What's your governance IQ?

New laws and existing regulations continue to zero in on how seriously companies are taking governance. Shareholders are calling for more engagement and transparency, while employees are striving to become better educated on these issues.

With this heightened emphasis on governance, corporate secretaries and the general counsel have a lot on their shoulders. Not only are these professionals charged with upholding extraordinary expectations for their companies’ legal departments, but they must also act as the company’s trusted advisers who can help to set the tone at the top.

Keeping abreast of the latest developments in the governance world is no easy feat, and it remains a major requirement that corporate officers continuously struggle with. Indeed, no matter how experienced and knowledgeable you are, sometimes answering even simple governance questions can pose a significant challenge.

How much do you know about governance and compliance in today’s business environment? Take this quiz to find out.

1. Tipping off the SEC with information leading to a fine of $1 million or more can earn whistleblowers a maximum reward equal to what percentage of the revenue recovered?

A. 10 percent
B. 20 percent
C. 30 percent
D. 40 percent

2. In today’s business environment, non-profits are gaining a significant amount of attention. These organizations play an integral role in many communities. Each member of the board must meet higher expectations these days, and it is easy for corporate officers to misconstrue the important aspects of non-profit governance. Which of the following are popular non-profit governance policies?

A. Executive compensation
B. Whistleblower
C. Conflict of interest
D. All of the above

3. In an era of crossing silos and new regulations, corporate secretaries are being asked to do more with less – and nowadays these governance professionals have so many responsibilities, it’s easy to forget some of them. Which of the following is a major responsibility of the corporate secretary?

A. Approving the corporate business model with the CEO
B. Holding briefings with institutional shareholders to answer their concerns
C. Making sure board members are comfortable during board meetings
D. Signing off on company financial records

4. Corporate governance differs tremendously throughout the world. Which country has been the slowest at adopting independent directors?

A. Japan
B. India
C. Germany
D. Canada

5. What major corporate governance/accounting failure led to the enactment of Sarbanes-Oxley (SOX)?

A. Enron
B. Tesla Motors
C. Lehman Brothers
D. Swiss Airlines

6. Under Dodd-Frank, a significant amount of the provisions are targeted at financial institutions. Debit card swipe fee limits appear in an amendment named for which of the following US senators?

A. Dick Durbin
B. Robert Casey
C. Chris Dodd
D. Chuck Schumer

7. What organization is responsible for the internal control model required by SOX?

A. Public Companies Accounting Oversight Board
B. Committee of Sponsoring Organizations
C. American Institute of Certified Public Accountants
D. Institute of Internal Auditors

8. A GovernanceMetrics International (GMI) rating of ‘F’ means that a company has:

A. Failed to split the role of the CEO/chairman
B. Incurred fines from regulators
C. Committed recent ethics violations
D. All of the above

9. Adhering to the various aspects of SOX can be a cumbersome process; in fact, researchers have identified a series of areas where SOX compliance can go wrong. Which part of SOX compliance do most companies fail to take seriously?

A. Change of control
B. Identity management
C. Documentation
D. Corrective controls

10. According to the Journal of Accountancy, Foreign Corrupt Practices Act (FCPA) violations can result in all of the following except for:

A. Imprisonment for up to 20 years for individuals who engage in bribery of a foreign official
B. Shareholder lawsuits brought under the FCPA
C. Fines of up to $25 million per violation against entities and $5 million per violation against individuals
D. Debarment from government contracting programs

Answers

1: C. The SEC has sweetened the deal for those who are willing to come forward about corporate misconduct. Under the Dodd-Frank Act, the SEC will pay eligible employees between 10 and 30 percent of the settlement for original information leading up to a successful enforcement action of over $1 million. In August, the federal watchdog rolled out its first whistleblower award, a $50,000 payment to an anonymous informant who helped expose a major securities fraud. The SEC says that the whistleblower’s assistance led to a court ordering more than $1 million in sanctions, of which approximately $150,000 has been collected.

