Chapter 4 Corporate Governance and Corporate Compliance 1. What is the name of the company in the “But I Fired You First” scenario? a. Attwell b. Atmel c. Atlem d. Allmen Answer: b. Atmel 2. Who is being fired in “But I Fired You First” scenario? a. CEO and the Board of Directors a. CEO and the Chairman of the Board c. Chairman of the Board and the Board of Directors d. CEO and the CFO Answer: a. CEO and the Board of Directors 3. What does the company make in the “But I Fired Your First” scenario? a. computer software b. computer hardware c. computer chips d. computer servers Answer: c. computer chips 4. What is the major ethical issue in the “But I Fired You First” scenario? a. The CEO had misused company travel funds b. The CEO had given false information to the Board of Directors c. The CEO was illegally given stock options. d. The CEO ordered the CFO to change figures on the financial statements Answer: a. The CEO had misused company travel funds 5. When an investigation recommended that the CEO be fired in “But I Fired You First”, what happened next? a. The CEO was fired b. The CEO was only fired after he received a severance package of $20 million c. The CEO stated the recommendation was not valid because he fired the Board of Directors first d. The CEO started his own investigation Answer: c. The CEO stated the recommendation was not valid because he fired the Board of Directors first 6. Corporate governance can be defined as: a. The system used by firms to control the actions of their employees b. The election process used to vote in a new Board of Director c. The corporate compliance system used by the firm d. The system used by firms to identify who the critical stakeholders are for the firm Answer: a. The system used by firms to control the actions of their employees 7. The system that is used by firms to control and direct their operations and the operations of their employees is called: a. Corporate Compliance b. Corporate Governance c. Corporate Control d. Corporate Directive Answer: b. Corporate Governance 8. Traditionally, the board of directors is responsible for representing the interests of: a. stockholders b. management c. employees d. stakeholders Answer: a. stockholders 9. The relationship between board of directors and stockholders is based on which theory? a. management b. subordinate c. agency d. investor Answer: c. agency 10. Agency theory relates to the board of directors because: a. the board of directors is an “agent” of the stockholder b. the board of directors requires advice from both internal and external agents c. the board of directors must meet certain criteria established by consulting agents d. the board of directors is responsible for determining external agents for the firm Answer: a. the board of directors is an “agent” of the stockholder 11. Board members can be classified as either: a. internal and external b. inside and outside c. financial and non-financial d. compensated and non-compensated Answer: a. internal and external 12. A board member who has direct financial ties to the firm is called what kind of board member? a. financial b. direct c. inside d. supportive Answer: c. inside 13. A board member who has no direct financial ties to the firm is called what kind of board member? a. non-financial b. indirect c. outside d. non-supportive Answer: c. outside 14. Which of the following is not a traditional responsibility of the board of directors? a. establishing and maintaining internal financial controls b. establishing and revising a firm’s code of ethics c. identifying the firm’s future critical competitors d. selecting the firm’s external auditor Answer: c. identifying the firm’s future critical competitors 15. Which of the following is not considered a core value needed to help guide the behavior of members on the board of directors? a. integrity b. competence c. citizenship d. responsibility Answer: b. competence 16. Which of the following board of director core values corresponds with considering the local community in the decision making process? a. corporate social responsibility b. social awareness c. citizenship d. responsibility Answer: c. citizenship 17. Based on the recommendations of Wharton, Lorsch and Hanson, how often should the CEO be evaluated on achieving his or her goals by the board of members? a. monthly b. quarterly c. twice a year d. yearly Answer: d. yearly 18. Based on the recommendations of Wharton, Lorsch and Hanson, how often should the board of directors meet without the presence of the CEO? a. monthly b. quarterly c. twice a year d. yearly Answer: d. yearly 19. Based on the recommendations of Wharton, Lorsch and Hanson, how should institutional shareholders view themselves? a. investors b. advisors c. active owners d. majority owners Answer: c. active owners 20. Which of the following is not a typical decision made by the board of directors? a. the annual business plan of the firm b. the hiring and compensation of the board members c. the issuance of stock options d. the type of computer software used by the firm Answer: d. the type of computer software used by the firm 21. Which of the following is not a typical decision made by the board of directors? a. the issuance of dividends b. litigation settlements greater than a certain amount c. contingent liabilities issues greater than a particular amount d. compensation levels for different management ranks Answer: d. compensation levels for different management ranks 22. Which of the following is not a traditional board of directors committee? a. compensation b. legal c. succession d. nominating Answer: b. legal 23. Which board of directors committee is responsible for the decision to issue new stock? a. executive b. auditing c. finance d. equity Answer: c. finance 24. Which board of directors committee is responsible for the top level decisions of the firm? a. executive b. strategic c. planning d. comprehensive Answer: a. executive 25. Which board of directors committee is responsible for the appointment of new board members? a. appointment b. selection c. nominating d. placement Answer: c. nominating 26. Which board of directors committee is responsible for the