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Chapter 05
Corporate Governance
True / False Questions
1. Management consulting is the system by which business organizations are directed and
controlled.
True False
5-1
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
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.
True False
3. Corporate transparency is concerned with how well an organization meets its obligations to
its stakeholders.
True False
4. The board members of a company are not accountable to the company and its shareholders.
True False
5. Corporate governance does not impact the efficiency of financial markets.
True False
6. A board of directors is a group of individuals who oversee the governance of an organization.
True False
7. Creditors, suppliers, and professional consultants represent the inside members of a board of
directors.
True False
8. Members of a board of directors are not eligible to be a part of the audit committee of an
organization.
True False
9. The strategic business unit of an organization is responsible for monitoring the financial
policies and procedures of the organization.
True False
5-2
10. Independent or outside directors are not eligible to be a part of the compensation committee
of an organization.
True False
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.
True False
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.
True False
13. The corporate governance committee of an organization is staffed by members of the board
of directors and specialists.
True False
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.
True False
15. The Cadbury report, established by Sir Adrian Cadbury in 1992 to address financial aspects of
corporate governance, dealt exclusively with external governance.
True False
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.
True False
5-3
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.
True False
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.
True False
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.
True False
20. The King II report emphasized the need for companies to adopt an exclusive approach to
corporate governance instead of an inclusive one.
True False
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.
True False
22. The "comply or else" guideline gave companies the flexibility to comply with governance
standards or explain their noncompliance in their corporate documents.
True False
23. The "comply or explain" guideline proved to be an effective deterrent to corporate financial
scandals.
True False
5-4
24. The "comply or explain" methodology refers to the set of guidelines that requires companies
True False
25. The "comply or else" methodology is more aggressive than the "comply or explain"
methodology.
True False
26. The Sarbanes-Oxley Act of 2002 incorporates the "comply or else" approach to corporate
governance.
True False
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.
True False
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.
True False
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.
True False
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.
True False
5-5
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.
True False
32. The CRAFTED principles of governance, offered by the European business school INSEAD,
recommend creating a culture and climate of consistency in an organization.
True False
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.
True False
34. Running a small company does not require a constant evaluation of risk-versus-reward
scenarios.
True False
35. In his Harvard Business Review article, Walter Salmon recommends that a good board
comprises three or more outside directors for every insider.
True False
36. Ethical misconduct is possible even if a board of directors passes all the criteria established
by Walter Salmon.
True False
37. The ethical conduct of a business can be influenced by the individual personalities involved.
True False
5-6
38. Having all the effective mechanisms listed on the corporate governance checklist in place
ensures completely effective corporate governance.
True False
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.
True False
40. Studies show that a commitment to good corporate governance makes a company both more
attractive to investors and lenders and more profitable.
True False
Multiple Choice Questions
41. Corporate governance is the process by which _____.
A. the revenue assets of a business are fixed

B. corporations are nationalized by the government
C. the government is monitored by corporations
D. corporations are directed and controlled
42. Setting up a governance system that allows organizations to be directed and controlled:
A. leads to underpinning the integrity and efficiency of financial markets.

B. weakens a company's potential and makes it less attractive to investors.
C. paves way for financial difficulties and incidents of fraud.
D. makes managers and board members less accountable to shareholders.
5-7
43. If the corporate governance in an organization is poor, it _____.
A. weakens the company's potential and makes it less attractive to investors

B. forces the board of directors to be accountable to the senior executives against their will
C. leads to employees taking control of their own decisions without consulting their managers
D. results in underpinning the integrity and efficiency of financial markets
44. The board of directors of a company:
A. is not accountable to the company's stakeholders.

B. should ideally be elected by the CEO.
C. oversees the governance of the organization.
D. should ideally have less power than the CEO.
45. The inside members of a company's board of directors:
A. typically have no direct connection with the company.

B. hold managerial positions within the company.
C. comprise the company's creditors and suppliers.
D. include the external consultants used by the company.
46. Identify a feature of the outside members of an organization's board of directors.
A. They are not permitted to have financial connections to the organization.

B. They have less importance than the inside members in the decision-making process.
C. They are the ones who make all the major organizational decisions without consulting the
inside members.
D. They may comprise the company's creditors, suppliers, or consultants.
5-8
47. One of the responsibilities of the audit committee of a company is to:
A. elect members of the company's board of directors.

B. manage the company's leadership pipeline.
C. monitor the company's accounting policies and procedures.
D. elect members of the corporate governance committee.
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 _____.
A. business sales unit

B. audit committee
C. human resourcing unit
D. marketing committee
49. The _____ of a company is an operating committee responsible for determining the salaries,
bonuses, and perks for the CEO and other senior executives.
A. credit committee
B. business sales unit
C. compensation committee
D. quality assurance unit
50. Which of the following is true of the compensation committee of a company?
A. It sets the compensation for all the employees of the company.

B. It cannot be staffed by individuals on the company's board of directors.
C. It cannot be staffed by independent or outside directors of the company.
D. It oversees the salaries and bonuses of the senior executives only.
5-9
51. Identify a true statement about the corporate governance committee of a company.
A. It monitors the ethical performance of the corporation.

B. It does not oversee compliance with the company's internal code of ethics.
C. It is in charge of setting the compensation packages of all the senior executives.
D. It does not include the employees of the company.
52. One of the primary responsibilities of an organization's _____ is to ensure compliance with the
company's internal code of ethics.

B. quality assurance unit
C. corporate governance committee
D. proposal committee
corporate governance, addressed:
A. the cultural aspects of a company's activities.

