Corporate Governance Quiz

The board typically ensures that the company has an appropriate enterprise risk management system in place .

The investment committee reviews proposals for large acquisitions or projects and also monitors the performance of acquired assets and of projects requiring large capital expenditures .

Social factors considered in ESG implementation generally pertain to the management of the human capital of a business, including data privacy and security.

The ability to manage the conflicting interests of company relations with stakeholders requires good communication with stakeholders and a good understanding of their various interests .

Information asymmetry can exist between a company’s shareholders and its managers because the company’s managers may be much more knowledgeable about the company’s functioning and strategic direction. This makes it more difficult for shareholders to monitor the firm’s managers and determine whether they are acting in shareholders’ interests.

Corporate governance is the arrangement of checks, balances, and incentives a company needs to minimize and manage the conflicting interests between insiders and external shareholders.

Compared with other stakeholder groups, customers tend to be less affected by or concerned with a company’s financial performance .

The objective of a value-based ESG approach is to mitigate risks and identify opportunities by analyzing ESG considerations in addition to traditional finance metrics. Avoidance of companies that conflict with moral or ethical values reflects a value-based approach.

(Reduction in risks associated with increased litigation costs) and ( Increase in risk-adjusted returns through ESG factor ranking ) are incorrect. The objective of a value-based ESG approach is to mitigate risks and identify opportunities by analyzing ESG considerations in addition to traditional finance metrics.

The risks of poor corporate governance have long been understood by analysts and shareholders. In contrast, the practice of considering environmental and social factors has been slower to take hold .

A common law system offers better protection of shareholder interests than does a civil law system .

With cumulative voting, shareholders get a vote for each share they own times the number of director elections each year and can give all their votes to a single candidate for the board. This helps minority stockholders to get more proportional representation on the board of directors .

Shareholder and manager interests can diverge with respect to risk tolerance. In some cases, shareholders with diversified investment portfolios can have a fairly high risk tolerances because specific company risk can be diversified away. Managers are typically more risk averse in their corporate decision making to better protect their employment status .

Effective corporate governance requires a system of appropriate controls and procedures to protect financial markets and investors.

(All stakeholders should have the right to participate in the governance of the firm) is incorrect. Only shareholders have the right (not all stakeholders) to participate in the governance of the firm.

(An audit committee that benefits from the direct guidance of management) is incorrect. The audit and compensation committees are best structured with exclusively independent directors, and no management involvement.

Stakeholder theory focuses on the conflicts of interest among owners and several groups that have an interest in a company’s activities, including creditors .

The primary motivation of activist shareholders is to increase shareholder value. If they feel management or the board has failed to act in the best interests of shareholders, they may attempt to force changes by gaining control of the board.

(environmentally sustainable business practices) is incorrect. This is more likely to be a goal of ESG investors with an investment mandate focused on environmental factors.

(consideration of human rights in employee relations) is incorrect. This is more likely to be a goal of ESG investors with an investing mandate focused on social factors.

A specific concern among investors of energy companies is the existence of “stranded assets,” which are carbon-intensive assets at risk of no longer being economically viable because of changes in regulation or investor sentiment . 

While leverage increases risk for all stakeholders, shareholders generally benefit through higher potential returns. Senior management typically benefits through equity-based compensation. For non-management employees, equity-based compensation is likely to be small to non-existent .

Often, policies on related-party transactions require that such transactions or matters be voted on by the board (or shareholders), excluding the director holding the interest .

Positive screening does not exclude any sectors but seeks to invest in the companies with the best practices. Negative screening typically excludes some sectors. Thematic investing refers to making an investment in a company or project in order to advance specific social or environmental goals.

Negative screening refers to the practice of excluding certain sectors, companies, or practices that do not meet specific ESG criteria based on the investor’s values, ethics, or preferences .

Material environmental effects can arise from strategic or operational decisions based on inadequate governance processes or errors in judgment. For example, oil spills, industrial waste contamination events, and local resource depletion can result from poor environmental standards, breaches in safety standards, or unsustainable business models. Such events can be costly in terms of regulatory fines, litigation, clean-up costs, reputational risk, and resource management.

Management is most likely to present the proposed sale to the investment committee, whose main role is to review the viability of material investment opportunities proposed by management.

(Risk) is incorrect. Assessing proposed investment or divestment opportunities is the primary role of the investment committee, not the risk committee. The risk committee assists the board in determining the risk policy, profile, and appetite of the company.

(Audit) is incorrect. Assessing proposed investment or divestment opportunities is the primary role of the investment committee, not the audit committee.

Reduced risk of default is among the benefits of effective corporate governance. Risks from poor corporate governance include related party transactions by managers and opportunities for some stakeholder groups to gain advantage at the expense of others .

Unlike civil law systems, common law systems provide judges with the ability to create law by setting precedents that are followed in subsequent cases. Shareholders are viewed as better protected under common law because judges may rule against management actions in situations that are not specifically addressed by statutes.

(When CEO duality is common ) is incorrect. Under CEO duality, the CEO also serves as chairperson of the board. All else equal, this decreases the protection of shareholder interests in favor of those of management.

( When stakeholder theory prevails ) is incorrect. Stakeholder theory incorporates the interests of non-shareholders such as customers, suppliers, and employees. This inevitably dilutes the focus on shareholders.

Ordinary resolutions, such as those to appoint an auditor or elect a board member, require a simple majority. Acquisitions, mergers, takeovers, and amendments to the company bylaws often require a supermajority of more than 50% for passage .

Responsible investing is the broadest (umbrella) term used to describe investment strategies that incorporate environmental, social, and governance (ESG) factors into their approaches .  

The election of directors is considered an ordinary resolution and, therefore, requires only a simple majority of votes to be passed .

Green finance is an example of impact investing, which seeks to achieve targeted social or environmental objectives by direct investment in projects or companies. Values-based investing is used to express the moral or ethical beliefs of the investor. Negative screening refers to the practice of excluding certain sectors or companies that deviate from acceptable standards.

(Negative screening) is incorrect. Negative screening refers to the practice of excluding certain sectors or companies that deviate from acceptable standards.

(Values-based investing) is incorrect. Values-based investing is used to express the moral or ethical beliefs of the investor.