guidelines on how the board of directors should operate? a. operating b. corporate governance c. corporate compliance d. guiding Answer: b. corporate governance 27. Which board of directors committee is responsible for determining the type of compensation given to top executives? a. salary b. compensation b. compensation c. evaluation d reward Answer: b. compensation 28. Which board of directors committee is responsible for determining the process to replace the CEO? a. selection b. placement c. succession d. nominating Answer: c. succession 29. Which board of directors committee is responsible for monitoring the internal operations of the firm? a. corporate compliance b. corporate governance c. auditing d. evaluating Answer: c. auditing 30. Which board of directors committee is responsible for reviewing alternative financial plans? a. audit b. executive c. finance d. accounting Answer: c. finance 31. Which of the following is not a type of board of directors? a. passive b. proactive c. intervening d. operating Answer: b. proactive 32. Which type of board of directors is considered a “rubber stamp” board? a. passive b. non-interest c. neutral d. un-motivating Answer: a. passive 33. Which type of board of directors verifies the activities of the CEO? a. verifying b. intervening c. certifying d. operating Answer: c. certifying 34. Which type of board of directors has a proactive role within the decision-making process? a. proactive b. operating c. intervening d. engaged Answer: d. engaged 35. Which type of board is actively involved in all the major decisions of the firm? a. proactive b. operating c. intervening d. engaged Answer: c. intervening 36. Which type of board actually makes the key decisions of the firm? a. proactive b. operating c. intervening d. engaged Answer: b. operating 37. What was the compensation ratio when comparing the CEO’s compensation and the average worker’s compensation in 1982? a. 21 times b. 28 times c. 36 times d. 42 times Answer: d. 42 times 38. What was the compensation ratio when comparing the CEO’s compensation and the average worker’s compensation in 2004? a. 103 times b. 207 times c. 365 times d. 431 times Answer: d. 431 times 39. What was the average total compensation for a CEO in 2004? a. $2.3 million b. $6. 8 million c. $9.7 million d. $11.8 million Answer: d. $11.8 million 40. What was the compensation ratio when comparing the CEO’s compensation and the average worker’s compensation in 1982? a. 21 times b. 28 times c. 36 times d. 42 times Answer: d. 42 times 41. Carr and Valinezhad argue that high CEO compensation can be explained by which philosophical theory? a. ethical egoism b. utilitarianism c. Kant’s ethics d. Sidgwick’s dualism Answer: c. Kant’s ethics 42. The Sarbanes-Oxley Act was a direct response to which ethics scandals? a. Enron and Tyco b. Tyco and WorldCom c. Enron and WorldCom d. Enron, WorldCom and Tyco Answer: c. Enron and WorldCom 43. What accounting oversight board was established with the passage of SOX? a. Public Company Accounting Oversight Board b. Certified Public Accountant Oversight Board c. Public Company Auditing Oversight Board d. Certified Public Auditing Oversight Board Answer: a. Public Company Accounting Oversight Board 44. What function were auditing firms no longer allowed to do with the clients with the passage of SOX? a. advising b. consulting c. planning d. designing Answer: b. consulting 45. Under SOX, how often do firms have to change their external auditors? a. every three years b. every five years c. every seven years d. every ten years Answer: b. every five years 46. Under SOX who must certify the financial statements of the firm? a. CEO and Head of Internal Auditing b. CEO and CFO c. CEO and Head of External Auditing d. CFO and Head of External Auditing Answer: b. CEO and CFO 47. The reporting of all off-balance sheet transactions is a requirement of SOX based on which corporate scandal? a. Tyco b. WorldCom c. Enron d. Parmalat Answer: c. Enron 48. Under SOX, how many days do top executives have to report stock transactions? a. one day b. two days c. five days d. thirty days Answer: b. two days 49. Section 404 of SOX refers to: a. CEO compensation b. financial statement reporting c. internal controls d. role of external auditors Answer: c. internal controls 50. Which of the following was not one of the recommendations made by the Cadbury Committee? a. separating the role of the CEO and the chairman of the board b. the audit committee would be composed exclusively of outside members c. the establishment of a maximum CEO to average worker compensation ratio d. board members would serve only a specific term without automatic reappointment Answer: c. the establishment of a maximum CEO to average worker compensation ratio 51. Which of the following was not one of the recommendations of the Combined Code? a. a formal rigorous and transparent process to select new board members b. no director should be involved in deciding his or her own level of compensation c. board members should be rotated off the board every 4 years d. the board should evaluate its own performance Answer: c. board members should be rotated off the board every 4 years 52. Which of the following is not a step recommended by Deloitte & Touche to embed positive ethics and values with its compliance program? a. do a risk/assessment b. review the current ethical policies and procedures c. ask for feedback from the employees of the current value of ethics training d. review the current compliance program Answer: c. ask for feedback from the employees of the current value of ethics training 53. What is the most common criminal charge brought against a firm from the U.S. Federal Sentencing Guidelines For Organizations? a. violation of taxes b. environmental waste discharge c. fraud d. anti trust violations Answer: c. fraud 54. What is one of the major components of the U.S. Federal Sentencing Guidelines For Organizations? a. a formal code of ethics b a formal corporate ethics training program c. a formal corporate compliance program d. a formal corporate governance program Answer: c. a formal corporate compliance program 55. The conscious abuse of