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KASNEB CS23 practice questions

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Question 1Corporate Governance and Ethics

In agency theory, the core governance problem arises because:

  1. shareholders and managers always share the same objectives, which makes board monitoring unnecessary
  2. ownership is separated from control, so managers may pursue their own interests Correct answer.
  3. creditors rather than shareholders control the composition of the board
  4. employees elect the board of directors at the annual general meeting

Explanation

Agency theory treats governance as a contract between principals (owners) and agents (managers). Because interests diverge and managers hold superior information, agency costs arise, and monitoring, disclosure and incentive alignment are the governance responses. Separation of ownership from control is the condition that makes this problem possible.

Question 2Corporate Governance and Ethics

The stakeholder view of corporate governance holds that a company should be accountable to:

  1. the board of directors, as it is the supreme governing body
  2. all groups affected by its activities, including employees and the community Correct answer.
  3. shareholders alone, because they bear the residual risk of the business
  4. government regulators, since they issue the operating licence

Explanation

Stakeholder theory says the firm is accountable to every party that affects or is affected by it, not only to capital providers. Governance therefore balances shareholder returns against obligations to employees, customers, suppliers, communities and the environment. The narrower options describe the shareholder-primacy model or the internal hierarchy, not the stakeholder view.

Question 3Corporate Governance and Ethics

Corporate governance best practice recommends separating the roles of chairperson and chief executive primarily in order to:

  1. comply with the tax legislation of each operating jurisdiction
  2. preserve board independence and prevent concentration of power Correct answer.
  3. reduce the total remuneration paid to senior executives
  4. allow the chief executive to chair the board committees

Explanation

Combining the chair and CEO roles allows one person to set the board agenda, run management and lead performance evaluation of the board itself. Separation creates a check on executive power and allows the chair to lead the board independently. The other options describe remuneration design, tax compliance and committee practice, none of which is the rationale for role separation.

Question 4Corporate Governance and Ethics

A director's fiduciary duty requires the director to:

  1. follow the voting instructions of the largest shareholder
  2. attend every board and committee meeting without exception
  3. act in good faith in the best interests of the company Correct answer.
  4. guarantee that the company remains profitable in every financial year

Explanation

The fiduciary duty is a duty of loyalty: the director must act honestly and in good faith in the company's best interests, putting the company ahead of personal or sectional interests. It does not guarantee outcomes such as profit, and it is not discharged by attendance records or by obeying a dominant shareholder.

Question 5Corporate Governance and Ethics

An audit committee is normally expected to be composed:

  1. of representatives of the largest institutional shareholders
  2. wholly or mainly of independent non-executive directors Correct answer.
  3. mainly of executive directors and senior managers
  4. of the external auditors together with the finance director

Explanation

The audit committee oversees financial reporting, internal control and the external audit relationship, all of which require scrutiny of management. Independence from management is therefore essential, which is why best practice requires an independent non-executive membership under an independent chair. Management and auditors attend by invitation but are not members.

Question 6Corporate Governance and Ethics

A code of ethics is most likely to be effective when it is:

  1. framed in general aspirational language without specific rules
  2. kept confidential and issued only to senior managers at induction
  3. reviewed once at incorporation and left unchanged thereafter
  4. supported by visible leadership commitment and enforced through training and sanctions Correct answer.

Explanation

A code shapes behaviour only when leaders model it, staff are trained on it, breaches are investigated and sanctions are applied consistently. Enforcement mechanisms convert stated values into operational standards. Documents that are circulated narrowly, left vague, or never updated tend to become symbolic rather than effective.

Question 7Corporate Governance and Ethics

The principle of transparency requires the board to:

  1. release all internal board minutes to the general public
  2. withhold adverse news until the next annual general meeting
  3. disclose timely, accurate and material information to stakeholders Correct answer.
  4. publish only the information demanded by the tax authority

Explanation

Transparency means stakeholders receive a timely, accurate and complete picture of matters that are material to their decisions. It does not require wholesale publication of internal deliberations, nor selective disclosure of good news only.

