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LOS a: Define and describe corporate governance.

During a recent luncheon, Angus Rahamut and Dan Riding became engaged in a discussion of issues related to corporate governance. Neither of these individuals is an expert in the field of corporate governance and either of them may have made an inaccurate statement. Which of the following is most likely to be an inaccurate statement?

A)	“In order to avoid conflicts of interest, board members should seek management approval prior to hiring external advisors.”

B)	“Board members must have the experience and qualifications necessary for them to be able to make decisions independently from the firm’s management.”

C)	“To be independent, a board member must not have any material relationship with the firm’s executive management or their families.”

Ideally, independent board members can hire external consultants without management’s approval. This enables the board to obtain advice on specialized issues that is not biased by the interests of management.

Which of the following activities would least likely be an example of good corporate governance?

A)	The board has decided to eliminate finders’ fees for its members for any potential acquisitions that are brought to management’s attention.

B)	Management is allowed to act independently of board of directors.

C)	The board of directors has decided to conduct a self-assessment.

The board of directors should be allowed to act independently of management. Management should not be allowed to act independently from the board.

A)	the firm’s financial, operating, and governance activities are reported to shareholders in a fair, accurate, and timely manner, and management acts independent of the board of directors.

B)	there are proper procedures and controls covering management’s day-to-day operations and the firm acts lawfully in dealings with shareholders.

C)	the board of directors protects shareholder interests, and the shareholders have a voice in governance.

The board of directors must be able to act independent of management, not vice versa. Both of the remaining practices are examples of good corporate governance.

Corporate governance is the set of internal controls, processes and procedures defining how a firm is managed. Which of the following statements concerning corporate governance is least accurate?

A)	Good corporate governance dictates that the firm’s financial, operating and governance activities are reported to stakeholders in a fair, accurate and timely manner.

B)	Good corporate governance means that the board can work effectively with management.

C)	Corporate governance defines the appropriate rights, roles and responsibilities of management, the board, and stakeholders within a firm.

The board of directors must be able to act independently from management. Both remaining statements concerning corporate governance are accurate.

Which of the following statements regarding corporate governance practices is least accurate?

A)	Corporate governance is not as important for firms with largely dispersed minority shareholders.

B)	Good corporate governance practices ensure that the firm’s financial and operating activities are reported to shareholders in a verifiable manner.

C)	Corporate governance is the system of internal controls/procedures by which firms are managed.

Good corporate governance practices are extremely important in the case of firms with largely dispersed minority shareholders. Both remaining statements are accurate.

Corporate governance defines the appropriate rights, role, and responsibilities of:

A)	management only.

B)	management and the board of directors.

C)	management, the board of directors, and shareholders.

Corporate governance defines the appropriate rights, roles, and responsibilities of a corporation’s management, the board of directors, and shareholders.