CMA Sri Lanka SL4 Corporate Governance & Ethics Exam flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Agency cost

The reduction in firm value from the separation of ownership and control, comprising monitoring costs, bonding costs and residual loss incurred to align manager and shareholder interests.

Stewardship theory

A governance perspective assuming managers are trustworthy stewards whose satisfaction comes from organisational achievement, so empowering managers and reducing monitoring costs serves shareholders better than tight control.

Principal–principal conflict

Agency conflict between a controlling shareholder and minority shareholders, where the controller may extract private benefits through related-party deals, tunnelling or unequal treatment of share classes.

Comply or explain

A governance regime where a company may deviate from a code provision but must disclose the deviation and give reasoned explanation, allowing flexibility while preserving market accountability.

Independence criteria

Tests that disqualify a director's independence, typically former employment, close family ties to executives, material commercial relationships, advisory fees and tenure beyond a set period.

Chair–CEO separation

A board structure where different individuals hold the chair and chief executive roles, preventing concentration of power and enabling the chair to lead board challenge independently.

Board skills matrix

A documented grid mapping required competencies against current director capabilities, used to identify gaps and guide nomination, succession and professional development decisions.

Board evaluation

A structured annual review of board, committee and individual director performance, covering composition, dynamics, information quality and contribution, ideally led by an independent facilitator.

Audit committee composition

The membership rules for the audit committee: a minimum of three members, all non-executive and majority independent, with at least one financially literate member and an independent chair.

Auditor independence safeguards

Measures protecting external auditor objectivity, including audit partner rotation, restrictions on non-audit services, audit committee pre-approval of fees and periodic independence confirmation.

Remuneration committee

An independent board committee that sets executive pay policy, determines individual remuneration, links reward to performance and ensures no executive votes on their own pay.

Terms of reference

A formal written mandate for a board committee specifying its purpose, authority, composition, meeting frequency, duties and reporting lines to the full board.

Fiduciary duty

A director's obligation to act in good faith in the company's best interests, exercising care, skill and diligence, and subordinating personal interest to the company's interest.

Conflict of interest

A situation where a director's personal, financial or family interest may influence judgement; the director must disclose it, abstain from voting and where appropriate withdraw from discussion.

Business judgement rule

A judicial deference standard protecting directors from liability for informed, good-faith decisions made with due care and no personal interest, even where the outcome proves unfavourable.

Shadow director

A person whose instructions or directions the board is accustomed to follow, who owes director duties even without formal appointment, though professional advisers giving advice are excluded.

Risk appetite

The amount and type of risk an organisation is willing to accept in pursuit of its objectives, set by the board and translated into tolerance limits for operational decision-making.

Three lines model

An assurance structure where management owns risk, a risk and compliance function provides oversight, and internal audit gives independent assurance directly to the board and audit committee.

Internal audit charter

A formal document approved by the audit committee defining internal audit's purpose, authority, independence, scope and reporting lines, providing the mandate for its work.

Residual risk

The level of risk remaining after existing controls and risk responses have been applied, compared against risk tolerance to determine whether further treatment is required.

Segregation of duties

A preventive control that separates authorisation, custody, recording and reconciliation tasks so that no single person can both commit and conceal an error or fraud.

Related-party transaction

A transaction between the company and a director, senior manager, substantial shareholder or their close associates, requiring disclosure and often independent approval to protect minority interests.

Continuous disclosure

An obligation on listed companies to release price-sensitive information promptly and to all market participants equally, prohibiting selective disclosure to analysts or favoured investors.

Integrated reporting capitals

The six capitals in the integrated reporting framework: financial, manufactured, intellectual, human, social and relationship, and natural, showing how value is created over time.

Materiality

The threshold at which information could influence the economic decisions of users; it determines what must be disclosed and is assessed on both quantitative and qualitative grounds.

Deontology

An ethical theory judging the rightness of an action by whether it conforms to duties and rules, independent of the consequences that the action produces.

Virtue ethics

An approach focusing on the character traits of the decision maker, such as honesty, integrity and courage, rather than on rules or outcomes alone.

Moral intensity

The degree of ethical issue salience, determined by magnitude of consequences, social consensus, probability of effect, temporal immediacy, proximity and concentration of effect.

Rest's four components

A model of ethical behaviour comprising moral sensitivity, moral judgement, moral motivation and moral character, where failure at any stage can produce unethical conduct.

Speak-up culture

An organisational environment where employees feel safe to raise concerns about misconduct without fear of retaliation, supported by visible leadership response and protected reporting channels.

Protected disclosure

A disclosure of wrongdoing made in good faith to a prescribed person or regulator, which gives the whistleblower legal protection against dismissal or detrimental treatment.

Tone at the top

The ethical signals set by senior leadership through their behaviour, incentives and treatment of bad news, which shape the organisation's actual operating culture.