B. the financial aspects of corporate governance.
C. the need to consider the triple bottom line.
D. the failings of the "comply or explain" policy.
54. The main focus of the Cadbury report, established by Sir Adrian Cadbury in 1992 to address
financial aspects of corporate governance, was on _____.
A. external governance
B. corporate social responsibility
C. internal governance
D. recruiting policy
5-10
corporate governance, recommended:
A. adopting a Code of Best Practice to achieve high standards of corporate behavior.

B. considering the environmental and social aspects of an organization's activities.
C. formally recognizing all the stakeholders of an organization.
D. considering a company's impact on the larger community.
56. A feature of the King I report on corporate governance, established by Mervyn King in 1994, is
that _____.
A. it was inclusive of the recruiting policies of an organization

B. it limited its scope to internal corporate governance
C. it limited its scope to financial and regulatory accountability
D. it considered the impact of corporations' on the larger community
57. The King II report, released by the committee formed by Mervyn King, on corporate
governance:
A. strongly advocated that companies follow the traditional, single bottom line of profitability.
B. did not look beyond companies or take their impact upon the larger community into
account.
C. formally recognized the economic, environmental, and social aspects of a company's
activities.
D. did not recognize the involvement of a corporation's stakeholders in the efficient operation
of an organization.
58. One of the common characteristics of the King I and King II reports on corporate governance
was that _____.
A. they both limited their scope to the financial and regulatory accountability of corporations
B. they both advocated following the traditional, single bottom line of profitability
C. they both rejected the triple bottom line suggested by the Cadbury approach
D. they both incorporated a code of corporate practices that looked beyond corporations
5-11
59. Which of the following is true of the "comply or explain" approach to corporate governance?
A. It set stiff financial penalties for companies that refused to abide by the operational
standards.
B. It gave companies the flexibility to comply with the governance standards or justify why
they didn't in their corporate documents.
C. It was extremely explicit when it came to defining what would be acceptable explanations
for noncompliance.
D. It proved to be an effective deterrent to financial scandals and reduced the incidence of
unethical behavior in corporations.
60. The "comply or explain" approach to corporate governance was problematic because _____.
A. it did not take into consideration the remuneration packages provided to the employees of
a company
B. its stringent measures to deny flexibility to comply with governance standards caused
organization-wide friction
C. its definition of what constitutes an acceptable explanation for not complying was vague
D. it expected corporations to abide by an extremely rigid set of operating standards
61. The _____ of 2002 incorporates the "comply or else" approach to corporate governance.
A. Sarbanes-Oxley Act
B. Comstock Act
C. Multi-divisional Form Act
D. Trade Act
5-12
62. Which of the following is true of the "comply or else" approach to corporate governance?
standards.
B. It gave companies the flexibility to comply with the standards or explain why they didn't in
their corporate documents.
C. Its definition of what would be an acceptable explanation for not complying was not clear.
D. It was not incorporated into the Sarbanes-Oxley Act of 2002—which governs ethical
behavior in corporations.
63. In what way did the "comply or else" approach differ from the "comply or explain" approach
to corporate governance?
A. Unlike "comply or else," the "comply or explain" approach penalized companies that don't
conform to regulations heavily.
B. Unlike "comply or explain," the "comply or else" approach did not offer corporations an
easy way to avoid conforming to the operating standards.
C. Unlike "comply or explain," the "comply or else" approach had a vague definition for what
constitutes an acceptable explanation for noncompliance.
D. Unlike "comply or else," the "comply or explain" approach was successful in discouraging
unethical behavior in corporations.
64. Merging the roles of the chief executive officer and the chairperson of the board of an
organization is advantageous because _____.
A. the power of the stockholders and the independence of the board are increased
B. the power vested in external public shareholders is decreased
C. the checks that the board set in place against unethical behavior become more effective
D. the board is led by someone familiar with the inner workings of the organization
5-13
65. Which of the following is an effect of merging the roles of the chief executive officer and the
chairperson of the board?
A. The power of the stockholders is maximized.

B. The oversight provided by the board is increased.
C. The independence of the board is compromised.
D. The influence of the CEO is minimized.
66. The merging of the roles of the chief executive officer and the chairperson of a board is
inadvisable because _____.
A. the independence of the board is maximized

B. the financial goals of a company takes utmost importance
C. the power of the chief executive officer decreases
D. the power of the stockholders is minimized
67. Which of the following is true of the CRAFTED principles of governance?
A. It recommends creating a culture of consistency, accountability, and responsibility.

B. It considers only the financial profitability of all operational actions.
C. It favors a tight information flow managed by a company's senior executive leaders.
D. It approves of selecting members of a board by trading professional favors.
68. Which of the following actions is a step toward running a company successfully?
A. Merging the roles of the chief executive officer and the chairperson of the board
B. Liberating the chief executive officer from constraints laid by the board members
C. Evaluating risk-versus-reward scenarios frequently, regardless of the company's size
D. Reducing the board's independence and decreasing the power of stockholders
5-14
69. Which of the following principles should a company follow for effective corporate
governance?
A. The appointments to the board of directors should always be done on the basis of quid pro
quo agreements.
B. The board of directors and the CEO should work together when evaluating risk-versus-
reward scenarios.
C. The board of directors should consist solely of members who have direct connections to
the company.
D. The roles of the chairperson of the board and that of the chief executive officer should be
merged.
70. Walter Salmon's checklist to assess the quality of the board recommends:
A. following an exclusive rather than an inclusive approach.