Question 8Corporate Governance and Ethics

Insider trading is prohibited mainly because:

  1. it is a related party transaction that needs board approval
  2. it misuses confidential price-sensitive information and undermines market confidence Correct answer.
  3. it always depresses the market price of the company's shares
  4. it involves trading in the shares of the trader's own employer

Explanation

Insider trading is the misuse of information not available to the market, which gives the trader an unfair advantage at the expense of other investors. Widespread tolerance of the practice would deter participation and damage confidence in the integrity of the market. Trading in one's employer's shares is lawful when it is not based on unpublished price-sensitive information.

Question 9Corporate Governance and Ethics

Stewardship theory differs from agency theory in that it assumes managers are:

  1. answerable only to the company's secured creditors
  2. trustworthy stewards who are intrinsically motivated to serve the organisation Correct answer.
  3. self-interested agents who require constant monitoring and incentives
  4. incapable of exercising judgement without detailed board instructions

Explanation

Stewardship theory holds that managers identify with the organisation and gain satisfaction from organisational achievement, so empowerment and trust are preferred to heavy monitoring. Agency theory takes the contrasting view that managers are self-interested and need monitoring and incentives to align them with owners.

Question 10Corporate Governance and Ethics

A non-executive director is generally regarded as independent only where the director:

  1. was formerly the company's finance director until last year
  2. has no material business, employment or family ties with the company Correct answer.
  3. receives a bonus linked to the company's annual profit
  4. has served continuously on the board for fifteen years

Explanation

Independence is about the absence of relationships that could compromise objective judgement, such as material contracts, recent senior employment, family ties to executives or remuneration tied to results. Long tenure, prior executive office and profit-linked pay are each recognised threats to that objectivity.

Question 11Corporate Governance and Ethics

Under an 'apply and explain' governance regime, entities are expected to:

  1. adopt only those practices that are financially beneficial to the entity
  2. comply with every recommendation or state reasons for non-compliance
  3. apply the recommended practices and explain how the principles are achieved Correct answer.
  4. obtain regulatory approval before applying any recommended principle

Explanation

An apply-and-explain basis requires entities to implement the recommended practices and then explain how the underlying governance principles are being achieved in their particular circumstances. This differs from comply-or-explain, where non-compliance with a recommendation is permitted provided reasons are disclosed.

Question 12Corporate Governance and Ethics

Where a director has a personal interest in a transaction before the board, the director should:

  1. resign from the board with immediate effect
  2. disclose the interest and abstain from the discussion and the vote Correct answer.
  3. delegate the decision to the chief executive officer
  4. vote in favour of the transaction to show commitment to the company

Explanation

Conflict-of-interest rules require full disclosure to the board and abstention from both deliberation and voting on the matter. This protects the integrity of the decision and ensures the conflicted director does not influence the outcome. Resignation is not required, and delegation to management does not cure the conflict.

Question 13Corporate Governance and Ethics

An effective whistleblowing policy should provide for:

  1. confidential reporting channels and protection against retaliation Correct answer.
  2. mandatory identification of the reporter to line management
  3. disciplinary action against any employee who raises a concern
  4. reports handled exclusively by internal audit without independent oversight

Explanation

Concerns about wrongdoing are most likely to be raised where reporters can do so confidentially and are protected from victimisation. Best practice also routes serious reports to an independent channel or committee so that wrongdoing by senior staff is not screened by those implicated.

Question 14Corporate Governance and Ethics

The principal responsibility of a board remuneration committee is to:

  1. determine the fees payable to the external auditor
  2. recommend executive pay and incentives linked to performance Correct answer.
  3. nominate new directors for approval by shareholders
  4. approve the annual financial statements before publication

Explanation

The remuneration committee designs and recommends executive pay, incentive plans and termination arrangements, linking reward to performance while avoiding conflicts of interest. It works with independent advice and reports to shareholders through the remuneration report.

Question 15Corporate Governance and Ethics

The triple bottom line approach to measuring corporate performance focuses on:

  1. shareholders, directors and auditors
  2. compliance, internal control and disclosure
  3. profit, cash flow and liquidity
  4. economic, social and environmental outcomes Correct answer.

Explanation

The triple bottom line broadens performance measurement beyond financial return to include social and environmental impacts alongside economic results. It is the measurement expression of sustainability reporting, capturing the value an entity creates and the externalities it imposes.

