CFAI Practice: M03 — Corporate Governance

Source: CFAI Official Practice Problems 2026 Case: Kobe Steel Ltd. — falsifying data on materials quality

Questions

1. Three key stakeholder relationships and their role in misconduct:

• Kobe Corp ↔ Customers (contractual): Delivered inferior-quality product
• BOD ↔ Kobe Corp (agent): Board failed to monitor, causing reputational damage
• Managers ↔ Employees (contractual): Culture prioritized winning orders over quality

2. Stakeholder incentive conflicts:

Customers incentivized by product quality; management incentivized by winning purchase orders and meeting deadlines → quality standard conflict.

3. Best practice to prevent recurrence:

• A. Shareholder rights plan
• B. Stock-based compensation plan
• C. Audit committee of independent members ✓

4. Financial risk implications:

Stock price fell + cost of debt jumped. Investors must assess past benefit from misconduct and future loss from (1) no longer falsifying data, (2) customer confidence loss.

5. Governance failures most likely resulted in reduced:

• A. cost of debt
• B. agency costs
• C. growth opportunities ✓

Reputational damage to Kobe among customers reduces growth opportunities.