B. the consideration of a single bottom line of profitability.
C. that the roles of employees in senior positions must be increased.
D. that there be three or more outside directors for every insider.
71. Which of the following is true of ethical misconduct?
A. It can occur even if all the checks governing a board of directors is in place.
B. It cannot be influenced by the personalities of individual board members.
C. It is least likely to occur when a CEO has more authority than board members.
D. It is barred effectively by the "comply or explain" approach to corporate governance.
72. The fiduciary responsibility of a manager is ultimately based on his or her _____.
A. educational background
B. work experience
C. charisma
D. trust
5-15
73. Which of the following is true of managers in an organization with good corporate
governance?
A. They must be nominated by the compensation committee.

B. They should fulfill a fiduciary responsibility to the owners.
C. They must consider only the single bottom line of profitability.
D. They should follow an exclusive, rather than an internal, approach.
74. A commitment to good corporate governance:
A. necessitates decreasing the independence of a board.

B. often affects a company's public image adversely.
C. means adopting the "comply or explain" approach.
D. makes a company more attractive to investors.
75. Which of the following checks, when in place, reduces the risk of fraud or unethical behavior
in a corporation?
A. The participants of the governance process must be made accountable effectively.

B. The roles of the chief executive officer and the chairperson of the board must be merged.
C. The authority of the chief executive officer should be absolute and unchallenged.
D. The company should follow the "comply or explain" approach to governance.
76. _____ is about the way in which boards oversee the running of a company by its managers
and how board members are, in turn, accountable to shareholders and the company.
A. Management consulting
B. Corporate governance
C. Corporate transparency
D. Management education
5-16
77. The _____ of an organization is staffed by members of the board of directors plus
independent or outside directors.
A. editorial committee
B. human resources team
C. accounting team
D. audit committee
78. The Cadbury report, established to address financial aspects of corporate governance,
argued for a guideline of _____, which gave companies the flexibility to act in accordance with
governance standards or clarify why they do not in their corporate documents.
A. basic limiting principle

B. comply or else
C. comply or explain
D. maximum power principle
79. The first step in a policy of disregarding the corporate governance model is the decision to:
A. merge the roles of chief executive officer (CEO) and chairperson of the board into one
individual.
B. nominate a compensation committee by the board of directors of an organization.
C. reach out to consultants to find new solutions on maximizing the effectiveness of
corporate governance.
D. elect an auditing committee to oversee the financial reporting processes of an organization
by the chief executive officer (CEO).
80. If the board of an organization is to serve its purpose in setting the operational tone for the
organization, it should be composed of members who:
A. represent professional conduct in their own organizations.

B. are opposed to the practice of utilitarianism.
C. support a decentralized model of corporate management.
D. are more likely to take risks in high-risk situations.
5-17
Fill in the Blank Questions
81. _____ is the process by which organizations are directed and controlled.
________________________________________
82. The involvement of individual shareholders as owners of an organization helps increase the
_____ of managers.
________________________________________
83. A board of directors is a group of individuals, elected by the vote of _____ at the annual
general meeting, who oversee the governance of an organization.
________________________________________
84. A _____ is elected by the owners of a company to represent their interests in the effective
running of the company.
________________________________________
85. _____ members of a board of directors hold management positions in a company.
________________________________________
86. The _____ committee of an organization is responsible for monitoring the financial policies
and procedures of the organization.
________________________________________
87. The primary responsibility of the _____ committee of an organization is to oversee the
compensation packages for the senior executives of the organization.
________________________________________
5-18
88. The corporate governance committee of an organization oversees compliance with the
company's internal _____ as well as any federal and state regulations on corporate conduct.
________________________________________
89. The focus of the _____ report, established in 1992, on corporate governance was on internal
governance.
________________________________________
90. The _____ report, released by the committee formed by Mervyn King, formally recognized the
need to move the stakeholder model forward and consider a triple bottom line as opposed to
the traditional single bottom line of profitability.
________________________________________
91. The King II report, released by the committee formed by Mervyn King, recommended moving
beyond the traditional single bottom line of _____.
________________________________________
92. The triple bottom line advocated by the King II report, released by the committee formed by
Mervyn King, recognizes the economic, environmental, and _____ aspects of a company's
activities.
________________________________________
93. The "_____" approach to corporate governance gave companies the flexibility to comply with
governance standards or explain their noncompliance in their corporate documents.
________________________________________
94. The Sarbanes-Oxley Act of 2002 incorporates the "_____" approach to corporate governance.
________________________________________
5-19
95. The "_____" approach to corporate governance requires companies to abide by a set of
operating standards or face stiff financial penalties.
________________________________________
96. The argument in favor of merging the roles of the CEO and chairperson is one of _____.
________________________________________
97. INSEAD, the European business school, offers the _____ principles of corporate governance.
________________________________________
98. _____ recommended a checklist of 22 questions to assess the quality of boards of directors in
his Harvard Business Review article.
________________________________________
99. Running a company of any size effectively requires the board of directors to work with the
_____, making constant evaluations of risk-versus-reward scenarios.
________________________________________
100.Corporate governance is about managers fulfilling a _____ responsibility to the owners of

their companies.
________________________________________
Essay Questions
5-20
101.What is corporate governance? Why it is important?
102.What roles do the audit committee and the compensation committee of an organization play
in ensuring good governance?
103.In what way did the King I approach on corporate governance differ from the Cadbury
approach?
5-21
104.Explain the "comply or explain" guideline. Why did the "comply or else" policy come into
force?
105.Does a commitment to good corporate governance affect a company's profitability?
5-22
Chapter 05 Corporate Governance Answer Key
True / False Questions
1. Management consulting is the system by which business organizations are directed and
controlled.
FALSE
Corporate governance is the system by which business organizations are directed and
controlled.
Accessibility: Keyboard Navigation

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Explain the term corporate governance.
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.
TRUE

Blooms: Remember
Difficulty: 1 Easy
5-23
3. Corporate transparency is concerned with how well an organization meets its obligations
to its stakeholders.
FALSE
Corporate governance is concerned with how well an organization meets its obligations to
its stakeholders.

