Answers :

1. Define corporate governance and briefly describe the role of corporate

governance. (4 marks)

a) Definition of corporate governance

Corporate governance is the system by which companies are directed and
controlled. It focuses on the relationships between a company's directors,
shareholders and other stakeholders. It provides the structure through
which the objectives of the company are set, and the means of achieving
those objectives and monitoring performance are determined (OECD).

Role of corporate governance

The role of corporate governance is to protect shareholders rights,
enhance disclosure and transparency, facilitate effective functioning of the
board and provide an efficient legal and regulatory enforcement
framework.

2. Examine how sound corporate governance can make it more difficult for
companies to fail. (10 marks)

Promotion of relationships with shareholders

Good governance ensure alignment of the interests of shareholders and
directors. It helps to minimise the chances of agency problems arising
through directors pursuing their own interests and threatening the
company's future by reckless behaviour, or failing to pursue the best long-
term strategies for the company.

Risk management
Governance ensure company has a risk management system in place for
the identification, evaluation and mitigation of risk. These systems should
particularly highlight risks that may have serious impacts upon the future
of the company, so that effective action can be taken to deal with them.

Control systems
As part of risk management, good governance should ensure that
effective controls that protect the business are being operated. These
include controls that ensure that business assets are being safeguarded
and resources are not being wasted on unprofitable activities, but are
being used efficiently and effectively.
 Promotes reporting
Governance ensure company demonstrate transparency by providing
financial information that is accurate and fair and also additional, voluntary,
disclosures. These will help investors and other key stakeholders make
informed decisions about the company. Full disclosure will also encourage
accountability, as directors and senior managers will know that
stakeholders have the information available to scrutinise their stewardship
effectively.

Promotes stakeholder confidence

A well-governed company will make stakeholders have trust in them. It is
particularly important for shareholders to have confidence, as a loss of
belief will lead to the company's market price falling, maybe threatening its
future. There are also other important stakeholders, such as taxation
authorities or industry regulators, who can be a serious threat to
companies that they do not believe to be sound and therefore take action
against them.

Attracts funding
Good governance can be a means of attracting additional funding into a
company. More sources of funds may be available and the costs of
different sources of funds should be low. This should enhance solvency as
more cash will be available over the longer-term, and liquidity, as fixed
finance costs should be low.

3. What is the UK Corporate Governance Code and why is it important to

business organisations? (15 marks)

UK Corporate Governance Code is a written document that contain guidelines to

the key components of effective board practice.

The Code is important as it ensure that companies meet with minimum standards
regarding the reporting, management and rules or organisation within companies.

It is also important as compliance to Code is a requirement for being listed as a

public company and on the stock exchange. This provides reassurance to
investors and encourages investment.

The main principles of the Code can be divided into 5 areas. Each area has a set
of principles of good governance followed by a series of provisions that details
how the principle might be achieved

The areas are as follows :

Section A : Leadership
Every company should be headed by an effective board which is collectively
responsible for the long-term success of the company.
No one individual on the should have an unfettered powers of decision over the
others.
 Section B : Effectiveness
The board and its committees should have the appropriate balance of skills,
experience, independence and knowledge of the company to enable them to
discharge their respective duties and responsibilities effectively.
All directors should be able to allocate sufficient time to the company to
discharge their responsibilities effectively.

Section C : Accountability
The board should present a fair, balanced and understandable assessment of
the company’s position and prospects.
The board is responsible to maintain sound risk management and internal control
systems.

Section D : Remuneration
There should be a formal and transparent procedure for developing policy on
executive remuneration and for fixing the remuneration packages of individual
directors.
No director should be involved in deciding his or her own remuneration.

Section E : Relations with Shareholders

The board is responsible to ensure a satisfactory dialogue with shareholders
based on the mutual understanding of objectives take place.
The board should use general meetings to communicate with investors and to
encourage their participation.

4. Define the following theories and give an example of each theory in a

business management context.

i. Agency theory (5 marks)

ii. Stakeholder theory (5marks)
iii. Transaction cost theory (5marks)
i. Agency theory

This theory cover the relationship between the principals and agents in the
business. In an agency relationship, two parties exist ie principal and agent
whereby the principals delegate some decision-making authority to the
agents, so in return, agents have the responsibility to act and make decision
in the best interest of the principal.

This theory also cover the issue that may arise between the 2 parties for
example different objectives and different risk perspective.

One example agency relationship in business management is shareholders-

directors relationship. Shareholders (as principal) elect and delegate the
authority to run the company to the directors (as agents), so in return,
directors have fiduciary responsibility to manage the company in the best
interest of shareholders.

ii. Stakeholder theory

This theory based on the view that company have responsibility to wider
group of stakeholders, not only the shareholders.

