Corporate Governance

Question 1

Primary Role of The Board of Directors

Answer 1

Safeguard the Company Assets
and
Maximize Shareholder Return

Question 2

Board of Directors

Answer 2

Have No Individual Authority

Act as a Group if they have a Quorum - duly constituted

Question 3

Specific Duties of the Board of Directors

Answer 3

Officers - Election, Supervision and Removal of Officers
(with or without cause) Review their conduct
Bylaws - Adoption, Amendment and Repeal of Bylaws
Compensation of Mgmt - they set it
Corporate Structure Changes - Initiate them
Power to set Director Compensation
Declare Dividends
Fiduciary Duties - Always Act in the Best Interest of Corp.
are NOT Insurers of the Corp.’s success.

Question 4

Fiduciary Duties - Right to Rely

Answer 4

Board of Directors has a right to rely on info, opinions, reports or statements of:
1. Corp. Officers, employees, or a committee of the brd
2. Legal Counsel, accountants or other persons who
they reasonably believe are professionally competent

Question 5

Fiduciary Duties - Liability for Unlawful Dist.’s/Dividends

Answer 5

May be held liable for authorizing distributions in violation of law, such as when

1. the Corp. wd. not be able to pay its debts as they become due in the regular course of business
2. the Corp’s total assets wd. be less than its total liab’s

Question 6

Fiduciary Duties - Loyalty

Answer 6

Directors owe their Corp. duty of Loyalty. Must
Act in The Best Interest of their Corp.

Prohibits directors from competing with the Corp.
(can’t be on Brd. of Dir’s for Coke & Pepsi)

Does Not Prohibit Dir’s from transacting business w. the Corp. (buying from or selling to the Corp.)

Actions w. conflict of interest will be upheld if:
1) have full disclosure & it’s approved by disinterested majority of the board or shareholders
OR
2) the transaction is fair and reasonable to the Corp.

Question 7

Fiduciary Duties - Corp. Opportunity Doctrine

Answer 7

If presented w. a business opportunity that is of interest to the Corp, Generally the Duty of Loyalty prohibits a director from taking the opportunity himself, unless he first present it to the Corp. and they decline to take it.

Question 8

Indemnification

Answer 8

GR, Corporations are allowed to indemnify directors for expenses for any lawful suit. Corp. may also pay any judgment imposed on a director, except in a shareholder derivative suit.

Question 9

Limitations on Director Liability

Answer 9

Articles of Incorporation limits director’s liability to the Corp. for money damages for actions taken as a dir.
EXCEPT if they act IN BAD FAITH or are UNETHICAL.

Examples:

1. Financial benefit rec’d that they were not entitled to
2. Intentional Harm Inflicted on Corp. or Shareholders
3. Unlawful Distributions
4. Intentional Violations of Criminal Law
5. Breaches of the Duty of Loyalty

Question 10

Directors Manage Principal - Agent Conflict

Answer 10

Conflicts between Company Shareholders (Principal)
and Corp’s Senior Management (Agent).

Acts as Intermediary role, ensure that managers to do not act in their own best interest for personal gain.

Question 11

OFFICERS OF CORPORATION (Page B1-5)

Answer 11

Officers are Individual Agents of the Corporation

Question 12

COSO

Answer 12

Committee on Sponsoring Organizations

An independent private sector initiative, initially established in the mid 1980’s to study the factors that lead to fraudulent financial reporting.

Question 13

An effective system of internal controls requires

PASS KEY IN BOOK

Answer 13

More than just adherence to policies and procedures by management, the board of directors and the internal auditors.

It requires the use of JUDGEMENT in determining the sufficiency of controls, in applying the proper controls, and in assessing the effectiveness of the system of internal controls. The Principles-based approach of the framework supports the emphasis on the importance of management JUDGEMENT.`

Question 14

Definition of Internal Control

Answer 14

Internal Control is a process that is designed and implemented by an organization’s management, board of directors and other employees to provide reasonable assurance that it will achieve its compliance, operating, and reporting objectives.

Question 15

Internal Control FRAMEWORK Objectives (3) “ORC”

MEMORIZE THESE

Answer 15

O - Operational Objectives (effectiveness & efficiency)
R - Reporting Objectives (reliability,timeliness and transparency of an entity’s external & internal financial and non-financial reporting)
C - Compliance Objectives (ensure the entity is adhering to all applicable laws and regulations)

Question 16

Components of Internal Control (CRIME) (5)

Answer 16

C - Control Environment (EBOCA)
R - Risk Assessment by Mgmt
I  - Information & Communication Systems
M - Monitoring
E - Existing Control Activities

Question 17

C in “CRIME” = Control Environment (remember EBOCA)

Answer 17

“Tone at the top” approach taken by the senior management & board of directors of an entity. The 5 principles related to the control environment are:

E - Ethics & Integrity Commitment to them(ethical values)
B - Board Independence and Oversight
O - Organizational Structure (reporting lines, authorities & responsibilities)
C - Competence, Commitment to hire, develop & retain competent employees.
A - Accountability-Individuals held accountable)

Question 18

R in “CRIME” = Risk Assessment (remember EAR)

Answer 18

E - Event Identification (identify risk & decide how to manage it)
A - Assess Risk (consider potential for fraud)
R - Respond to Risk

Question 19

I in “CRIME” = Information & Communication

Answer 19

Between Internal & External Parties

Obtain & Use Information
Internally Communicate Information (Internal Audit, Audit Committee, Management)
Communicate with External Parties (CPA Firm, Customers)

Question 20

M in “CRIME” = Monitoring Activities

Answer 20

Assess the design & operation of controls on a timely basis and take the necessary corrective actions.

Ongoing and/or separate evaluations - Frequency of testing dictated by Risk.

Communication of Deficiencies - Report deficiencies in a timely manner to parties responsible for taking corrective action.

Question 21

E in ‘CRIME” = Existing Control Activities (to mitigate risk)

Answer 21

Set forth by entity’s policies & procedures.

Control Activities can be detective or preventive in nature

Select & Develop Control Activities to mitigate risk to acceptable levels.

Select & Develop Technology Controls (IT) to support the achievement of objectives

Deployment of Policies & Procedures put policies into action.

Question 22

The Business Judgment Rule

Answer 22

Acts performed or decisions made in good faith, by a director or fiduciary, conducted in a manner that he believes to be in the best interest of the corp. and with the ordinary care an ordinarily prudent person in a like position would exercise. (and they are within the powers
that they are authorized to do).

Question 23

the most effective method to transmit a message of ethical behavior throughout an organization?

Answer 23

According to the COSO, demonstrating appropriate behavior by example is the most effective method to transmit a message of ethical behavior throughout an organization. The commitment to ethical behavior begins with the tone at the top, and is best established by management’s demonstrated commitment to ethical behavior.

Question 24

which components is designed to ensure that internal controls continue to operate effectively?

Answer 24

The monitoring component or function of the internal control framework is designed to ensure that internal controls continue to operate effectively

Question 25

Compliance objectives include

Answer 25

adherence to the laws, rules, and regulations associated with operations, including environmental regulations and other laws.

Question 26

Under the corporate opportunity doctrine, a director presented with a business opportunity that may be of interest to his/her corporation

Answer 26

is prohibited through the duty of loyalty from taking the opportunity without first presenting it to the corporation. Only after the corporation is presented formally with the opportunity and decides not to take it can the director move forward. An informal discussion with a fellow board member is insufficient.

Question 27

A code of conduct should be in writing and available to employees who want to read it, but there is no requirement

Answer 27

that it must be displayed in public areas.