Blooms: Remember
Difficulty: 1 Easy
4. The board members of a company are not accountable to the company and its
shareholders.
FALSE
The board members of a company are not accountable to the company and its
shareholders.

Blooms: Remember
Difficulty: 1 Easy
5. Corporate governance does not impact the efficiency of financial markets.
FALSE
Good corporate governance plays a vital role in underpinning the integrity and efficiency of
financial markets.

Blooms: Remember
Difficulty: 1 Easy
5-24
6. A board of directors is a group of individuals who oversee the governance of an
organization.
TRUE

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Understand the responsibilities of the board of directors and the major governance
committees.
7. Creditors, suppliers, and professional consultants represent the inside members of a

board of directors.
FALSE
The inside members of a board of directors hold management positions in a company.

Outside members may have direct connections to the company as creditors, suppliers,
customers, or professional consultants.

Blooms: Remember
Difficulty: 1 Easy
committees.
8. Members of a board of directors are not eligible to be a part of the audit committee of an
organization.
FALSE
The audit committee of an organization is staffed by members of the board of directors

plus independent or outside directors.

Blooms: Remember
Difficulty: 1 Easy
committees.
5-25
9. The strategic business unit of an organization is responsible for monitoring the financial
policies and procedures of the organization.
FALSE
The audit committee of an organization is responsible for monitoring the financial policies

Blooms: Remember
Difficulty: 1 Easy
committees.
10. Independent or outside directors are not eligible to be a part of the compensation
committee of an organization.
FALSE
The compensation committee of an organization is staffed by members of the board of

directors plus independent or outside directors.

Blooms: Remember
Difficulty: 1 Easy
committees.
5-26
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.
FALSE
The compensation committee of an organization is responsible for setting the

compensation for the CEO and other senior executives. Compensation policies for the
employees of the corporation are left to the management team to oversee.

Blooms: Remember
Difficulty: 1 Easy
committees.
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.
FALSE
Typically, the compensation package of a CEO and other senior executives of an

organization consists of a base salary, stock options, performance bonus, and other perks.

Blooms: Remember
Difficulty: 1 Easy
committees.
13. The corporate governance committee of an organization is staffed by members of the

board of directors and specialists.
TRUE

Blooms: Remember
Difficulty: 1 Easy
committees.
5-27
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.
TRUE

Blooms: Remember
Difficulty: 1 Easy
committees.
15. The Cadbury report, established by Sir Adrian Cadbury in 1992 to address financial
aspects of corporate governance, dealt exclusively with external governance.
FALSE
The Cadbury report on corporate governance focused on internal governance.

Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Explain the significance of the "King I" and "King II" reports.
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.
TRUE

Blooms: Remember
Difficulty: 1 Easy
5-28
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.
FALSE
The King I report recognized the involvement of all the corporation's stakeholders—the
shareholders, customers, employees, vendor partners, and the community in which the
corporation operates—in the efficient and appropriate operation of an organization.

Blooms: Understand
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.
TRUE

Blooms: Understand
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.
TRUE

Blooms: Remember
Difficulty: 1 Easy
5-29
20. The King II report emphasized the need for companies to adopt an exclusive approach to
corporate governance instead of an inclusive one.
FALSE
The King II report emphasized the need for companies to adopt an inclusive approach to
corporate governance instead of an exclusive one.

Blooms: Remember
Difficulty: 1 Easy
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.
FALSE
The Cadbury report argued for a guideline of "comply or explain" which gave companies
the flexibility to comply with governance standards or explain why they do not in their
corporate documents.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 Explain the differences between the following two governance methodologies: "comply or
explain" and "comply or else."
5-30
22. The "comply or else" guideline gave companies the flexibility to comply with governance
standards or explain their noncompliance in their corporate documents.
FALSE
The "comply or explain" guideline gave companies the flexibility to comply with
governance standards or explain their noncompliance in their corporate documents.

Blooms: Remember
Difficulty: 1 Easy
23. The "comply or explain" guideline proved to be an effective deterrent to corporate financial
scandals.
FALSE
The "comply or explain" guideline was followed by a series of financial scandals which led
critics to argue that it offered no real deterrent to corporations.

Blooms: Understand
5-31
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.
FALSE
The "comply or else" methodology refers to the set of guidelines that requires companies

Blooms: Remember
Difficulty: 1 Easy
25. The "comply or else" methodology is more aggressive than the "comply or explain"
methodology.
TRUE

Blooms: Understand
26. The Sarbanes-Oxley Act of 2002 incorporates the "comply or else" approach to corporate
governance.
TRUE

Blooms: Understand
5-32
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.
FALSE
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 lost.

Blooms: Understand
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.
TRUE

Blooms: Understand
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.
TRUE

Blooms: Understand
5-33
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.
FALSE
By permitting one individual to function as both the chief executive officer of an

organization and the chairperson of its board, the independence of the board is
compromised.

Blooms: Understand
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.
FALSE
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 minimized.

Blooms: Understand
32. The CRAFTED principles of governance, offered by the European business school INSEAD,
recommend creating a culture and climate of consistency in an organization.
TRUE

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Identify an appropriate corporate governance model for an organization.
5-34
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.
TRUE

Blooms: Understand
34. Running a small company does not require a constant evaluation of risk-versus-reward
scenarios.
FALSE
Running a company of any size requires constant evaluation of risk-versus-reward

scenarios.