Question 16Corporate Governance and Ethics

A deontological approach to business ethics judges the rightness of an action by:

  1. the greatest net benefit to the greatest number of people
  2. the prevailing social norms of the society concerned
  3. whether it conforms to duties and rules, regardless of consequences Correct answer.
  4. the character traits and virtues of the decision maker

Explanation

Deontology holds that certain duties and rules bind decision makers irrespective of the outcomes those rules produce. This contrasts with consequentialist thinking such as utilitarianism, which evaluates actions solely by their results.

Question 17Corporate Governance and Ethics

A board weighing a plant closure faces competing harms to employees, investors and the local community. Under utilitarian reasoning, the decision is judged by:

  1. the overall balance of benefits and harms to all affected parties Correct answer.
  2. the personal integrity of the chief executive officer
  3. whether the contractual rights of employees were respected
  4. whether the decision complies with the company's code of conduct

Explanation

Utilitarianism evaluates an act by its consequences, seeking the greatest net welfare for all those affected. It therefore requires the decision maker to weigh the aggregate benefits and harms rather than to focus on a single party's rights or the actor's own character.

Question 18Corporate Governance and Ethics

Integrated reporting is designed primarily to explain to providers of financial capital:

  1. the market share achieved by each product line
  2. the biographical details of each member of the board
  3. the detailed tax computations of each subsidiary company
  4. how the organisation creates value over time through the capitals it uses Correct answer.

Explanation

An integrated report connects financial, manufactured, intellectual, human, social and relationship, and natural capital to show how value is created, preserved or eroded over the short, medium and long term. It is a concise, strategic communication rather than a collection of granular operating data.

Question 19Corporate Governance and Ethics

Which arrangement best safeguards the independence of the external auditor?

  1. appointing a former finance director of the client as engagement partner
  2. rotating the engagement partner and restricting non-audit services Correct answer.
  3. having the audit partner serve on the client's audit committee
  4. paying part of the audit fee in shares of the client company

Explanation

Independence is protected by rotating key audit personnel, limiting the provision of non-audit services that create self-review and self-interest threats, and maintaining direct reporting lines to the audit committee. These measures reduce familiarity and financial self-interest pressures.

Question 20Corporate Governance and Ethics

The business judgement rule shields directors from liability where they:

  1. avoided taking any decision on a matter carrying risk
  2. acted in good faith, on an informed basis, for the company's benefit Correct answer.
  3. acted mainly to entrench themselves in office
  4. relied on their uninformed opinion despite available expert advice

Explanation

The rule recognises that directors must take commercial risks and will sometimes be wrong; it protects decisions made honestly, with adequate information and in the company's interest. Negligent failure to inform oneself, bad faith or improper purpose removes the protection.

Question 21Corporate Governance and Ethics

Which situation most clearly shows a director's independence that exists in appearance only?

  1. A non-executive director classed as independent holds a consultancy contract with a subsidiary Correct answer.
  2. The audit committee meets the external auditors without management present
  3. The board is chaired by a non-executive director and has a majority of independents
  4. An independent director holds no shares and receives no bonus

Explanation

Independence must exist in substance, judged by the absence of relationships that could sway judgement. A continuing consultancy contract with the group creates a material financial relationship that compromises objectivity whatever the director's formal classification. The other options describe features that reinforce genuine independence.

Question 22Corporate Governance and Ethics

A company proposes to buy services from a firm owned by the chairperson's spouse on terms worse than market rates. Governance best practice requires:

  1. approval by the chief executive alone, since speed protects commercial value
  2. confidential treatment, to protect the parties' commercial interests
  3. review and approval by independent directors, plus disclosure to shareholders Correct answer.
  4. approval by the full board with the chairperson leading the discussion

Explanation

Related party transactions must be screened by directors free from the conflict, typically through a committee, and material ones must be disclosed to shareholders so they can assess whether the terms are fair. The conflicted chairperson must be excluded from the deliberation and vote. Secrecy or executive-level approval cannot cure the conflict.