Stakeholders refer to any person/group that can affect or be affected by the

actions of the company.

Stakeholders can be categorised into internal and external stakeholders.

Internal stakeholders refers to persons/group within the company such as
directors and employees, and external stakeholders refer to persons/groups
outside the company such as bankers and government.

Example of stakeholders in business management includes employees,

customers, supplier, creditors and competitors.
 iii. Transaction cost theory

This theory highlight the aim of company to minimise the cost of exchanging
resources in the environment and managing this cost inside the company.

To minimise the cost, the company should obtain control over resources. So
to obtain the control, company may choose between 2 methods :

a) Ownership of asset (hierarchy solution) where the decision over

production, supply and purchase made by managers and impose
through hierarchy
b) Buying the use of asset (market solution) where the decision made by
individual/firm based on the market price

The decision over which method to choose is based on the comparison of

the transaction costs of the 2 methods. A cheaper option should be chosen
for profit maximisation.

Transaction costs are at the indirect costs (ie non-production costs) incurred
in performing an activity, for example the expenses incurred through
outsourcing.

5. In Agency Theory, dilemmas can arise between the principal and agent.
This is sometimes referred to as the ‘principal-agent problem’. Give an
example of a dilemma and describe what is involved. (10marks)

One example of principal-agent relationship is shareholders-directors relationship.

Shareholders (principal) appoints agents (directors) to manage the company on

their behalf.

Conflict of interest
Example of principal-agent problem in this relationship is that both shareholders
and directors have their own interests. This lead to a potential conflict of interest
where the directors may act in their own interest instead of the shareholders’.
Conflict of interest arose when the objectives of directors (eg high salary, high
bonus) differ with the objectives of shareholders (wealth maximisation).

In order to achieve their objectives, directors may prioritise their own gain instead
of the company when managing the company. This is a more dangerous
situation as they might become greed, overambitious and abuse their power to
gain more of their interest.

Because directors are driven by self interest and have power in controlling the
company, they cannot be relied on to act in the best interest of the shareholders.
They might make decision on behalf of the shareholders that is not in the best
interest of the shareholders.

They also might act independently from the shareholders in order to obtain some
sort of previously agreed upon incentive or bonus. As such, shareholders might
lose their trust on directors to act on their behalf.

To address this issue, the corporate governance policies which aimed to align
the objectives of both principal and agent should be put in place.

This alignment of interests of both parties can be done by offering incentives to

directors for example offering profit-related pay, share issue scheme and share
option scheme.

Different risk appetite

It is very likely that both the directors and shareholders would have a different
level of risk appetite.

Shareholders are mostly not involved in the day to day management of the
company and hence are not fully equipped with information to understand the
rationale behind critical business decisions. As such they might have a low level
of risk appetite and reluctant to take risk for fear of their investment will lose its
value.

But sometime, because of the lack of information, shareholders might be bold

and would have a greater risk appetite hence might want company to take up
bigger risk if the expected returns are sufficiently high.
 On the contrary, directors are more far sighted and have a far greater risk
appetite due to their close access to the relevant information. They believe in the
going concern concept of accounting and most of their decisions are taken
keeping the long term view of the company in mind.

But at the same time, as directors earn most of their income from the company
they work for, they are therefore interested in the stability of the company,
because this will protect their job and their future income.

This means that directors might be risk averse and reluctant to invest in higher
risk projects.

While the shareholders are keen to increase current and future value of their
holdings, the directors are more interested in the long term growth of the
company. Thus the differences in their approach create a feeling of distrust and
disharmony.

(*only one of the two point should be selected)

6. Stakeholder theory can give rise to challenges between different parties.

Give an example of a challenge and describe what might be involved.
(10 marks)

Stakeholders can give challenge when they have power to exert influence over
the direction and management of company and expect their claims to be
delivered.

Example of challenge a company might face include difficulties in managing and

satisfying the claims of different stakeholders groups. The claims of different
groups of stakeholders are conflicting, and they are often inconsistent with each
other.

Take into example stakeholders of a manufacturing company would be

shareholders, factory workers, suppliers of raw materials, key customers and tax
authority.
Company might face pressure from shareholders to maximize short-term profits
and increase the value of their investments. This could lead to decisions that
prioritize cost-cutting measures, such as layoffs or outsourcing, to improve the
company's financial performance. However, such actions might negatively impact
employees, leading to job insecurity, lower wages, or reduced benefits.

