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Chapter 1
Review Questions
1. What is the primary goal of corporate governance?
To create a balance of power-sharing among shareholders, directors, and management to enhance shareholder value and protect the interests of other stakeholders. 2. What is the primary mission of a public company?

To create sustainable and enduring shareholder value.
3. What is the role of a corporate governance gatekeeper?
To align management’s interests with those of long-term shareholders and to protect investors from misleading financial information published in public filings. 4. Corporate governance reforms and best practices require the establishment of what four key gatekeepers to deal with the perceived agency problems of asymmetric information between management and investors and to improve the quality of public financial information? (1) Independent and competent board of directors; (2) independent and competent external auditor; (3) objective and competent legal counsel; and (4) objective and competent financial advisors and investment bankers. 5. How does an effective corporate governance structure improve investor confidence? It ensures corporate accountability, enhances the reliability and quality of public financial information, and enhances the integrity and efficiency of the capital market. 6. What is the primary intent of corporate governance reforms? To improve:

• The reliability, integrity, transparency, and quality of financial reports. • The effectiveness of internal controls over financial reporting and related risk management assessment. • The credibility of the external audit function.

• The independence and objectivity of other gatekeepers such as legal counsel and financial analysts. • Shareholder monitoring and democracy.
7. What benefits are obtained by the proper implementation of SOX? • Improved corporate governance.
• Enhanced quality, reliability, and transparency of financial information. • Improved audit objectivity and effectiveness in lending credibility to published financial statements. 8.How can the board of directors influence the corporate culture? • Set an appropriate “tone at the top,” promoting personal integrity and professional accountability. • Reward high-quality and ethical performance.

• Discipline poor performance and unethical behavior. • Maintain the company’s high reputation and stature in the industry and the business community. 9. What is the intention of organizational codes of business ethics and conduct? Codes of business ethics and conduct are intended to govern behavior, but they cannot substitute for moral principles, culture, and character. 10. Corporate governance depends on what three practices to be effective? • Compliance with state and federal statutes.

• Compliance with listing standards.
• Implementation of best practices suggested by investor activists and professional organizations. 11. Why is there no universal definition of corporate governance? The scope covers a vast array of distinct economic phenomena and it is often described from a shareholder’s view. 12. How have SOX provisions, SEC-related rules, and listing standards influenced the corporate governance structure? • Auditors, analysts, and legal counsel who were not traditionally considered components of corporate governance are now brought into the realm of internal governance as gatekeepers. • The legal status and fiduciary duty of company directors and officers have been more clearly defined and significantly enhanced. • Certain aspects of state corporate law were preempted and federalized. 13. What business entities are currently affected by SOX?

SOX applies equally to and is intended to benefit all publicly traded companies, although many provisions are also relevant to private and not-for-profit organizations. 14.What is the...
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