Investors
B Employees
C Regulators
D Managers
E Auditors

Answer 16

A,D The separation of ownership and control refers to the classic ‘agency problem’, in
which investors (shareholders) who own the company delegate responsibility for
running the business to managers (as agents) for the ultimate benefit of the owners.
Corporate governance is fundamentally concerned with ensuring that the managers
act as the owners would want them to.

Question 17

The stewardship approach to corporate governance requires directors of limited
companies:
A to act at all times in the best interests of the company
B to allow shareholders to see detailed accounting records on request
C to hold regular monthly meetings to answer shareholders’ questions
D to consult the shareholders over difficult management decisions

Answer 17

A The stewardship approach requires that directors should act at all times in the
company’s best interests, not in their own interests. This resolves the agency problem.
Allowing shareholders to see detailed accounting records on request, holding monthly
meetings to answer shareholders’ queries and consulting shareholders over difficult
management decisions are not required by the stewardship approach, though a
company can choose to follow such procedures. SAMPLE PAPER

Question 18

The board of directors of Lake plc is concerned that the current chief executive’s actions are
undermining the ethical culture at the company. She fails to listen to the concerns of
managers about unfair treatment of suppliers, and she has failed to learn from a recent
scandal in which the company was fined for data protection breaches.
To improve the ethical culture at Lake plc, which of the following is the most important
action for the board to take?
A Draft a code of business ethics for Lake plc’s employees
B Rewrite Lake plc’s policies regarding suppliers and customers
C Demonstrate leadership by encouraging Lake plc’s chief executive to be more open
D Brief shareholders more fully about Lake plc’s incentive scheme for managers

Answer 18

C Lake plc’s Chief Executive has failed to show a key attribute of an ethical leader, which
is openness: being open minded and willing to learn. Boards have a responsibility to
act where leaders do not deliver on ethical leadership, so Lake plc’s board should
demonstrate leadership by encouraging the Chief Executive to be more open. While
drafting a code of business ethics, rewriting policies and talking to shareholders can
also help to build an ethical corporate culture, it is addressing unethical leadership that
is the key way to improve it. SAMPLE PAPER

Question 19

Protea plc manufactures sporting equipment for leisure centres. The Chairman is Jonathan
Potter, and the Chief Executive is his daughter Elise. All of the directors receive bonuses
based on annual profits. The company’s sales are made by individual salespeople who
routinely bypass the company’s strict credit check procedures. A number of irrecoverable
debts have arisen in the current year that would have affected profitability and the share
price, if the Finance Director had not manipulated the accounts.
From this information, what are the likely corporate governance issues at Protea plc?
A Domination by a small group
B Emphasis on short-term profitability
C Lack of supervision of employees
D All of the above

Answer 19

D Domination by a small group: key figures are related
Short-term view: directors’ bonuses are based on annual profits
Lack of supervision: the sales force can tie the company into contracts that represent a
credit risk

Question 20

Which of the following is a list of the five key elements of good corporate governance?
A Board of directors, senior management, employees, external auditors, internal auditors
B Senior management, shareholders, employees, external auditors, lenders
C Board of directors, senior management, shareholders, external auditors, internal
auditors
D Senior management, stakeholders, internal auditors, employees, government
regulators LO 5

Answer 20

C Board of directors, senior management, shareholders, external auditors, internal
auditors are the key elements of good corporate governance.

Question 21

Ultra Zeta AG is a company based in Germany. The business has a dual board structure for
its Board of Directors.
Which of the following types of board forms part of the company’s board structure?
A Unitary board
B Supervisory board
C Non-executive board
D Executive board

Answer 21

B A dual board system consists of a supervisory board and a management board.