CFA ESG Chapter 5 Exam Questions &
Answers 100% Accurate!!
Corporate governance can be distilled down to what two factors, known as the two 'A's'
of corporate governance? - ANSWERSAccountability and alignment.
Talk through the two 'A's' of corporate governance. - ANSWERSAccountability: Who's
on the board, who are they responsible/accountable to, and do they produce a set of
accounts which are true and fair. Corp governance focuses on board structure, director
independence and accurate accounts, as well as who will take responsibility.
Alignment: arises from the agency problem, therefore, requires appropriate incentives
and chains of accountability to ensure alignment.
What has given rise to corporate governance codes? - ANSWERSCorporate failures
and scandals, where companies failed through theft or financial reports didn't reflect at
all truth and fairness.
What was the world's first formal corporate governance code? - ANSWERSEmerged in
the UK in 1992, The Cadbury Committee was brought together by the LSE, Financial
Reporting Council, and the accounting profession following the Caparo and Polly Peck
scandals. It is still considered best practice today and is incorporated globally, grown
from concepts of accountability and alignment.
What were the Caparo and Polly Peck scandals? - ANSWERSCaparo tried to buy
Fidelity, only to discover that their profits were massively overstated. Share price of
PollyPeck had been pumped up on misleading financial reporting.
What did the Cadbury Committee propose that is still around today? - ANSWERSThat
every public company should have an audit committee that meet twice a year, and their
core theme that no individual should have 'unfettered powers of decision', so roles of
Chairman and CEO should not be combined.
What UK model is followed around the world on corporate governance? Comply ... what
is the issue with this? - ANSWERSComply or Explain. Issue is that it is voluntary at the
moment, but there is a move to make this regulatory.
What is the differences between a single and two tier board? - ANSWERSSingle: mix of
exec and non-exec directors, in Japan exec directors are dominant, France and US
there is a combined Chair and CEO, UK recommends for them to be split.
Two: Wholly non-exec supervisory board that oversees the exec board, non-execs may
not be independent by being large shareholders, this is adopted in Germany,
Netherlands, Scandanavia, China.
, Is one method of corporate governance considered better? Who has set out best
practice for this area? - ANSWERSNo one model of corporate governance is
considered better than others. Best practices incorporated in International Corporate
Governance Network (ICGN) and Organisation of Economic Co-Operation and
Development (OECD).
What is the Greenbury Report? - ANSWERSUK report came out because of the
shocking levels of pay at newly privatised companies, it pushed for increased visibility of
renumeration structures.
What is the Sarbanes-Oxley Act 2002? - ANSWERSUS act following the Enron, Tyco,
and WorldCom scandals all to do with financial reporting. It created the Public Company
Accounting Oversight Board (PCAOB) establishing a standard for audit independence
and challenge.
Which US act post the financial crisis led to greater standards and oversight of banks? -
ANSWERSThe Dodd-Frank Act.
Following scandals around Olympus and Toshiba, what then emerged in Japan? -
ANSWERSThe Japanese Corporate Governance Code 2015, revised in 2018 on board
independence.
What is the definition of shareholder engagement? - ANSWERSShareholder
engagement is the active dialogue between companies and their investors.
For minority shareholders there must always be protections against exploitation by the
dominant shareholders. What are the two protections? - ANSWERSApplication of class
tests and pre-emption rights.
What is the application of class tests? - ANSWERSApplication of class tests is if the
business wants to carry out a really big transaction, which would constitute more than
25% of the value of the business then you have to put it to a vote to all of the
shareholders.
What are pre-emption rights? - ANSWERSIf a business wants to release more shares,
they have to give their existing shareholders the right to buy these on a pro rata basis.
Why do minority shareholders feel begrudged by dual shareclasses? - ANSWERSDual
share classes are usually split where one share class is held by founders/early investors
and will have more votes per share than the other share class. The LSE has stopped
this, but it happens in the US.
What American state is home to more than 50% of the publicly traded companies in the
US? - ANSWERSThis is where the companies are incorporated, and the state is
Delaware. It essentially has the most relaxed and accommodating corporate laws.
