BCOR 380 1st Edition Exam 4 Study Guide What is integrity The self commitment to always treat others with dignity and fairness What is ethics The study of integrity What is business ethics The study of how to use one s economic and professional power with integrity What are the two governance methodologies The two governance methodologies are 1 comply or explain why you are not complying and 2 comply or else go find another job What is corporate governance Corporate governance is the system by which business corporations are directed and controlled This makes managers accountable to owners and public interest stakeholders It is also the process of deciding who is to own the corporation who is to control the corporation and how those in control are to exercise that control What are the major components of corporate governance and how do they relate Owners or shareholders elect a Board of Directors that elects an Executive Committee or officers led by a Chairman of the Board who hired the Chief Executive Officer or president who hires the Chief Operating Officer and the Chief Financial Officer The Executive Committee also appoints and Audit Committee chaired by the CFO a Compensation Committee and a Corporate Governance Committee both separately chaired by a member of the Board of directors Match the responsibility with the corporate governance component Shareholders decide who is to serve on the Board of Directors and they approve reject bylaw changes Board of Directors creates approves corporate policies chooses Board Chair approves disapproves recommendations by the Audit Compensation and Corporate Governance Committees Executive Committee chooses the agenda for Board meets and approves major contracts Who properly belongs on a Board of Directors Those who will best represent the organization s stakeholders What is an outside board member director An outside board member is someone who owns stock but derives no income from the organization other than dividend income What is an inside board member director An inside board member is someone who derives an income from the organization other than dividend income What is a two tiered board It is someone where the executive committee makes all the real decisions leaving the other members of the board with no real power What is a vested stakeholder A vested stakeholder is an organization or individual with a claim to the organization s future earnings Four examples of a corporate vested stakeholder is shareholders unpaid creditors pension holders and public service providers utilities What are stakeholders Stakeholders are vested interests as well as those who are or can be affected by the operations of the organization What does good corporate governance require Good corporate governance requires that a corporation s strategic plan have ethical considerations Five reasons of this include its outcome will impact all of the organization s stakeholders it has a strong HR component meaning it has to be fair to employees a primary objective is efficiency and this means it must foster sustainable practices there is a need to be aligned with the company s mission statement which should include a statement of values and goals are set by senior management and so set the tone for the whole organization What is the primary area of debate in corporate governance today Record high Executive Earnings EE Average Worker Earnings WE EE WE Annual income of the top executive divided by the annual income of the organization s average wage earner What are the negative outcomes of high EE WE ratios Lower dividends to shareholders lower wages to line employees and the potential for future cash flow problems What are four features a Board of Directors should have Board of Directors should have three or more outside directors the limiting of executive insiders on the board to the CEO the COO and the CFO directors who routinely speak to senior managers who are not represented on the board and a membership of only 8 to 15 members What is say on pay This term refers to the right of shareholders to have a direct vote regarding executive compensation What are special purpose entities SPE Special purpose entities are limited partnerships or companies created to fund or manage risks associated with specific assets What are three key issues in the ethics of accounting and where do they occur Creative Bookkeeping techniques the accounting function conflicts of interest the auditing function and hidden fees and an inevitable exposure to higher hidden interest rates financial transactions What is GAAP GAAP is generally accepted accounting principles This applies to key issue number 1 accounting It is not a set of laws and established legal precedents but rather a set of standard operating procedures with in the profession What is the purpose of GAAP The purpose of GAAP is to assure accurate financial statements that present an organization s true financial stability operational efficiency and potential growth In what two basic ways can one violate the provisions of GAAP The first basic way is by failing to follow its guidelines defining professional procedures and by failing to be accurate in categorizing assets incomes and expenditures What is the Sarbanes Oxley Act Its purpose is to create a governmental accounting board and mandatory compliance with a broad range of accepted accounting procedures relating to the management reporting and auditing responsibilities of businesses and financial institutions What is the problem of agency The use of one s decision making power to direct the resources of an organization to one s personal interests What are two things that can especially harm reputation of the financial community Two things that can harm the reputation of the financial community are 1 a belief by the public that bankers brokers and others hide harmful information and 2 a belief by the public the market is manipulated What is the Chinese fire wall The Chinese fire wall is where one division in a firm cannot ethically reveal material information to another division or when the sharing of information can harm clients What is Mosaic analysis Mosaic analysis is a method used by stock market analysts to gather information about a corporation s character and financial stability What is passive unethical behavior Passive unethical behavior is the deliberate hiding of material financial or product information so as not to harm sales volume What is financial market