Question 23Corporate Governance and Ethics

The OECD Principles of Corporate Governance are principally intended to:

  1. set maximum levels of executive remuneration in member countries
  2. prescribe detailed accounting standards for listed companies
  3. protect shareholder rights and promote equitable treatment and transparency Correct answer.
  4. establish criminal penalties for directors who breach their duties

Explanation

The OECD Principles provide a non-binding framework covering shareholder rights, equitable treatment of shareholders, the role of stakeholders, disclosure and transparency, and board responsibilities. They are principles for jurisdictions to implement through their own codes and law, not detailed prescriptive rules.

Question 24Corporate Governance and Ethics

The concept of 'tone at the top' suggests that an organisation's ethical climate is shaped most strongly by:

  1. the conduct and signals of senior leaders and the board Correct answer.
  2. the length and detail of the written code of ethics
  3. the number of compliance officers employed by the firm
  4. the severity of penalties set out in the disciplinary policy

Explanation

Staff infer what is genuinely expected of them from the behaviour of leaders, the questions leaders ask and the decisions they reward. Written rules and enforcement structures matter, but they are interpreted through the example set at the top of the organisation.

Question 25Corporate Governance and Ethics

The board's role in risk management is best described as:

  1. delegating all risk oversight to the external auditor
  2. guaranteeing that no material risk event will occur
  3. setting risk appetite and ensuring a sound control framework Correct answer.
  4. preparing detailed risk registers for every operating department

Explanation

The board sets the risk appetite, approves the risk policy and satisfies itself that an effective risk management and internal control system is in place and operating. Detailed risk registers are prepared by management, and no control system can guarantee that no risk event occurs.

Question 26Corporate Governance and Ethics

The agency problem in a listed company arises primarily because:

  1. auditors do not have unrestricted access to the information held by management
  2. boards meet too infrequently to supervise the work of the executive team
  3. shareholders are too numerous to attend the annual general meeting in person
  4. ownership is separated from control and managers may pursue their own interests Correct answer.

Explanation

In a listed company the owners (shareholders) delegate decision-making to managers who do not bear the full wealth effects of their decisions. This separation of ownership from control creates scope for managers to act in their own interest rather than the owners' interest. The resulting divergence is the core of the agency problem that governance mechanisms are designed to control.

Question 27Corporate Governance and Ethics

Best practice requires that the audit committee of a listed company be composed of:

  1. a majority of executive directors, chaired by the chief executive officer
  2. the chief executive officer and the partner in charge of the external audit
  3. independent non-executive directors, one with financial expertise Correct answer.
  4. the finance director together with two other executive directors of the company

Explanation

The audit committee oversees the integrity of financial reporting, the external audit and the internal control environment, so it must be able to challenge management objectively. Membership is therefore restricted to independent non-executive directors, and at least one member should have recent and relevant financial experience. Including executives whose work is being reviewed would destroy the committee's independence.

Question 28Corporate Governance and Ethics

The roles of board chairperson and chief executive are usually separated because:

  1. the chief executive is not permitted to attend meetings of the board of directors
  2. company law in most jurisdictions prohibits one person from holding both posts at the same time
  3. combining them concentrates power and weakens board oversight of management Correct answer.
  4. the chairperson must always be a non-executive director elected by the shareholders

Explanation

The board's accountability role depends on a clear division between running the company and leading the board. Where one person holds both posts, the same individual sets the agenda, chairs the discussion and answers for the performance being reviewed. Separating the roles preserves an independent voice at the head of the board.

Question 29Corporate Governance and Ethics

Corporate governance is best defined as:

  1. the system by which companies are directed and controlled Correct answer.
  2. the day-to-day management of a company's operational activities by its executives
  3. the set of legal rules governing competition and consumer protection in markets
  4. the process of auditing financial statements and reporting the results to shareholders

Explanation

The classic Cadbury formulation describes corporate governance as the system by which companies are directed and controlled. It covers the allocation of rights and responsibilities among shareholders, directors and managers, and the rules and procedures for decision-making. It is therefore broader than management, audit or market regulation taken alone.

Question 30Corporate Governance and Ethics

Virtue ethics evaluates a business decision primarily by reference to:

  1. the total net benefit the decision produces for all the parties affected by it
  2. the specific duties the decision-maker owes to identified stakeholders
  3. whether the decision complies with the letter of the applicable law
  4. the character and motives of the person making the decision Correct answer.