Answers 100% Accurate!!
Corporate governance can be distilled down to what two factors, known as the two 'A's'
of corporate governance? - ANSWERSAccountability and alignment.
Talk through the two 'A's' of corporate governance. - ANSWERSAccountability: Who's
on the board, who are they responsible/accountable to, and do they produce a set of
accounts which are true and fair. Corp governance focuses on board structure, director
independence and accurate accounts, as well as who will take responsibility.
Alignment: arises from the agency problem, therefore, requires appropriate incentives
and chains of accountability to ensure alignment.
What has given rise to corporate governance codes? - ANSWERSCorporate failures
and scandals, where companies failed through theft or financial reports didn't reflect at
all truth and fairness.
What was the world's first formal corporate governance code? - ANSWERSEmerged in
the UK in 1992, The Cadbury Committee was brought together by the LSE, Financial
Reporting Council, and the accounting profession following the Caparo and Polly Peck
scandals. It is still considered best practice today and is incorporated globally, grown
from concepts of accountability and alignment.
What were the Caparo and Polly Peck scandals? - ANSWERSCaparo tried to buy
Fidelity, only to discover that their profits were massively overstated. Share price of
PollyPeck had been pumped up on misleading financial reporting.
What did the Cadbury Committee propose that is still around today? - ANSWERSThat
every public company should have an audit committee that meet twice a year, and their
core theme that no individual should have 'unfettered powers of decision', so roles of
Chairman and CEO should not be combined.
What UK model is followed around the world on corporate governance? Comply ... what
is the issue with this? - ANSWERSComply or Explain. Issue is that it is voluntary at the
moment, but there is a move to make this regulatory.
What is the differences between a single and two tier board? - ANSWERSSingle: mix of
exec and non-exec directors, in Japan exec directors are dominant, France and US
there is a combined Chair and CEO, UK recommends for them to be split.
Two: Wholly non-exec supervisory board that oversees the exec board, non-execs may
not be independent by being large shareholders, this is adopted in Germany,
Netherlands, Scandanavia, China.
, Is one method of corporate governance considered better? Who has set out best
practice for this area? - ANSWERSNo one model of corporate governance is
considered better than others. Best practices incorporated in International Corporate
Governance Network (ICGN) and Organisation of Economic Co-Operation and
Development (OECD).
What is the Greenbury Report? - ANSWERSUK report came out because of the
shocking levels of pay at newly privatised companies, it pushed for increased visibility of
renumeration structures.
What is the Sarbanes-Oxley Act 2002? - ANSWERSUS act following the Enron, Tyco,
and WorldCom scandals all to do with financial reporting. It created the Public Company
Accounting Oversight Board (PCAOB) establishing a standard for audit independence
and challenge.
Which US act post the financial crisis led to greater standards and oversight of banks? -
ANSWERSThe Dodd-Frank Act.
Following scandals around Olympus and Toshiba, what then emerged in Japan? -
ANSWERSThe Japanese Corporate Governance Code 2015, revised in 2018 on board
independence.
What is the definition of shareholder engagement? - ANSWERSShareholder
engagement is the active dialogue between companies and their investors.
For minority shareholders there must always be protections against exploitation by the
dominant shareholders. What are the two protections? - ANSWERSApplication of class
tests and pre-emption rights.
What is the application of class tests? - ANSWERSApplication of class tests is if the
business wants to carry out a really big transaction, which would constitute more than
25% of the value of the business then you have to put it to a vote to all of the
shareholders.
What are pre-emption rights? - ANSWERSIf a business wants to release more shares,
they have to give their existing shareholders the right to buy these on a pro rata basis.
Why do minority shareholders feel begrudged by dual shareclasses? - ANSWERSDual
share classes are usually split where one share class is held by founders/early investors
and will have more votes per share than the other share class. The LSE has stopped
this, but it happens in the US.
What American state is home to more than 50% of the publicly traded companies in the
US? - ANSWERSThis is where the companies are incorporated, and the state is
Delaware. It essentially has the most relaxed and accommodating corporate laws.