public roles and resources for the private benefit of the firm or individual is defined as: a. corruption b. petty corruption c. grand corruption d. influence peddling Answer: a. corruption 56. When private individuals give illegal financial incentives to nonelected public officials in exchange for favorable dealings defines: a. corruption b. petty corruption c. grand corruption d. influence peddling Answer: b. petty corruption 57. When illegal financial incentives are given to higher-ranked public officials, it is defined as: a. corruption b. petty corruption c. grand corruption d. influence peddling Answer: c. grand corruption 58. When illegal transactions take place along with legal actions, it is defined as: a. corruption b. petty corruption c. grand corruption d. influence peddling Answer: d. influence peddling 59. The Act that forbids U.S. companies from giving bribes in other countries in return for business favors is called: a. Foreign Control Practices Act b. Foreign Corrupt Practices Act c. Foreign Currency Practices Act d. Foreign Country Practices Act Answer: b. Foreign Corrupt Practices Act 60. “But I Fired You First” refers to a battle between the CEO and the board of directors. a. True b. False Answer: a. True 61. Corporate governance focuses on the relationship between firms and governments. a. True b. False Answer: b. False 62. Agency theory is the underlying philosophy pertaining to the relationship between the board of directors and investors. a. True b. False Answer: a. True 63. The planning committee is a traditional board of directors committee. a. True b. False Answer: b. False 64. An “Engaged” board is the most involved board of directors. a. True b. False Answer: b. False 65. The CEO to average worker compensation ratio has increased by over ten times from 1982 to 2004. a. True b. False Answer: a. True 66. Tyco was one of the corporate scandals which resulted in the passage of the Sarbanes-Oxley Act. a. True b. False Answer: b. False 67. Under SOX, the CFO of the firm must sign all financial statements a. True b. False Answer: a. True 68. Section 204 of SOX refers to the internal control responsibilities of the firm. a. True b. False Answer: b. False 69. The Cadbury Code is the United Kingdom equivalent to SOX. a. True b. False Answer: a. True 70. Influence peddling occurs when private individuals give illegal financial incentives to highly ranked public officials. a. True b. False Answer: b. False 71. Petty corruption occurs when illegal transactions take place along with legal transactions. a. True b. False Answer: b. False 72. Why is corporate governance such an important ethical issue? Answer: Corporate governance is important in studying ethics from two perspectives. The first perspective is the fiduciary duty board members have to the owners of the firms. Since the board members are selected to serve the best interests of the stockholders, board members have a legal and ethical duty to make decisions that benefit the firm. The second perspective is to consider the firm’s stakeholders as the “owners” of the firm. Based on stakeholder theory, the firm should identify and serve the needs of the various stakeholders. As a result, the board of directors should incorporate the needs and expectations of the stakeholders in their decision making process. By having a strong corporate governance structure, firms can guarantee that they effectively serve the needs of all the stakeholders. 73. Do you think there has been a general movement from passive boards to more involved operating board of directors? Answer: Yes, this is the case. The passage of SOX has forced firms in the United States to re-examine their corporate governance structure. Due to the strict guidelines and severe potential penalties of non compliance highlighted in SOX, CEOs and other top level executives are acutely aware of what their legal requirements are for SOX compliance. As a result, board members are now much more engaged and proactive in their commitment to the board since they can be held personally responsible if there are corporate governance failures. It can be safely stated that the role of the “rubber stamp” board is either in danger or is extinct. 74. Do you think SOX could have been passed in any previous time period? Answer: No, SOX was passed during the perfect storm of corporate reform. Both Congress and the general public were fed up with consistent news related to one corporate scandal after another. In a previous era, the power of the industry lobbyists would ensure that SOX would not be passed due to the competitive “disadvantage” it would give U.S. based firms. Even after the passage of SOX, firms continued to complain about the high costs. One factor the firms had omitted was that there could have been very high one time costs to get the firm in compliance with SOX but the maintenance costs would be much lower. The net result is that firms do not discuss the cost of SOX implementation any longer and the United States has one of the most transparent corporate governance systems in the world. 75. Given the high level of corruption of some countries highlighted in Tables 4-6 and 4-7, why don’t these companies increase their level of government regulations to combat these corrupt activities? Answer: The answer to this question is very complex. A number of countries with high corruption levels would be considered to be emerging or developing countries. Within this framework, these countries do not have the resources available to implement and monitor corporate compliance regulations as would be the case in developing countries, Furthermore, if government employees are paid very low wages because of the lack of resources within the country, it is very difficult to control corruption and bribery as supplements for the employee’s income. In addition, in a number of countries, financial transactions are not considered bribes but are considered an “expected” gift from one person to another. Test Bank For Understanding Business Ethics Peter Allen Stanwick, Sarah D. Stanwick 9780131735422, 9788131755365, 9781506303239, 9781452256559
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