ACCA BT · Chapter 4
Corporate governance and social responsibility MCQs with Answers
11 multiple-choice questions on Corporate governance and social responsibility for ACCA BT Business and Technology. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
The need for corporate governance arises mainly from which of the following?
- A) The requirement for companies to pay corporation tax
- B) The need for companies to publish marketing information
- C) The separation of ownership of a company from its control by management
- D) The existence of competition between companies in the same industry
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Answer: C) The separation of ownership of a company from its control by management
Corporate governance addresses the agency problem: shareholders (principals) own the company but directors (agents) control it, and the directors may act in their own interests rather than the owners'. Governance mechanisms aim to align the two. Tax, marketing and competition are not the root cause of governance requirements.
Question 2
Which of the following is the most important role of independent non-executive directors on a company's board?
- A) To manage the day-to-day operations of the company's divisions
- B) To provide independent scrutiny and challenge of the executive directors' performance and decisions
- C) To prepare the company's financial statements
- D) To act as the company's external auditors
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Answer: B) To provide independent scrutiny and challenge of the executive directors' performance and decisions
Independent non-executive directors bring objective judgement, monitor and challenge the executives, and typically sit on audit, remuneration and nomination committees. They are not involved in day-to-day management or in preparing the financial statements, and they cannot act as external auditors, which must be independent of the board.
Question 3
Which board committee is normally responsible for monitoring the integrity of the financial statements and overseeing the relationship with the external auditor?
- A) The remuneration committee
- B) The nomination committee
- C) The audit committee
- D) The risk committee of executive directors
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Answer: C) The audit committee
The audit committee, made up of independent non-executive directors, reviews financial reporting, internal controls and the internal audit function, and oversees the appointment, independence and work of the external auditor. The remuneration committee sets executive pay and the nomination committee leads board appointments.
Question 4
Why is it generally recommended that the roles of chairman and chief executive officer be held by different individuals?
- A) To reduce the total cost of directors' remuneration
- B) Because the chief executive must be a non-executive director
- C) To avoid too much power being concentrated in one person
- D) To ensure that the company has more shareholders
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Answer: C) To avoid too much power being concentrated in one person
Separating the roles means the chairman can run the board and hold the executive team to account, while the chief executive runs the business. Combining them would concentrate unchecked power in one individual. The separation is not about cost, the CEO is an executive director, and it has no effect on the number of shareholders.
Question 5
A 'comply or explain' approach to corporate governance is characteristic of which type of regime?
- A) A rules-based regime
- B) A regime with no regulation
- C) A principles-based regime
- D) A regime that applies only to private companies
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Answer: C) A principles-based regime
Under a principles-based approach, companies are expected to follow a code of best practice but may depart from a provision if they explain why. A rules-based regime requires mandatory compliance with detailed rules, with legal penalties for breach, and so does not permit an 'explain' alternative.
Question 6
Which of the following would most clearly threaten the independence of a non-executive director?
- A) She was employed as the company's finance director until two years ago
- B) She is a non-executive director of an unrelated company in a different industry
- C) She holds a professional accountancy qualification
- D) She receives a fixed annual fee for her board duties
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Answer: A) She was employed as the company's finance director until two years ago
Recent employment with the company, particularly in a senior executive role, creates a relationship that could compromise objective scrutiny of former colleagues and of decisions she was involved in. A board seat at an unrelated company, a professional qualification and a fixed fee do not of themselves impair independence; a fixed fee is in fact preferred to performance-related pay for NEDs. Governance codes, such as the UK Corporate Governance Code, typically regard employment by the company within the last five years as a factor that may impair a non-executive director's independence.
Question 7
Carroll's pyramid of corporate social responsibility identifies four levels. Which level forms the base of the pyramid?
- A) Legal responsibilities
- B) Ethical responsibilities
- C) Economic responsibilities
- D) Philanthropic responsibilities
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Answer: C) Economic responsibilities
Carroll's pyramid places economic responsibilities (being profitable) at the base, followed by legal responsibilities (obeying the law), ethical responsibilities (doing what is right and fair) and, at the top, philanthropic responsibilities (being a good corporate citizen). The base reflects that a business must survive economically to fulfil the others.
Question 8
A company voluntarily funds a scholarship scheme for students from deprived areas, even though it has no legal obligation to do so and gains no direct commercial benefit. In Carroll's framework, this is an example of which responsibility?
- A) Economic
- B) Philanthropic
- C) Legal
- D) Ethical
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Answer: B) Philanthropic
Philanthropic responsibilities are discretionary activities that contribute to society, such as donations and community programmes, and are desired rather than expected. Ethical responsibilities concern acting fairly and avoiding harm beyond legal requirements, legal responsibilities concern compliance with the law, and economic responsibilities concern profitability.
Question 9
Which view of corporate social responsibility argues that the only social responsibility of a business is to maximise profits for its shareholders within the rules of the game?
- A) The stakeholder view
- B) The view associated with Milton Friedman
- C) The view associated with Carroll's philanthropic level
- D) The triple bottom line view
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Answer: B) The view associated with Milton Friedman
Friedman argued that managers are agents of shareholders and that spending company funds on social causes is effectively taxing the owners without their consent, so a business's responsibility is to make profit within the law and ethical custom. The stakeholder view and the triple bottom line (people, planet, profit) both take a broader view of corporate responsibility.
Question 10
A listed company's remuneration committee is designing an incentive scheme for executive directors. Which feature would best align directors' interests with those of shareholders over the long term?
- A) An annual cash bonus based solely on reported profit for the current year
- B) A fixed salary with no performance-related element
- C) Share options that can be exercised immediately on grant
- D) Share awards that vest only if total shareholder return targets are met over a three-year period
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Answer: D) Share awards that vest only if total shareholder return targets are met over a three-year period
Long-term share-based awards linked to shareholder return give directors a stake in sustainable value creation. A bonus based only on current-year profit encourages short-termism and possible earnings manipulation, a fixed salary provides no incentive alignment, and options exercisable immediately reward no future performance.
Question 11
The 'triple bottom line' approach to reporting performance focuses on which three areas?
- A) Social, environmental and economic performance
- B) Revenue, costs and profit
- C) Customers, suppliers and employees
- D) Planning, organising and controlling
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Answer: A) Social, environmental and economic performance
The triple bottom line, often summarised as people, planet and profit, asks organisations to report on their social, environmental and economic impact rather than financial profit alone. The other options list financial measures, stakeholder groups and management functions respectively.