Mock Examination Submission Form Overall mark: ACCA P1 Governance, Risk and Ethics Mock Examination 1

Transcription

1 Mock Examination Submission Form This front sheet should be attached to your submitted answers Name: address: For HTFT Partnership to complete Date received: Marker: Date returned: Overall mark: ACCA P1 Governance, Risk and Ethics Mock Examination 1

2 SECTION A Question One This question is compulsory and MUST be attempted The following information should be used when answering question 1 Two years ago, UK company Talbot plc was planning a listing for its shares and a launch on the London Stock Market. In preparing for the listing, the company s investment bank advised the company chairman and chief executive officer (CEO) that the corporate governance arrangements were unsatisfactory and had to be improved. At the time the company s board of directors consisted of seven members. Bill Talbot was the chairman and CEO. He owned 75% of the shares, but intended to sell 90% of these in the stock market launch. There were three other executive directors: as finance director, a sales and marketing director and an operations director. There were also three non-executive directors (NEDs). One of these was Glenn Talbot, a brother of Bill Talbot; he represented the interests of other family shareholders who together held about 15% of the company s shares. Another NED was Philip Song, a director of a company that was a major supplier to Talbot plc. The third NED was Lawrence Marsh, an old friend of Bill Talbot; he had been a NED since the company was formed over ten years previously. In response to the advice from the investment bank, the company changed the composition of the board of directors. Since obtaining its listing two years ago, the company has acquired a reputation for poor corporate governance. The company s auditors have recently made a report to the board of directors expressing concern about some weaknesses in the company s internal financial controls. At a board meeting, the finance director expresses his strong disagreement with the auditor s opinion and argued that the recent audit had in fact been unsatisfactory an unprofessional. The company chairman had to ask the chairman of the audit committee for his views on the matter. Bill Talbot resigned from his position as CEO of the company about one year after the stock market launch and sold his remaining shares. The nominations committee identified a potential replacement, an individual with a high reputation in the industry as a successful executive manager. However, there were difficulties when the remuneration committee discussed the terms of a remuneration package with him. The potential candidate demanded a contract with a three-year notice period for termination and a share-based incentive scheme that would give him the chance of acquiring over 10% of the company s share capital after four years. He did not want any annual cash bonus incentives. Discussions on remuneration failed to reach agreement and eventually another individual was appointed as the new CEO. After a series of profit warnings by the company, two institutional investors (together owning about 16% of the company s shares) had a meeting with the chairman and CEO. They expressed their dissatisfaction with the company s strategy and poor financial performance and argued that the company should sell one of its operating divisions. They had been advised that the sale value of this division might be higher than the current market capitalisation of Talbot plc. The chairman and CEO refused to agree to these demands. Since that meeting the company issued yet another profit warning and the two institutional shareholders held another meeting with the chairman and CEO, telling them that they were still demanding the sale of the operating division. They now claimed to have the support of over 50% of the company s shareholders. ACCA P1 Mock 2

3 Requires: (a) Explain how a company might acquire a poor reputation for corporate governance and suggest what the consequences of such a poor reputation might be. (b) Explain the problems with the composition of the board of directors before the stock market launch and suggest how the company might have changed the composition of the board to comply with the requirements of the UK Combined Code on Corporate Governance. (15 marks) (c) Describe the responsibilities of the audit committee with regard to the external audit and recommend what the audit committee should have done to resolve the disagreement between the auditors and the finance director. (d) Explain how the demands of the potential candidate for the position of CEO were contrary to the principles and provisions of the UK Combined Code on Corporate Governance. (e) Recommend, giving your reasons, the course of action that the two institutional investors should take next assuming that they wish to act as responsible shareholders in the company. (7 marks) (50 marks) ACCA P1 Mock 3

