Flashcards in Corporate Governance Deck (31):
What is the primary duty of the board of directors?
To monitor management behavior.
What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?
Oversees the board
Responsible for hiring new CEO
What is the responsibility of the audit committee of the board of directors?
The audit committee appoints and oversees the external auditor.
What is the duty of the compensation committee of the board of directors?
The compensation committee handles the CEO's compensation package.
DF Act says shareholders must have nonbinding vote on executive compensation every 3 years
Shareholders get to vote on golden parachutes
What does the NYSE and NASDAQ require of the board of directors?
They require the board to be independent.
NYSE is more strict - no affiliations within last 5 years. NASDAQ only last 3 years.
What is the main goal in an executive compensation package?
The package should ensure that the goals of management should match those of the shareholders.
How can an executive compensation package ensure that goals of management align with those of shareholders?
Executive compensation should create an incentive for management to govern in a shareholder-friendly way that doesn’t sacrifice the long-term success of the enterprise for short-term gain.
Which influences help mold the direction that management takes?
They range from internal (Board of Directors- Audit Committee- Internal Control) to external (Creditors- SEC- IRS)
These influences should not be tainted by undue influence from management or have financial ties to management such as compensation-related duties
What is shirking?
When management doesn't act in the best interest of shareholders.
It can be alleviated by tying compensation to stock performance or company profit.
What requirements are imposed on a public company under Sarbanes-Oxley?
Management must submit a report on the effectiveness of Internal Control in the 10K.
Management must disclose significant Internal Control deficiencies.
CEO/CFO must certify that the financial statements comply with securities laws and fairly present the financial condition of the company.
What characteristics are promoted by the COSO framework on internal control?
Reliable financial reporting
Effective and efficient operations
What are the elements of the control environment?
I ntegrity & Ethics
H R Policies
A ssignment of authority and responsibility
M anagement's Operating Style
B oard of Directors & Audit Committee
O rganizational Structure
What are control activities?
Policies and procedures that help ensure management directives on internal control are carried out.
E.g. Authorization and approval, physical controls, verifications, etc.
What are the basic elements of internal control?
Information and Communication
What is the significance of the Information and Communication aspect of internal control?
Management must have access to relevant and timely information to make good decisions.
How does Monitoring affect internal control?
Internal Control activities must be constantly monitored and evaluated for effectiveness.
What activities does the COSO framework for enterprise risk management include?
Identifies Risk Factors
Promotes Risk Response Decisions
Compares Management Risk vs. Shareholder Goals
Aids in evaluating opportunities
Promotes Quicker Capital movement
Does NOT eliminate all risk
What are possible responses to risk under the COSO framework for enterprise risk management?
Avoid or Reduce
Share or Accept
What is the agency problem?
Corporate management may not operate in the best interest of shareholders
What is included in the Articles of Incorporation?
Proposed name and initial address
Powers of corporation
Name of registered agent
Name and address of each incorporator
Number of authorized shares and types of stock
Typically amendments must be approved by shareholders
What are a shareholder's rights?
Elect board of directors
Receive dividend once declared
Subscribe to stock issues so ownership won't be diluted
May inspect books and records in good faith for proper purpose
Can sue on behalf of corp. if officers are violating fiduciary duty (derivative suit)
What is the business judgement rule?
A corporate director may not be held liable for errors in judgement providing they acted in good faith, loyalty and due care
What is a financial expert and which committee must have one?
Audit committee must have one
Expert understands GAAP and financial statements
Has experience preparing, auditing, analyzing or evaluating financial statements in same complexity as current company
Understands internal controls for financial reporting
What are the standards for Internal Auditors?
Attribute standards - characteristics of internal audit activity
Performance standards - quality of internal audit activities
Implementation standards - expands on above standards
What are the levels of Filers with SEC?
Large Accelerated ≥ $700M
Accelerated ≥ $75M and < $75M
What are the divisions of the SEC?
Corporate Finance - reviews reports from public companies
Enforcement - assist with executing law enforcement, which cases to take to court
Office of Chief Accountant - advises SEC on accounting and auditing, approve rules by PCAOB
Office of Whistleblower - handles tips and complaints, provides guidance to Enforcement division and whistleblowers
How did SOX improve the SEC's power?
CEO and CFO must certify reports filed with SEC
Made prosecution of fraud easier
Made destruction or tampering with documentation illegal
Prohibits retaliation against whistleblowers
What does the Dodd-Frank Act regulate?
Gives awards to whistleblowers
Strengthened rules for retaliation against whistleblowers - they can now sue corporation
What is the JOBS Act?
Exemption rules for Emerging Growth Companies
For up to 5 years from date of IPO
- Certain disclosure requirements
- Integrated audit of internal control
- Shareholder vote on executive compensation
What is internal control under the COSO framework?
A process enacted by the BOD, management, and others to provide a reasonable assurance regarding the achievement of objectives relating to operations, reporting and compliance