Blooms: Understand
35. In his Harvard Business Review article, Walter Salmon recommends that a good board
comprises three or more outside directors for every insider.
TRUE

Blooms: Remember
Difficulty: 1 Easy
5-35
36. Ethical misconduct is possible even if a board of directors passes all the criteria
established by Walter Salmon.
TRUE

Blooms: Understand
37. The ethical conduct of a business can be influenced by the individual personalities
involved.
TRUE

Blooms: Understand
38. Having all the effective mechanisms listed on the corporate governance checklist in place
ensures completely effective corporate governance.
FALSE
Having all the effective mechanisms in place does not necessarily ensure effective

Blooms: Understand
5-36
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.
TRUE

Blooms: Remember
Difficulty: 1 Easy
40. Studies show that a commitment to good corporate governance makes a company both
more attractive to investors and lenders and more profitable.
TRUE

Blooms: Understand
Multiple Choice Questions
41. Corporate governance is the process by which _____.
A. the revenue assets of a business are fixed

B. corporations are nationalized by the government
C. the government is monitored by corporations
D. corporations are directed and controlled

Blooms: Understand
5-37
42. Setting up a governance system that allows organizations to be directed and controlled:
A. leads to underpinning the integrity and efficiency of financial markets.

B. weakens a company's potential and makes it less attractive to investors.
C. paves way for financial difficulties and incidents of fraud.
D. makes managers and board members less accountable to shareholders.

Blooms: Understand
43. If the corporate governance in an organization is poor, it _____.
A. weakens the company's potential and makes it less attractive to investors

B. forces the board of directors to be accountable to the senior executives against their
will
C. leads to employees taking control of their own decisions without consulting their
managers
D. results in underpinning the integrity and efficiency of financial markets

Blooms: Understand
5-38
44. The board of directors of a company:
A. is not accountable to the company's stakeholders.

B. should ideally be elected by the CEO.
C. oversees the governance of the organization.
D. should ideally have less power than the CEO.

Blooms: Understand
committees.
45. The inside members of a company's board of directors:
A. typically have no direct connection with the company.

B. hold managerial positions within the company.
C. comprise the company's creditors and suppliers.
D. include the external consultants used by the company.

Blooms: Understand
committees.
5-39
46. Identify a feature of the outside members of an organization's board of directors.
A. They are not permitted to have financial connections to the organization.

B. They have less importance than the inside members in the decision-making process.
C. They are the ones who make all the major organizational decisions without consulting
the inside members.
D. They may comprise the company's creditors, suppliers, or consultants.

Blooms: Understand
committees.
47. One of the responsibilities of the audit committee of a company is to:
A. elect members of the company's board of directors.

B. manage the company's leadership pipeline.
C. monitor the company's accounting policies and procedures.
D. elect members of the corporate governance committee.

Blooms: Understand
committees.
5-40
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 _____.

B. audit committee
C. human resourcing unit
D. marketing committee

Blooms: Apply
Difficulty: 3 Hard
committees.
49. The _____ of a company is an operating committee responsible for determining the
salaries, bonuses, and perks for the CEO and other senior executives.
A. credit committee
B. business sales unit
C. compensation committee
D. quality assurance unit

Blooms: Remember
Difficulty: 1 Easy
committees.
5-41
50. Which of the following is true of the compensation committee of a company?
A. It sets the compensation for all the employees of the company.

B. It cannot be staffed by individuals on the company's board of directors.
C. It cannot be staffed by independent or outside directors of the company.
D. It oversees the salaries and bonuses of the senior executives only.

Blooms: Understand
committees.
51. Identify a true statement about the corporate governance committee of a company.
A. It monitors the ethical performance of the corporation.

B. It does not oversee compliance with the company's internal code of ethics.
C. It is in charge of setting the compensation packages of all the senior executives.
D. It does not include the employees of the company.

Blooms: Understand
committees.
5-42
52. One of the primary responsibilities of an organization's _____ is to ensure compliance with
the company's internal code of ethics.

B. quality assurance unit
C. corporate governance committee
D. proposal committee

Blooms: Remember
Difficulty: 1 Easy
committees.
aspects of corporate governance, addressed:
A. the cultural aspects of a company's activities.

B. the financial aspects of corporate governance.
C. the need to consider the triple bottom line.
D. the failings of the "comply or explain" policy.

Blooms: Understand
5-43
54. The main focus of the Cadbury report, established by Sir Adrian Cadbury in 1992 to
address financial aspects of corporate governance, was on _____.
A. external governance
B. corporate social responsibility
C. internal governance
D. recruiting policy

Blooms: Remember
Difficulty: 1 Easy
aspects of corporate governance, recommended:
A. adopting a Code of Best Practice to achieve high standards of corporate behavior.

B. considering the environmental and social aspects of an organization's activities.
C. formally recognizing all the stakeholders of an organization.
D. considering a company's impact on the larger community.

Blooms: Understand
5-44
56. A feature of the King I report on corporate governance, established by Mervyn King in
1994, is that _____.
A. it was inclusive of the recruiting policies of an organization

B. it limited its scope to internal corporate governance
C. it limited its scope to financial and regulatory accountability
D. it considered the impact of corporations' on the larger community

Blooms: Understand
57. The King II report, released by the committee formed by Mervyn King, on corporate
governance:
A. strongly advocated that companies follow the traditional, single bottom line of
profitability.
B. did not look beyond companies or take their impact upon the larger community into
account.
C. formally recognized the economic, environmental, and social aspects of a company's
activities.
D. did not recognize the involvement of a corporation's stakeholders in the efficient
operation of an organization.