Explanation

Virtue ethics asks what a person of good character would do, focusing on traits such as honesty, courage and integrity rather than on rules or outcomes. The assessment centres on the agent and their motives rather than on the consequences of the act. It is therefore distinct from utilitarian and deontological reasoning.

Question 31Corporate Governance and Ethics

The 'one share, one vote' principle in corporate governance means that:

  1. minority shareholders may veto any resolution passed by the majority
  2. each shareholder may cast one vote at every general meeting regardless of the size of the holding
  3. directors must each hold at least one share before they may vote at board meetings
  4. voting power at general meetings is proportionate to the number of shares held Correct answer.

Explanation

The principle holds that voting rights attach to shares and increase in line with the size of the holding, so that economic interest and control are aligned. It protects the link between risk-bearing and decision-making power. Departures from it, such as dual-class shares, dilute that alignment.

Question 32Corporate Governance and Ethics

To protect its independence, the head of internal audit should report functionally to:

  1. the finance director
  2. the audit committee Correct answer.
  3. the external auditor
  4. the chief executive officer

Explanation

Functional reporting to the audit committee gives internal audit the standing to review any part of the organisation, including senior management, without fear of reprisal. Administrative reporting may remain with the chief executive for day-to-day purposes. This dual reporting line is the standard safeguard for internal audit independence.

Question 33Corporate Governance and Ethics

Which of the following best illustrates a bonding cost in agency theory?

  1. a shareholder appointing an independent auditor to review the annual accounts
  2. a board commissioning an external evaluation of its own performance
  3. a bank charging a higher interest rate to a company with weak internal controls
  4. an executive accepting shares that vest only if five-year profit targets are met Correct answer.

Explanation

Bonding costs are incurred by the agent to signal that their interests are aligned with the principal's, for example by accepting deferred or performance-linked pay that is forfeited on poor results. Monitoring costs, by contrast, are borne by the principal to observe the agent. This distinction is central to the agency cost framework.

Question 34Corporate Governance and Ethics

Under the duty of care and skill, a director is generally expected to exercise:

  1. the professional skill of a qualified accountant in all financial matters before the board
  2. only the level of skill the director in fact personally possesses at the time
  3. the highest level of technical expertise available anywhere in the company's industry
  4. the care and skill a reasonably diligent person would show in comparable circumstances Correct answer.

Explanation

The modern standard combines an objective and a subjective element: the care, diligence and skill that a reasonably diligent person with the same responsibilities would exercise, together with any special knowledge or skill the director actually has. A director is not expected to be the best in the industry. Where a director holds a professional qualification, the higher personal standard applies to matters within that expertise.

Question 35Corporate Governance and Ethics

A director who is offered a business opportunity that properly belongs to the company must first:

  1. resign from the board before taking up the opportunity
  2. refer the matter to the external auditors for a binding ruling
  3. accept it personally and disclose the resulting profit at the next board meeting
  4. offer the opportunity to the company for its consideration Correct answer.

Explanation

Under the duty of loyalty, a director may not divert a corporate opportunity without first giving the company the chance to decide whether to pursue it. Disclosure and approval by disinterested directors, or a decision to decline, must come before the director takes the opportunity personally. Resigning beforehand does not cure an opportunity already diverted.

Question 36Corporate Governance and Ethics

Stakeholder theory holds that a company should be managed:

  1. in accordance with whatever the largest shareholder directs
  2. in the interests of all the groups affected by its activities Correct answer.
  3. only to the extent required by the law of the jurisdiction concerned
  4. exclusively for the financial return of its shareholders

Explanation

Stakeholder theory argues that employees, customers, suppliers, communities and other affected groups have legitimate claims that management must balance alongside shareholder interests. The firm is treated as a network of relationships rather than as a pure instrument of shareholder wealth. This contrasts with shareholder primacy and with mere legal compliance.

Question 37Corporate Governance and Ethics

Ethical relativism in business decision-making holds that:

  1. an action is right if it produces the greatest good for the greatest number
  2. the morality of an act depends solely on its consequences for the firm's profit
  3. right and wrong depend on the norms of the culture or group concerned Correct answer.
  4. there are universal moral standards that bind every business everywhere

Explanation

Ethical relativism denies that a single trans-cultural standard can settle moral questions, locating morality in the accepted norms of a particular society or group. This creates practical difficulty for multinational firms because it can justify practices that are unacceptable elsewhere. It is often contrasted with universalist approaches such as Kantian ethics.