2: D. According to Ellis Carter’s article ‘Top 10 non-profit governance mistakes’, there are many common non-profit governance missteps that lawyers make. Some of the most common mistakes are failing to provide effective oversight, neglecting to understand fiduciary duties such as reviewing and setting compensation for the chief executive, and operating with outdated governance policies.

3: C. Although this looks like a very mundane type of responsibility, it is critical to the effectiveness of the corporate secretary – if the board is not comfortable with how the board meetings are run and managed, it makes cooperation between everyone during those meetings more difficult. Despite the fact that corporate secretaries spend a vast amount of time on different areas of governance, all of the other choices are beyond their authority.

4: A. In Japan, management style differs from the West. According to the Tokyo Stock Exchange (TSE), 69 percent of 2,268 listed companies have no independent directors on their boards. This was evident in the infamous Olympus case, where ex-CEO turned whistleblower Michael Woodford, originally from the UK, bought fiscal improprieties to the attention of a Japanese-style board of directors, which was later criticized for its lack of transparency and independent oversight. Allegedly, the former chief executive’s management style clashed with the culture of the boardroom, which affected the company’s decision-making process. Most directors who sit on boards in Japan are promoted internally, but in order to meet global standards, companies listed on the TSE are starting to slowly diversify their boardrooms.

5: A. SOX was enacted in 2002 in response to a string of major accounting scandals, most notably at Enron and WorldCom. The collapse at Enron brought to light the unethical accounting practices that had been concealed by management and the board for many years. Enron was the biggest audit failure of all time – through accounting loopholes and poor financial reporting techniques, the company’s executives were able to conceal billions of dollars in losses incurred from making risky bets and failed projects.

6: A. In 2010, Senator Dick Durbin managed to add the ‘swipe fee’ amendment to the Dodd-Frank legislation, thus capping the fees charged on debit card transactions. This provision allowed many small businesses and consumers to escape the outrageous debit card fees that major financial institutions slapped on every transaction. While the new amendment has changed the retail banking landscape, industry observers feel that banks will think of new ways to recover the lost revenue by imposing more fees on the consumer, which will encourage less transparency in the retail banking sector. The new fee limits apply to any bank that holds more than $10 billion in assets.

7: B. In an effort to comply with SOX 404, companies must show the effectiveness of their internal controls by disclosing all financial material in their annual audit reports. Companies are also required to continuously test internal control systems for areas of weakness. To make this process easier, the Committee of Sponsoring Organizations has established a model whereby firms can measure their control systems against certain metrics. The organization was established to provide governance, fraud and business ethics knowledge to US entities.

8: D. Meeting GMI standards is no easy task. All of the choices represent grey areas in governance – it is only after a thorough analytical review that an ‘F’ rating is assigned if a company is seen as an environmental, social or governance risk. The F-rated companies usually show discrepancies in accounting procedures that are closely associated with fraudulent financial statements, unethical actions and corporate governance factors that highlight a disconnect between management concerns and investor interests. Most recently, for example, GMI downgraded Facebook from a ‘D’ to an ‘F’ after a board member sold $400 million worth of shares. Prior to this move, the social networking giant was given a ‘D’ for its poor governance structure.

9: C. The online course SOX Security School contends that companies spend such a vast amount of time concentrating on the implementation of the right set of controls that they fail to actively document the results, as they should. While this will not have a negative impact on a company’s audit function, it is still seen as a risky area. The corporate secretary can help with the documentation of these processes because it serves as an important part of a company’s annual audit report as well.

10: B. The Journal of Accountancy says: ‘Private litigation, including shareholder lawsuits, is a potential consequence of an FCPA violation. However, no private right of action exists under the FCPA itself; only the DoJ and the SEC can pursue an FCPA claim. Private litigants may use the underlying illegal activities as the basis for lawsuits based on other legal theories.’ According to the Journal, other potential repercussions of violating the FCPA include:

• Fines of up to $25 million per violation against entities, and $5 million per violation against individuals
• Imprisonment of culpable individuals for up to 20 years
• Appointment of an independent compliance monitor, at the violator’s expense, to supervise the violator’s FCPA compliance program
• Debarment from governmental contracting programs
• Rescission of export license
• Severe reputational damage.