Blooms: Understand
5-45
58. One of the common characteristics of the King I and King II reports on corporate
governance was that _____.
A. they both limited their scope to the financial and regulatory accountability of
corporations
B. they both advocated following the traditional, single bottom line of profitability
C. they both rejected the triple bottom line suggested by the Cadbury approach
D. they both incorporated a code of corporate practices that looked beyond corporations

Blooms: Understand
59. Which of the following is true of the "comply or explain" approach to corporate
governance?
standards.
B. It gave companies the flexibility to comply with the governance standards or justify why
they didn't in their corporate documents.
C. It was extremely explicit when it came to defining what would be acceptable
explanations for noncompliance.
D. It proved to be an effective deterrent to financial scandals and reduced the incidence
of unethical behavior in corporations.

Blooms: Understand
5-46
60. The "comply or explain" approach to corporate governance was problematic because
_____.
A. it did not take into consideration the remuneration packages provided to the employees
of a company
B. its stringent measures to deny flexibility to comply with governance standards caused
organization-wide friction
C. its definition of what constitutes an acceptable explanation for not complying was
vague
D. it expected corporations to abide by an extremely rigid set of operating standards

Blooms: Understand
61. The _____ of 2002 incorporates the "comply or else" approach to corporate governance.
A. Sarbanes-Oxley Act
B. Comstock Act
C. Multi-divisional Form Act
D. Trade Act

Blooms: Remember
Difficulty: 1 Easy
5-47
62. Which of the following is true of the "comply or else" approach to corporate governance?
standards.
B. It gave companies the flexibility to comply with the standards or explain why they didn't
in their corporate documents.
C. Its definition of what would be an acceptable explanation for not complying was not
clear.
D. It was not incorporated into the Sarbanes-Oxley Act of 2002—which governs ethical
behavior in corporations.

Blooms: Understand
63. In what way did the "comply or else" approach differ from the "comply or explain"
approach to corporate governance?
A. Unlike "comply or else," the "comply or explain" approach penalized companies that
don't conform to regulations heavily.
B. Unlike "comply or explain," the "comply or else" approach did not offer corporations an
easy way to avoid conforming to the operating standards.
C. Unlike "comply or explain," the "comply or else" approach had a vague definition for
what constitutes an acceptable explanation for noncompliance.
D. Unlike "comply or else," the "comply or explain" approach was successful in
discouraging unethical behavior in corporations.

Blooms: Understand
5-48
64. Merging the roles of the chief executive officer and the chairperson of the board of an
organization is advantageous because _____.
A. the power of the stockholders and the independence of the board are increased
B. the power vested in external public shareholders is decreased
C. the checks that the board set in place against unethical behavior become more
effective
D. the board is led by someone familiar with the inner workings of the organization

Blooms: Understand
65. Which of the following is an effect of merging the roles of the chief executive officer and
the chairperson of the board?
A. The power of the stockholders is maximized.

B. The oversight provided by the board is increased.
C. The independence of the board is compromised.
D. The influence of the CEO is minimized.

Blooms: Understand
5-49
66. The merging of the roles of the chief executive officer and the chairperson of a board is
inadvisable because _____.
A. the independence of the board is maximized

B. the financial goals of a company takes utmost importance
C. the power of the chief executive officer decreases
D. the power of the stockholders is minimized

Blooms: Understand
67. Which of the following is true of the CRAFTED principles of governance?
A. It recommends creating a culture of consistency, accountability, and responsibility.

B. It considers only the financial profitability of all operational actions.
C. It favors a tight information flow managed by a company's senior executive leaders.
D. It approves of selecting members of a board by trading professional favors.

Blooms: Understand
68. Which of the following actions is a step toward running a company successfully?
A. Merging the roles of the chief executive officer and the chairperson of the board
B. Liberating the chief executive officer from constraints laid by the board members
C. Evaluating risk-versus-reward scenarios frequently, regardless of the company's size
D. Reducing the board's independence and decreasing the power of stockholders

Blooms: Apply
Difficulty: 3 Hard
5-50
69. Which of the following principles should a company follow for effective corporate
governance?
A. The appointments to the board of directors should always be done on the basis of quid
pro quo agreements.
B. The board of directors and the CEO should work together when evaluating risk-versus-
reward scenarios.
C. The board of directors should consist solely of members who have direct connections
to the company.
D. The roles of the chairperson of the board and that of the chief executive officer should
be merged.

Blooms: Apply
Difficulty: 3 Hard
70. Walter Salmon's checklist to assess the quality of the board recommends:
A. following an exclusive rather than an inclusive approach.

B. the consideration of a single bottom line of profitability.
C. that the roles of employees in senior positions must be increased.
D. that there be three or more outside directors for every insider.

Blooms: Understand
5-51
71. Which of the following is true of ethical misconduct?
A. It can occur even if all the checks governing a board of directors is in place.
B. It cannot be influenced by the personalities of individual board members.
C. It is least likely to occur when a CEO has more authority than board members.
D. It is barred effectively by the "comply or explain" approach to corporate governance.

Blooms: Understand
72. The fiduciary responsibility of a manager is ultimately based on his or her _____.
A. educational background
B. work experience
C. charisma
D. trust

Blooms: Remember
Difficulty: 1 Easy
73. Which of the following is true of managers in an organization with good corporate
governance?
A. They must be nominated by the compensation committee.

B. They should fulfill a fiduciary responsibility to the owners.
C. They must consider only the single bottom line of profitability.
D. They should follow an exclusive, rather than an internal, approach.