Question 38Corporate Governance and Ethics

King IV identifies four governance outcomes. They are:

  1. ethical culture, good performance, effective control and legitimacy Correct answer.
  2. transparency, accountability, fairness and responsibility
  3. profitability, liquidity, solvency and sustainability
  4. shareholder value, customer satisfaction, employee welfare and regulatory compliance

Explanation

King IV is structured around the outcomes of an ethical culture, good performance, effective control and legitimacy. Every recommended practice is directed at achieving these outcomes rather than at mere compliance. The report is applied on an 'apply and explain' basis so that governing bodies must describe how the outcomes are achieved.

Question 39Corporate Governance and Ethics

Under the Sarbanes-Oxley Act, the chief executive and chief financial officer of a listed company must:

  1. approve the appointment of the external audit firm on behalf of the board
  2. certify that the financial statements fairly present the company's position Correct answer.
  3. personally prepare the company's financial statements each quarter
  4. hold a recognised professional accountancy qualification

Explanation

Sarbanes-Oxley requires the principal executive and financial officers to certify each periodic report, confirming among other matters that it does not contain material misstatements and fairly presents the financial condition of the issuer. The certification attaches personal accountability to the signatories. It does not require them to prepare the statements themselves.

Question 40Corporate Governance and Ethics

The primary purpose of a stewardship code for institutional investors is to:

  1. encourage investors to monitor and engage with investee companies Correct answer.
  2. guarantee a minimum level of dividend to retail shareholders in investee companies
  3. limit the voting rights of activist hedge funds in investee companies
  4. require fund managers to disclose publicly the remuneration of their own senior staff

Explanation

Stewardship codes set expectations for how asset managers and asset owners exercise their ownership responsibilities, principally through monitoring, engagement and voting. They are designed to strengthen the accountability chain between ultimate beneficiaries and investee boards. They do not set dividend, remuneration or voting-right rules.

Question 41Corporate Governance and Ethics

A malus or clawback provision in an executive incentive plan allows the company to:

  1. convert executive shares into long-term debt instruments
  2. defer publication of the annual remuneration report
  3. increase the bonus whenever profits exceed the target set
  4. recover or withhold variable pay after it has been awarded or vested Correct answer.

Explanation

Malus allows unvested or unpayable awards to be reduced or withheld, while clawback allows the company to recover variable pay already paid. Both are triggered by events such as misstatement, misconduct or serious reputational damage. They align reward with long-term outcomes and deter excessive risk-taking.

Question 42Corporate Governance and Ethics

A board that engages an independent external facilitator for its annual performance evaluation is mainly seeking to:

  1. obtain an objective assessment free of internal loyalties and blind spots Correct answer.
  2. reduce the cost of the evaluation process compared with internal review
  3. satisfy the requirement that directors hold no other directorships
  4. transfer legal responsibility for governance failures to the facilitator

Explanation

External facilitation is recommended periodically because insiders may be reluctant to challenge colleagues or may share the same assumptions. An independent facilitator can surface issues that an internally led review would miss. Responsibility for acting on the findings remains with the board.

Question 43Corporate Governance and Ethics

The most appropriate control over directors' acceptance of gifts and hospitality is:

  1. an instruction that all gifts received be shared among the board
  2. a policy that gifts may be accepted if the giver is not a competitor
  3. a register with a stated value threshold and prior approval Correct answer.
  4. a total ban on any contact between directors and suppliers

Explanation

A gift and hospitality register with a clear value threshold, prior approval above that threshold and periodic review by the board gives transparency while permitting legitimate business courtesy. It creates an audit trail and allows conflicts of interest to be identified early. Blanket prohibitions or self-approval are impractical or ineffective.

Question 44Corporate Governance and Ethics

The nomination committee's main function is to:

  1. review the company's interim and annual financial statements
  2. oversee the company's enterprise-wide risk management framework
  3. set the remuneration of the executive directors and senior managers
  4. identify and recommend candidates for appointment to the board Correct answer.