Factory workers may claim for a safe working condition, job security and fair
wages. Suppliers of raw materials may demand on-time payments of amount
outstanding. Key customers may demand for quality products at lower prices.
Tax authority may demand for accurate declaration and payment of tax.

All of these demands are competing, lead to tension and conflict between the
shareholders, who primarily seek financial gains, and other stakeholders, who
prioritize social and environmental responsibilities.

It is not always possible to satisfy all these claims at the same time. The
company might find it difficult to deal with all of these claims and might fail and
disappoint these group of stakeholders especially if they have limited resources.

Further challenge will be faced by the company when failure to satisfy

stakeholders’ demands lead to their aggressive action on the company.
Shareholders might divest if they dissatisfy with the return. Factory workers may
go on strike, halting the production. Suppliers may stop supplying raw materials
until payments made. Key customers may terminate contracts if quality of
products are so bad. Tax authority may impose fines and penalties on under
declaration and underpayment of tax.

This stakeholders’ actions can affect the achievement of the company’s

objectives and affect its further decisions and actions. Thus, they should be
managed appropriately by the company. Navigating such challenges would
involve careful consideration and balancing of the interests of different
stakeholders. This might require the implementation of transparent
communication channels, stakeholder engagement initiatives, and the
development of sustainable business practices that benefit all parties involved.
7. Describe the types of Inside Directors and Outside Directors on a company
board. (10 marks)

Inside directors
Inside directors also known as executive directors. They are executive employed
by the company’s board and hence a full time member of staff.

They have managerial position in the company and are responsible for the
running day-to-day operation of the company.

Inside directors have legal liability to discharge their statutory duties, contractual
obligation in relations to agreements they entered into and subject to civil law in
relation to wrongdoing and negligence.

Their role is to provide independent, objective advice and the benefit of their day
to day experience to enable better decisions to be made in the strategic interests
of the company

Their responsibilities include provide support to the CEO in the management of

the company.

Outside directors
Outside directors also known as non-executive directors. They are executives of
other firm but not employed by the company’s board and hence not a full-time
member of staff.

They do not have managerial position in the company and thus not involve in the
day-to-day running of the company.

However, they also have the same status in company law as inside directors.

Their role is to provide objective and independent advice to the Board to enable it
to make better decisions in the interests of all shareholders and stakeholders

Their responsibilities include monitor the performance of executive members of

board.
8. What is the role of Chairman in relation to the two director types on the
board of a listed company? (5 marks)

Role of chairman
Oversee the orderly operation of the Board of Directors.
Facilitate good relationship between inside directors and outside directors.
Promote culture of openness and debate in board.
Design appropriate induction programme for new board members and training
programme for all directors
Ensure that board members' performance is formally evaluated on an annual
basis

9. The UK Corporate Governance Code has specific requirements regarding

the positions of Chairman and CEO. Explain what the requirement is and
what this means for Corporate Governance. (5 marks)

The UK Corporate Governance Code states that the roles of chairman and chief
executive officer (CEO) should not be exercised by the same individual. A CEO
should not become chairman of the same company.

The split is necessary to ensure that no one individual have unfettered power of
decision, avoid domination in board and abuse of power.

Chairman is the leader of the BOD. He must be independent in order to ensure

that he is deemed to act in the best interest of shareholders without undue
influence of executive directors.
10. Give two attributes for an effective Board Director, explaining the reasons
for your choice. (5 marks)

Expertise
Director should be someone that have a broad level of expertise and experience
in their field/industry to advise board on various matters and also act in the best
interest of the company.

Committed
Director should be committed to regularly turn up to board meeting, committee
meeting, necessary training and company events etc. This is to build relationship
with fellow board directors and stakeholders.

Willingness to challenge
Director should be willing to challenge the decision, action and proposal made in
the board meeting even if against the majority. Non-executive director especially
should be able to challenge the decision of executive director to ensure the
decision made are robust and in the best interest of company.

Coaching ability
A good director should be someone who will guide their people and subsequently
the company to success. A director should be willing to coaching calls to his
management team and do one to one meeting with the them to ensure the
company strategy can be effectively implemented.