Blooms: Understand
5-52
74. A commitment to good corporate governance:
A. necessitates decreasing the independence of a board.

B. often affects a company's public image adversely.
C. means adopting the "comply or explain" approach.
D. makes a company more attractive to investors.

Blooms: Understand
75. Which of the following checks, when in place, reduces the risk of fraud or unethical
behavior in a corporation?
A. The participants of the governance process must be made accountable effectively.

B. The roles of the chief executive officer and the chairperson of the board must be
merged.
C. The authority of the chief executive officer should be absolute and unchallenged.
D. The company should follow the "comply or explain" approach to governance.

Blooms: Understand
5-53
76. _____ is about the way in which boards oversee the running of a company by its
managers and how board members are, in turn, accountable to shareholders and the
company.
A. Management consulting
B. Corporate governance
C. Corporate transparency
D. Management education

Blooms: Remember
Difficulty: 1 Easy
77. The _____ of an organization is staffed by members of the board of directors plus
independent or outside directors.
A. editorial committee
B. human resources team
C. accounting team
D. audit committee

Blooms: Remember
Difficulty: 1 Easy
committees.
5-54
78. The Cadbury report, established to address financial aspects of corporate governance,
argued for a guideline of _____, which gave companies the flexibility to act in accordance
with governance standards or clarify why they do not in their corporate documents.
A. basic limiting principle

B. comply or else
C. comply or explain
D. maximum power principle

Blooms: Remember
Difficulty: 1 Easy
79. The first step in a policy of disregarding the corporate governance model is the decision
to:
A. merge the roles of chief executive officer (CEO) and chairperson of the board into one
individual.
B. nominate a compensation committee by the board of directors of an organization.
C. reach out to consultants to find new solutions on maximizing the effectiveness of
D. elect an auditing committee to oversee the financial reporting processes of an
organization by the chief executive officer (CEO).

Blooms: Understand
5-55
80. If the board of an organization is to serve its purpose in setting the operational tone for the
organization, it should be composed of members who:
A. represent professional conduct in their own organizations.

B. are opposed to the practice of utilitarianism.
C. support a decentralized model of corporate management.
D. are more likely to take risks in high-risk situations.

Blooms: Understand
Fill in the Blank Questions
81. _____ is the process by which organizations are directed and controlled.
Corporate governance
Blooms: Remember
Difficulty: 1 Easy
82. The involvement of individual shareholders as owners of an organization helps increase

the _____ of managers.
accountability
Blooms: Understand
5-56
83. A board of directors is a group of individuals, elected by the vote of _____ at the annual
general meeting, who oversee the governance of an organization.
shareholders
Blooms: Remember
Difficulty: 1 Easy
committees.
84. A _____ is elected by the owners of a company to represent their interests in the effective
running of the company.
board of directors
Blooms: Remember
Difficulty: 1 Easy
committees.
85. _____ members of a board of directors hold management positions in a company.
Inside
Blooms: Remember
Difficulty: 1 Easy
committees.
86. The _____ committee of an organization is responsible for monitoring the financial policies
audit
Blooms: Remember
Difficulty: 1 Easy
committees.
5-57
87. The primary responsibility of the _____ committee of an organization is to oversee the
compensation packages for the senior executives of the organization.
compensation
Blooms: Remember
Difficulty: 1 Easy
committees.
88. The corporate governance committee of an organization oversees compliance with the
company's internal _____ as well as any federal and state regulations on corporate
conduct.
code of ethics
Blooms: Remember
Difficulty: 1 Easy
committees.
89. The focus of the _____ report, established in 1992, on corporate governance was on
internal governance.
Cadbury
Blooms: Understand
90. The _____ report, released by the committee formed by Mervyn King, formally recognized
the need to move the stakeholder model forward and consider a triple bottom line as
opposed to the traditional single bottom line of profitability.
King II
Blooms: Understand
5-58
91. The King II report, released by the committee formed by Mervyn King, recommended
moving beyond the traditional single bottom line of _____.
profitability
Blooms: Remember
Difficulty: 1 Easy
92. The triple bottom line advocated by the King II report, released by the committee formed
by Mervyn King, recognizes the economic, environmental, and _____ aspects of a
company's activities.
social
Blooms: Remember
Difficulty: 1 Easy
93. The "_____" approach to corporate governance gave companies the flexibility to comply
with governance standards or explain their noncompliance in their corporate documents.
comply or explain
Blooms: Understand
94. The Sarbanes-Oxley Act of 2002 incorporates the "_____" approach to corporate
governance.
comply or else
Blooms: Remember
Difficulty: 1 Easy
5-59
95. The "_____" approach to corporate governance requires companies to abide by a set of
operating standards or face stiff financial penalties.
comply or else
Blooms: Remember
Difficulty: 1 Easy
96. The argument in favor of merging the roles of the CEO and chairperson is one of _____.
efficiency
Blooms: Understand
97. INSEAD, the European business school, offers the _____ principles of corporate
governance.
CRAFTED
Blooms: Remember
Difficulty: 1 Easy
98. _____ recommended a checklist of 22 questions to assess the quality of boards of