Explanation

The nomination committee leads the process for board appointments, evaluating the balance of skills, experience and diversity and recommending candidates to the board or shareholders. It also typically oversees succession planning for the board and senior management. Remuneration and financial review belong to other committees.

Question 45Corporate Governance and Ethics

Jones's concept of moral intensity suggests that a manager is most likely to recognise an ethical issue when the:

  1. decision has been formally approved in advance by the company's external legal advisers
  2. decision is consistent with the established practice of industry competitors
  3. decision affects a very large number of anonymous consumers located far away
  4. harm from the decision is severe and falls on people close to the decision-maker Correct answer.

Explanation

Moral intensity is made up of characteristics such as magnitude of consequences, social consensus, probability of effect, temporal immediacy, proximity and concentration of effect. Where harm is serious, likely and close to the decision-maker, moral intensity is high and the issue is more likely to be recognised. Approval, distance and industry custom lower perceived intensity rather than raise it.

Question 46Corporate Governance and Ethics

In Rest's four-component model of moral behaviour, moral sensitivity refers to:

  1. the personal commitment to place moral values above other competing values
  2. the ability to recognise that a situation has an ethical dimension Correct answer.
  3. the capacity to reason towards a defensible moral conclusion
  4. the courage to carry out a moral judgement despite organisational pressure

Explanation

Rest's model comprises moral sensitivity, moral judgement, moral motivation and moral character. Sensitivity is the interpretive step of noticing that a decision affects others and involves ethical considerations. Judgement concerns reasoning, motivation concerns priorities and character concerns implementation.

Question 47Corporate Governance and Ethics

The 'enlightened shareholder value' approach requires directors to:

  1. maximise short-term profit regardless of the effect on other stakeholders
  2. subordinate shareholder returns to the interests of the local community
  3. treat all stakeholder interests as having equal legal weight to shareholders' interests
  4. promote the success of the company for shareholders while having regard to wider stakeholder interests Correct answer.

Explanation

Enlightened shareholder value keeps shareholder success as the objective but requires directors to consider employees, suppliers, customers, communities and the environment insofar as doing so promotes that success. Stakeholder interests are therefore instrumental rather than equal in legal weight. It is associated with provisions such as section 172 of the UK Companies Act 2006.

Question 48Corporate Governance and Ethics

Under the UK Bribery Act 2010, a commercial organisation is liable for failing to prevent bribery by an associated person unless it can show that it had:

  1. reported the bribery to the police within 24 hours of discovery
  2. made a political donation to the authority investigating the conduct
  3. adequate procedures in place to prevent bribery Correct answer.
  4. no knowledge whatsoever of the bribery at board level

Explanation

The Act creates a strict corporate offence of failing to prevent bribery by persons associated with the organisation, such as employees, agents or subsidiaries. The only statutory defence is that the organisation had adequate procedures designed to prevent bribery. Ignorance or prompt reporting does not displace the offence.

Question 49Corporate Governance and Ethics

The 'critical mass' argument for board gender diversity holds that:

  1. board diversity is a relevant requirement only in companies that operate internationally
  2. diversity targets should be met by appointing a single female non-executive director to each board
  3. women should be appointed to boards only where they hold recognised professional financial qualifications
  4. a minority of women on a board can influence decisions only once it reaches a certain size Correct answer.

Explanation

The critical mass argument draws on evidence that one or two women in a group tend to be treated as tokens, whereas around a third or more allows minority voices to shape discussion and outcomes. It therefore supports targets aimed at substantial rather than symbolic representation. The rationale is about group dynamics, not qualifications, tokenism or geography.

Question 50Corporate Governance and Ethics

A listed company's audit committee holds a private session with the external auditor at each meeting, with executive directors absent. The governance purpose of this practice is to:

  1. Satisfy the requirement for auditors to report to shareholders annually
  2. Enable the committee to direct the auditor's accounting judgements
  3. Allow the auditor to negotiate the audit fee directly with non-executives
  4. Let the auditor raise concerns about management without management present Correct answer.

Explanation

Private sessions between the audit committee and the external auditor protect auditor independence and give the auditor a confidential channel to report concerns about management or internal controls. The audit committee oversees the audit relationship but does not direct the auditor's professional judgements, which remain the auditor's responsibility.