Corporate Governance Flashcards
What is the primary duty of the board of directors?
To monitor management behavior.
Safeguard co assets
Maximize shareholder return
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.
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?
Executice 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.
Disclose significant Internal Control deficiences.
CEO/CFO must certify that the financial statements comply with securities laws and fairly present the financial condition of the company.
What characteristics/objectives that are promoted by the COSO framework on internal control?
Reliable financial reporting
Effective and efficient operations
Compliance
What are the elements of the control environment?
o Commitment to Integrity o Exercise Oversight Responsibility o Establish Structure and Authority o Commitment to Competence o Accountability
What are control activities?
A component of internal control that includes actions being taken to promote the control environment.
o Develop Control Activities
o Develop IT Controls
o Policies and Procedures
What are the basic elements of internal control?
Control Environment Risk Assessment Control Activities Information and Communication Monitoring
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.
o Relevant Information
o Internal Communications
o External Communications
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
Which of the three objectives within the Internal Control - Integrated Framework is the focus of COSO?
Reporting objectives
What are the four categories in enterprise risk management (ERM)?
Internal environment objective setting ( strategic, operations, reporting, compliance) event identification (event that affects implementation of a strategy/achievement of objective) risk response (avoid, reduce, share or except)
What type of risk requires no action?
Inherent Risk
What type of risk exists after management takes action?
Residual Risk
What does enterprise risk management (ERM) do for an organization?
It manages risks and seizes opportunities to achieve the goals of the organization.
It provides a framework for risk management, determines response strategy, and monitors the progress.
What are limitations of enterprise risk management (ERM)?
Limitations refer to reasons the control system may not function as designed.
ERM is as effective as the people responsible for its functioning.
ERM operates at different levels with respect to different objectives.
ERM deals with risk, which relates to the future and is inherently uncertain