directors in his Harvard Business Review article.
Walter Salmon
Blooms: Remember
Difficulty: 1 Easy
5-60
99. Running a company of any size effectively requires the board of directors to work with the
_____, making constant evaluations of risk-versus-reward scenarios.
chief executive officer
Blooms: Remember
Difficulty: 1 Easy
100. Corporate governance is about managers fulfilling a _____ responsibility to the owners of
their companies.
fiduciary
Blooms: Remember
Difficulty: 1 Easy
Essay Questions
101. What is corporate governance? Why it is important?
Corporate governance is the process by which organizations are directed and controlled. It
is concerned with how well organizations meet their obligations to their stakeholders. It
ensures the accountability of managers to board members, and in turn, the accountability
of board members to shareholders. Good corporate governance plays a vital role in
underpinning the integrity and efficiency of financial markets. Poor corporate governance
weakens a company's potential and at worst can pave the way for financial difficulties and
even fraud. If companies are well governed, they will usually outperform other companies
and will be able to attract investors whose support can finance further growth.
Blooms: Understand
5-61
102. What roles do the audit committee and the compensation committee of an organization
play in ensuring good governance?
The audit committee of an organization is an operating committee staffed by members of

the board of directors plus independent or outside directors. The committee is responsible
for monitoring the financial policies and procedures of the organization—specifically the
accounting policies, internal controls, and the hiring of external auditors.
The compensation committee of an organization is an operating committee staffed by
members of the board of directors plus independent or outside directors. The committee is
responsible for setting the compensation for the CEO and other senior executives.
Typically, this compensation will consist of a base salary, performance bonus, stock
options, and other perks.
Blooms: Remember
Difficulty: 1 Easy
committees.
103. In what way did the King I approach on corporate governance differ from the Cadbury
approach?
In contrast to Cadbury's focus on internal governance, the King I report "incorporated a

code of corporate practices and conduct that looked beyond the corporation itself, taking
into account its impact on the larger community." It went beyond the financial and
regulatory accountability upon which the Cadbury report had focused and took a more
integrated approach to the topic of corporate governance, recognizing the involvement of
all the corporation's stakeholders—the shareholders, customers, employees, vendor
partners, and the community in which the corporation operates— in the efficient and
appropriate operation of the organization.
Blooms: Understand
5-62
104. Explain the "comply or explain" guideline. Why did the "comply or else" policy come into
force?
The guideline of "comply or explain" gave companies the flexibility to comply with
governance standards or explain why they did not in their corporate documents (annual
reports, for example). The vagueness of what would constitute an acceptable explanation
for not complying, combined with the ease with which such explanations could be buried
in the footnotes of an annual report, raised concerns that comply or explain really wouldn't
do much for corporate governance. The string of financial scandals that followed the
report led many critics to argue that "comply or explain" offered no real deterrent to
corporations. The answer, they argued, was to move to a more aggressive approach of
comply or else, where failure to comply would result in stiff financial penalties. The
Sarbanes-Oxley Act of 2002 came into force and incorporated this approach.
Blooms: Understand
105. Does a commitment to good corporate governance affect a company's profitability?
A commitment to good corporate governance makes a company both more attractive to

investors and lenders and more profitable. A Deutsche Bank study of Standard & Poor's
500 firms showed that companies with strong or improving corporate governance
outperform those with poor or deteriorating governance practices. A Harvard-Wharton
study showed that U.S.-based firms with better governance have faster sales growth and
were more profitable than their peers. In a 2002 McKinsey survey, institutional investors
said they would pay premiums to own well-governed companies.
Blooms: Understand
5-63

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True / False Questions

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.

Multiple Choice Questions

41. Corporate governance is the process by which _____.

A. the revenue assets of a business are fixed

A. leads to underpinning the integrity and efficiency of financial markets.

A. weakens the company's potential and makes it less attractive to investors

44. The board of directors of a company:

A. is not accountable to the company's stakeholders.

45. The inside members of a company's board of directors:

A. typically have no direct connection with the company.

46. Identify a feature of the outside members of an organization's board of directors.

A. They are not permitted to have financial connections to the organization.

A. elect members of the company's board of directors.

A. business sales unit

50. Which of the following is true of the compensation committee of a company?

A. It sets the compensation for all the employees of the company.

A. It monitors the ethical performance of the corporation.

A. business sales unit

A. the cultural aspects of a company's activities.

A. adopting a Code of Best Practice to achieve high standards of corporate behavior.

A. it was inclusive of the recruiting policies of an organization

A. The power of the stockholders is maximized.

A. the independence of the board is maximized

67. Which of the following is true of the CRAFTED principles of governance?

A. It recommends creating a culture of consistency, accountability, and responsibility.

A. following an exclusive rather than an inclusive approach.

71. Which of the following is true of ethical misconduct?

A. They must be nominated by the compensation committee.

74. A commitment to good corporate governance:

A. necessitates decreasing the independence of a board.

A. The participants of the governance process must be made accountable effectively.

A. basic limiting principle

A. represent professional conduct in their own organizations.

85. _____ members of a board of directors hold management positions in a company.

100.Corporate governance is about managers fulfilling a _____ responsibility to the owners of

105.Does a commitment to good corporate governance affect a company's profitability?

True / False Questions

Accessibility: Keyboard Navigation

Accessibility: Keyboard Navigation

Accessibility: Keyboard Navigation

Accessibility: Keyboard Navigation

5. Corporate governance does not impact the efficiency of financial markets.

Accessibility: Keyboard Navigation

Accessibility: Keyboard Navigation

7. Creditors, suppliers, and professional consultants represent the inside members of a

The inside members of a board of directors hold management positions in a company.

Accessibility: Keyboard Navigation

The audit committee of an organization is staffed by members of the board of directors

Accessibility: Keyboard Navigation

Accessibility: Keyboard Navigation

The compensation committee of an organization is staffed by members of the board of

Accessibility: Keyboard Navigation

The compensation committee of an organization is responsible for setting the

Accessibility: Keyboard Navigation