Questions & explanations
1. Which 2009 Indian scandal is the classic example of corporate governance failure due to accounting fraud?
- (a) Harshad Mehta scam
- (b) Satyam scandal
- (c) 2G spectrum case
- (d) Bofors case
Answer: (b) Satyam scandal
The Satyam scandal of 2009, in which chairman Ramalinga Raju confessed to inflating the company's accounts by thousands of crores, is the classic Indian example of corporate governance failure. It exposed weak boards, audit failure and false disclosure, and led to major governance reforms.
2. Consider the following statements:
1. The OECD Principles of Corporate Governance are an internationally recognised standard.
2. SEBI's LODR Regulations apply to listed companies in India.
Which statement(s) is/are correct?
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Answer: (c) Both 1 and 2
Both statements are correct. The OECD Principles of Corporate Governance are a globally recognised benchmark adopted by many countries, and SEBI's Listing Obligations and Disclosure Requirements (LODR) Regulations govern corporate governance norms for listed companies in India.
3. A company that obeys every law in letter but exploits loopholes to mislead investors is best described as:
- (a) Legally compliant but ethically deficient
- (b) Both legally and ethically sound
- (c) Illegal and unethical
- (d) Ethical but illegal
Answer: (a) Legally compliant but ethically deficient
Such a company is legally compliant but ethically deficient. Compliance with the letter of the law is the minimum floor, while ethics requires honouring the spirit of the law. Exploiting loopholes to mislead breaches ethics even when it does not technically break the law.
4. ESG reporting and Business Responsibility and Sustainability Reporting (BRSR) primarily extend corporate governance towards:
- (a) Higher dividends only
- (b) Environmental, social and broader stakeholder responsibility
- (c) Faster product delivery
- (d) Lower employee wages
Answer: (b) Environmental, social and broader stakeholder responsibility
ESG (Environmental, Social, Governance) and BRSR frameworks extend corporate governance beyond financials to environmental impact, social responsibility and accountability to a wider set of stakeholders, reflecting the ethical, corporate-citizen view of the firm.
5. Corporate governance is best defined as:
- (a) The marketing strategy of a company
- (b) The system by which a company is directed and controlled
- (c) The process of hiring employees
- (d) The method of advertising products
Answer: (b) The system by which a company is directed and controlled
Corporate governance is the system of rules, practices and processes by which a company is directed and controlled, balancing the interests of the board, management, shareholders and other stakeholders. It is not about marketing, hiring or advertising.
6. Under the Companies Act 2013, mandatory Corporate Social Responsibility spending for qualifying large companies is governed by which section?
- (a) Section 135
- (b) Section 80
- (c) Section 144
- (d) Section 21
Answer: (a) Section 135
Section 135 of the Companies Act, 2013 mandates that qualifying companies (based on net worth, turnover or net profit thresholds) spend at least 2% of their average net profit of the preceding three years on Corporate Social Responsibility activities.
7. Which of the following is NOT a core pillar of corporate governance?
- (a) Transparency
- (b) Accountability
- (c) Profit maximisation at any cost
- (d) Fairness
Answer: (c) Profit maximisation at any cost
The core pillars of corporate governance are transparency, accountability, fairness, responsibility and independence. Profit maximisation at any cost, ignoring ethics and stakeholders, is the opposite of good governance and often leads to fraud.
8. The phrase 'comply or explain' in corporate governance means a company must:
- (a) Either follow a norm or publicly disclose its reasons for not doing so
- (b) Comply with norms only if profitable
- (c) Explain norms to its competitors
- (d) Ignore all voluntary norms
Answer: (a) Either follow a norm or publicly disclose its reasons for not doing so
The 'comply or explain' approach requires a company to either comply with a governance norm or, if it does not, publicly disclose and explain the reasons for non-compliance. This balances rule-based discipline with flexibility and transparency.
9. Which committee's 2017 report led to recent major corporate governance reforms for listed companies in India?
- (a) Kumar Mangalam Birla Committee
- (b) Narayana Murthy Committee
- (c) Uday Kotak Committee
- (d) Narasimham Committee
Answer: (c) Uday Kotak Committee
The Uday Kotak Committee (2017), constituted by SEBI, recommended reforms on board composition, independent directors, separation of chairman and managing director roles, and disclosure, many of which were implemented in subsequent SEBI norms.
10. The primary fiduciary duty of an independent director is owed to:
- (a) The promoter who appointed them
- (b) All shareholders and the company as a whole
- (c) Only the majority shareholders
- (d) The company's auditors
Answer: (b) All shareholders and the company as a whole
An independent director's fiduciary duty is owed to the company and all its shareholders, especially in protecting minority shareholders, not to the promoter who appointed them. This independence is the very purpose of the role.