Corporate Governance

Question 1

What is the primary duty of the board of directors?

Answer 1

To monitor management behavior.

Question 2

What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?

Answer 2

Oversees the board

Responsible for hiring new CEO

Question 3

What is the responsibility of the audit committee of the board of directors?

Answer 3

The audit committee appoints and oversees the external auditor.

Question 4

What is the duty of the compensation committee of the board of directors?

Answer 4

The compensation committee handles the CEO’s compensation package.

Question 5

What does the NYSE and NASDAQ require of the board of directors?

Answer 5

They require the board to be independent.

NYSE 3 yrs & NASDAQ 5 yrs

Question 6

What is the main goal in an executive compensation package?

Answer 6

The package should ensure that the goals of management should match those of the shareholders.

Question 7

How can an executive compensation package ensure that goals of management align with those of shareholders?

Answer 7

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.

Question 8

Which influences help mold the direction that management takes?

Answer 8

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

Question 9

What is shirking?

Answer 9

When management doesn’t act in the best interest of shareholders.

It can be alleviated by tying compensation to stock performance or company profit.

Question 10

What requirements are imposed on a public company under Sarbanes-Oxley?

Answer 10

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.

Question 11

What characteristics (objectives) are promoted by the COSO framework on Internal Control?

Answer 11

Reliable financial reporting

Effective and efficient operations

Compliance

Question 12

What are the elements of the Internal Control: control environment?

Answer 12

Integrity & Ethics
Competence
The Board of Directors & Audit Committee
Management’s Operating Style
Organizational Structure
Authority & Roles of Responsibilities
HR Policies

Question 13

Of the Internal Control, What are control activities?

Answer 13

A component of Internal Control that includes actions being taken to promote the control environment.

Question 14

What are the basic elements of Internal Control?

CRIME

Answer 14

Control Activities
Risk Assessment
Information and Communication
Monitoring
Environment (Control)

Question 15

What is the significance of the Information and Communication aspect of Internal Control?

Answer 15

Management must have access to relevant and timely information to make good decisions.

Question 16

How does Monitoring affect Internal Control?

Answer 16

Internal Control activities must be constantly monitored and evaluated for effectiveness.

Question 17

What activities does the COSO framework for enterprise risk management include?

Answer 17

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

Question 18

What are possible responses to risk under the COSO framework for enterprise risk management?

Answer 18

Avoid or Reduce

Share or Accept

Question 19

What do Articles of Incorporation must include?

Answer 19

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

Question 20

What is the Board of Directors duty to the company?

Answer 20

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

Question 21

what are the inherent(unavoidable) limitations of internal controls?

Answer 21

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.

Question 22

What is the Risk Mgmt Process?

Answer 22

Steps
1 - Identify Risks
2 - Assess Risks
3 - Prioritize Risks
4 - Formulate Risk Responses
5 - Monitor Risks Responses

Question 23

what are the rights of common shareholders?

Answer 23

1. Right to receive dividend, if declared by BOD
2. Right to subscribe to stock issues so that their ownership is not diluted (preemptive right)
3. Right to inspect books and records in good faith and for a proper purpose.
4. Right to sue on behalf of the corporation

Shareholders have NO RIGHT to manage corp unless they are also officers or directors.

Question 24

What are the duties of the Board of Directors?

Answer 24

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

Question 25

What is the best form of executive compensation ?

Answer 25

A combination of fixed salary and incentive compensation that is related to LT stock price.