4 SECTION B Both questions MUST be attempted Question Two Sam Mesentery was appointed a director of Ding Company in October this year taking on the role of financial controller. He had moved himself and his family to a new country to take up the post and was looking forward to the new challenges. When he arrived he learned that he was on the operating board of Ding Company and that there was a corporate board above the operating board that was senior to it. This surprised him as in the companies he had worked for in his own country, all directors in the company were equal. The corporate board at Ding was small, with five directors in total, while the operating board was larger, with ten members. After a few days in the job he received an requiring him to report to Annette Hora, the managing director. She said that she had regretfully received two complaints from another senior colleague about Sam s behaviour. First, Sam had apparently made a highly inappropriate remark to a young female colleague and second, his office was laid out in the wrong way. Not only was his desk positioned in breach of fire regulations but also, he was told that it was normal to have the desk facing towards the door so that colleagues felt more welcomed when they went in. It s company policy she said abruptly. Sam remembered the conversation with the young female colleague but was unaware of anything inappropriate in what he had said to her. He said that he positioned his desk so he could get the best view out of the window when he was working. The following day he arrived at work to find that the corporate board was in an emergency meeting. There had been a sudden and dramatic change in the circumstances of one of Ding s major suppliers and the corporate board later said that they needed to meet to agree a way forward and a strategy to cope with the change. Annette said that because of the competitive nature of its resource markets, Ding had to act fast and preferably before its competitors. Hence the necessity of a two-tier board structure. She said there was no time for lengthy discussions which was why the operating board was excluded. Sam was told that Ding operated in a complex and turbulent environment and when strategic factors in the environment changed, the company often had to respond quickly and decisively. It was a month later that Sam first met with Arif Zaman, Ding s non-executive chairman. After Arif asked Sam how he was settling in, Sam asked Arif why he preferred a two-tier board structure and Arif replied that actually it was Annette s idea. He said that she prefers it that way and because he is a non-executive member doesn t feel able to challenge her opinion on it. Because it seems to work he had no plans to discuss it with her. He went on to say that he was an old friend of Annette s and was only in post to satisfy the corporate governance requirements to have a non-executive chairman. He said that he saw his role as mainly ceremonial and saw no need to take any direct interest in the company s activities. He said that he chaired some board meetings when he was available and he sometimes wrote the chairman s statement in the annual report. (a) Explain the content of a director s induction programme and assess the advantages of such a programme for Sam. (b) Using information from the case, critically evaluate Annette s belief that two-tier boards are preferable in complex and turbulent environments such as at Ding Company. (c) Assess Arif Zaman s understanding of his role as non-executive chairman. (9 marks) (25 marks) ACCA P1 Mock 4

5 Question Three After a recent financial crisis in the country of Oland, there had been a number of high profile company failures and a general loss of confidence in business. As a result, an updated corporate governance code was proposed, with changes to address these concerns. Before the new code was published, there was a debate in Oland society about whether corporate governance provisions should be made rules-based, or remain principles-based as had been the case in the past. One elected legislator, Martin Mung, whose constituency contained a number of the companies that had failed with resulting rises in unemployment, argued strongly that many of the corporate governance failures would not have happened if directors were legally accountable for compliance with corporate governance provisions. He said that you can t trust the markets to punish bad practice, saying that this was what had caused the problems in the first place. He said that Oland should become a rules-based jurisdiction because the current comply or explain was ineffective as a means of controlling corporate governance. Mr Mung was angered by the company failures in his constituency and believed that a lack of sound corporate governance contributed to the failure of important companies and the jobs they supported. He said that he wanted the new code to make it more difficult for companies to fail. The new code was then issued, under a principles-based approach. One added provision in the new Oland code was to recommend a reduction in the re-election period of all directors from three years to one year. The code also required that when seeking re-election, there should be sufficient biographical details on each director to enable shareholders to take an informed decision. The code explained that these measures were in the interests of greater accountability. (a) Examine how sound corporate governance can make it more difficult for companies to fail, clearly explaining what corporate governance means in your answer. (b) Martin Mung believes that Oland should become a rules-based jurisdiction because the current comply or explain approach is ineffective as a means of controlling corporate governance. Explain the difference between rules-based and principles-based approaches to corporate governance regulation, and argue against Martin Mung s belief that comply or explain is ineffective. (c) Explain what accountability means, and discuss how the proposed new provisions for shorter re-election periods and biographical details might result in greater accountability as the code suggests. (7 marks) (25 marks) ACCA P1 Mock 5