Chapter 05
Corporate Governance
True / False Questions
1. Management consulting is the system by which business organizations are directed and
controlled.
2. The stakeholders of a company include its customers, its vendor partners, state and local
entities, and the community in which it conducts its business operations.
3. Corporate transparency is concerned with how well an organization meets its obligations
to its stakeholders.
4. The board members of a company are not accountable to the company and its
shareholders.
5. Corporate governance does not impact the efficiency of financial markets.
6. A board of directors is a group of individuals who oversee the governance of an
organization.
7. Creditors, suppliers, and professional consultants represent the inside members of a
board of directors.
8. Members of a board of directors are not eligible to be a part of the audit committee of an
organization.
9. The strategic business unit of an organization is responsible for monitoring the financial
policies and procedures of the organization.
10. Independent or outside directors are not eligible to be a part of the compensation
committee of an organization.
11. The main responsibility of the auditing committee of an organization is to set the
compensation for all the employees of the organization, including its outside contractors.
12. Typically, the compensation package of a CEO and other senior executives of an
organization consists of a base salary and stock options but does not include any performance
bonus or other perks.
13. The corporate governance committee of an organization is staffed by members of the
board of directors and specialists.
14. The corporate governance committee of a company oversees compliance with its internal
code of ethics as well as any federal and state regulations on corporate conduct.
15. The Cadbury report, established by Sir Adrian Cadbury in 1992 to address financial
aspects of corporate governance, dealt exclusively with external governance.
16. The King Report on Corporate Governance of 1994 incorporated a code of corporate
practices and conduct that looked beyond the corporation itself, taking into account its impact on
the larger community.
17. The King I report, established by Mervyn King in 1994, failed to recognize the involvement
of all the corporation’s stakeholders in the efficient and appropriate operation of an organization.
18. The King II report, released by the committee formed by Mervyn King, formally recognized
the need to move the stakeholder model forward and to consider a triple bottom line instead of a
single bottom line of profitability.
19. The triple bottom line proposed by the King II report, released by the committee formed by
Mervyn King, recognizes the economic, environmental, and social aspects of a company’s
activities.
20. The King II report emphasized the need for companies to adopt an exclusive approach to
corporate governance instead of an inclusive one.
21. The Cadbury report, established by Sir Adrian Cadbury in 1992 to address financial
aspects of corporate governance, argued for a guideline of “comply or else,” which required
companies to abide by a set of operating standards or face stiff financial penalties.
22. The “comply or else” guideline gave companies the flexibility to comply with governance
standards or explain their noncompliance in their corporate documents.
23. The “comply or explain” guideline proved to be an effective deterrent to corporate
financial scandals.
24. The “comply or explain” methodology refers to the set of guidelines that requires
companies to abide by a set of operating standards or face stiff financial penalties.
25. The “comply or else” methodology is more aggressive than the “comply or explain”
methodology.
26. The Sarbanes-Oxley Act of 2002 incorporates the “comply or else” approach to corporate
governance.
27. By merging the roles of the chief executive officer and the chairperson of the board of an
organization, the oversight provided by the board of directors is magnified.
28. The argument in favor of merging the roles of the chairperson of the board and the chief
executive officer of an organization is one of efficiency.
29. By permitting one individual to function as both the chief executive officer of a company
and the chairperson of its board, the board is given the benefit of leadership from someone who
is in touch with the inner workings of the organization.
30. The board of directors of an organization can secure its independence by permitting one
individual to function as both the chief executive officer of the organization and the chairperson
of its board.
31. By permitting one individual to function as both the chief executive officer of a company
and the chairperson of its board, the power of the stockholders is maximized.
32. The CRAFTED principles of governance, offered by the European business school INSEAD,
recommend creating a culture and climate of consistency in an organization.
33. If the board of directors is to serve its purpose in setting the operational tone for an
organization, it should be comprised of members who represent professional conduct in their own
organizations.
34. Running a small company does not require a constant evaluation of risk-versus-reward
scenarios.
35. In his Harvard Business Review article, Walter Salmon recommends that a good board
comprises three or more outside directors for every insider.
36. Ethical misconduct is possible even if a board of directors passes all the criteria
established by Walter Salmon.
37. The ethical conduct of a business can be influenced by the individual personalities
involved.
38. Having all the effective mechanisms listed on the corporate governance checklist in place
ensures completely effective corporate governance.
39. One of the flaws in the board of directors of Enron was that many of the directors were
affiliated with organizations that benefited directly from the company’s operations.
40. Studies show that a commitment to good corporate governance makes a company both
more attractive to investors and lenders and more profitable.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
Multiple Choice Questions
41. Corporate governance is the process by which _____.
42. Setting up a governance system that allows organizations to be directed and controlled:
43. If the corporate governance in an organization is poor, it _____.
44. The board of directors of a company:
45. The inside members of a company’s board of directors:
46. Identify a feature of the outside members of an organization’s board of directors.
47. One of the responsibilities of the audit committee of a company is to:
48. Catherine, a board member of Clayton Inc., is also part of an operating committee that is
responsible for overseeing the accounting policies of the company. This committee is known as
the _____.
49. The _____ of a company is an operating committee responsible for determining the
salaries, bonuses, and perks for the CEO and other senior executives.
50. Which of the following is true of the compensation committee of a company?
51. Identify a true statement about the corporate governance committee of a company.
52. One of the primary responsibilities of an organization’s _____ is to ensure compliance
with the company’s internal code of ethics.
53. The Cadbury report, established by Sir Adrian Cadbury in 1992 to address financial
aspects of corporate governance, addressed:
54. The main focus of the Cadbury report, established by Sir Adrian Cadbury in 1992 to
address financial aspects of corporate governance, was on _____.