Corporate Governance Flashcards
What is the primary duty of the board of directors?
To monitor management behavior.
What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?
Oversees the board
Responsible for hiring new CEO
What is the responsibility of the audit committee of the board of directors?
The audit committee appoints and oversees the external auditor.
What is the duty of the compensation committee of the board of directors?
The compensation committee handles the CEO’s compensation package.
What does the NYSE and NASDAQ require of the board of directors?
They require the board to be independent.
NYSE 3 yrs & NASDAQ 5 yrs
What is the main goal in an executive compensation package?
The package should ensure that the goals of management should match those of the shareholders.
How can an executive compensation package ensure that goals of management align with those of shareholders?
Executive compensation should create an incentive for management to govern in a shareholder-friendly way that doesn’t sacrifice the long-term success of the enterprise for short-term gain.
Which influences help mold the direction that management takes?
They range from internal (Board of Directors- Audit Committee- Internal Control) to external (Creditors- SEC- IRS)
These influences should not be tainted by undue influence from management or have financial ties to management such as compensation-related duties
What is shirking?
When management doesn’t act in the best interest of shareholders.
It can be alleviated by tying compensation to stock performance or company profit.
What requirements are imposed on a public company under Sarbanes-Oxley?
Management must submit a report on the effectiveness of Internal Control in the 10K.
Management must disclose significant Internal Control deficiencies.
CEO/CFO must certify that the financial statements comply with securities laws and fairly present the financial condition of the company.
What characteristics (objectives) are promoted by the COSO framework on Internal Control?
Reliable financial reporting
Effective and efficient operations
Compliance
What are the elements of the Internal Control: control environment?
Integrity & Ethics
Competence
The Board of Directors & Audit Committee
Management’s Operating Style
Organizational Structure
Authority & Roles of Responsibilities
HR Policies
Of the Internal Control, What are control activities?
A component of Internal Control that includes actions being taken to promote the control environment.
What are the basic elements of Internal Control?
CRIME
Control Activities Risk Assessment Information and Communication Monitoring Environment (Control)
What is the significance of the Information and Communication aspect of Internal Control?
Management must have access to relevant and timely information to make good decisions.
How does Monitoring affect Internal Control?
Internal Control activities must be constantly monitored and evaluated for effectiveness.
What activities does the COSO framework for enterprise risk management include?
Identifies Risk Factors Promotes Risk Response Decisions Compares Management Risk vs. Shareholder Goals Aids in evaluating opportunities Promotes Quicker Capital movement
Does NOT eliminate all risk
What are possible responses to risk under the COSO framework for enterprise risk management?
Avoid or Reduce
Share or Accept
What do Articles of Incorporation must include?
1) Corporation’s name
2) # of authorized shares of stock
3) Street address of the corporation’s initial registered office
4) Name of the registered agent at that office
5) Nam and address of each incorporator
What is the Board of Directors duty to the company?
BOD as a fiduciary duty by holding a position of trust and only overseeing it. It does not participate in the day to day activities
what are the inherent(unavoidable) limitations of internal controls?
1) established objectives must be suitable for internal control
2) Human judgement errors
3) Breakdowns in control(misunderstanding, carelessness)
4) Internal control override from Management
5) Manual or automated controls can be circumvented by Collusion
6) External Events.
What is the Risk Mgmt Process?
Steps 1 - Identify Risks 2 - Assess Risks 3 - Prioritize Risks 4 - Formulate Risk Responses 5 - Monitor Risks Responses
what are the rights of common shareholders?
- Right to receive dividend, if declared by BOD
- Right to subscribe to stock issues so that their ownership is not diluted (preemptive right)
- Right to inspect books and records in good faith and for a proper purpose.
- Right to sue on behalf of the corporation
Shareholders have NO RIGHT to manage corp unless they are also officers or directors.
What are the duties of the Board of Directors?
1) determine mission of the corp
2) selection and removal of CEO
3) Amend bylaws, unless this is the responsibility of shareholders
4) Determine Mgmt compensation
5) Decisions regarding declaration and payment of dividends
6) Decisions regarding major acquisitions and capital structure
7) Advising Mgmt
8) Providing governance oversight
9) Ensuring accurate financial reporting
10) Risk Management