11. Describe the roles of chairman and the board of directors. Give 3 examples
of a chairman’s distinct responsibilities and separately 3 examples of
responsibilities for those of the board of directors. (15 marks)

Roles of Chairman
Roles of a Chairman include the following :
• Oversee the orderly operation of the board of directors
• Chair interaction between the board, shareholders and executives
• Lead and guide the board of directors to optimise effectiveness
• Ensure the company obtain a satisfactory return for its shareholders

Roles of Board of Directors

Roles of BOD include the following :
• Provide entrepreneurial leadership for the company
• Set company values, culture and ethical code
• Act in the best interest of the company
• Protect the interest of shareholders and stakeholders
Responsibilities of Chairman
• Chair the board and shareholders meeting
• Serve as company’s primary representative
• Ensure that the board acts within its term of reference
• Exploit expertise of Board and ensure Board contribution at meetings
• Ensure risk management plan set by Board is effective

Responsibilities of Board of Directors

• Set strategic direction and objectives of the company
• Safeguard and ensure company has adequate resources
• Direct company’s performance (make, measure and manage)
• Manage legal, ethical, risk and environment compliance
• Set risk tolerance, perform risk assessment and ensure company has sound
internal control systems
• Discuss, approve and attend to matters required to be approved by the board
(eg issue share capital, approve borrowings, set dividend policy, remuneration)

(Max 3 marks for roles, 2 marks each for responsibilities = max 12 marks)
12. What are the advantages and disadvantages of the roles of chairman and
CEO of a company being carried out by the same person? (5 marks)

Advantages :
When CEO of a company also become the chairman of the same company, it
creates a single leader, in which help to cultivate a much stronger and more
unified leadership figure. That person can use their greater influence of control
and management to lead the company toward greater financial growth and
economic stability. Besides, looking for a single leader with intricate knowledge
of the company is far easier than search for two such individuals.

CEO that also serves as the chairman can make important business decisions
faster because direct confirmation or approval from another executive is no
longer a requirement. Being able to make quick decisions is useful because it
can help the company develop at a faster rate.

There will almost inevitably be conflict between two high-powered executive

officers as the they are of the same person.

Disadvantages :
There will be no independent representative for shareholders as there might be a
conflict of interest when Chairman also having a role as manager within the
company.

In CEO duality, there will be no clear path of accountability as the CEO

essentially monitors themselves, which can lead to an abuse of power and
position. This individual could use their position to provide themselves with unfair
advantages or participate in profiteering. The individual might be tempted to act
more in the self interest rather than purely in the interest of shareholders.
13. There are two types of directors to be found on a board. Name the two
different types and give an example of a role each could undertake on the
company board. (5 marks)

The two types of directors to be found on a board are executive directors and
non-executive directors.

Executive directors
The main role of executive directors is to provide independent and objective
advice, and the benefits of their day to day experience to enable better decisions
to be made in the interest of the company.

Executive directors have legal liability to discharge their statutory duties,

contractual obligations in relation to agreements they entered into, and subject to
civil law in relation to wrongdoing.

Non-executive directors
The main roles of non-executive directors is to provide independent and
objective advice to the Board to enable it to make better decisions in the interest
of shareholders and stakeholders.

Non-executive directors also have legal liability to discharge their statutory duties,
contractual obligations in relation to agreements they entered into, and subject to
civil law in relation to wrongdoing.

The numbers of non-executive directors varies from typically zero in a small

company (UK CG Code recommends minimum 2 on any Board) up to at least
half the board for listed company.
14. Define one of the main theories used in corporate governance and give a
practical example of the theory in a business management context.
(10 marks)

Agency theories

This theory covers the relationship between the principals and agents in the
business. In an agency relationship, two parties exist ie principal and agent
whereby the principals delegate some decision-making authority to the agents,
so in return, agents have the responsibility to act and make decision in the best
interest of the principal.

This theory also cover the issue that may arise between the 2 parties for
example different objectives and different risk perspective. In this relationship,
both principal and agent have different objectives, thus may cause conflict of
interest. To make sure agent act in the interest of principal, principal will incur
agency costs

One example agency relationship in business management is shareholders-

directors relationship. Shareholders (as principal) elect and delegate the
authority to run the company to the directors (as agents), so in return, directors
have fiduciary responsibility to manage the company in the best interest of
shareholders.

An agency problem between shareholders and directors is that both

shareholders and directors have their own interests. This lead to a potential
conflict of interest where the directors may act in their own interest instead of the
shareholders’.

In order to achieve their objectives, directors may prioritise their own gain instead
of the company when managing the company. This is a more dangerous
situation as they might become greed, overambitious and abuse their power to
gain more of their interest.

To address this issue, the corporate governance policies which aimed to align
the objectives of both principal and agent should be put in place.
This alignment of interests of both parties can be done by offering incentives to
directors for example offering profit-related pay, share issue scheme and share
option scheme.

Stakeholder theory

Stakeholder theory is about the relationship between the various stakeholders in

a business.

This theory based on the view that company have responsibility to wider group of
stakeholders, not only the shareholders.

Stakeholders refer to any person/group that can affect or be affected by the

actions of the company.

Some stakeholders would be internal such as directors, employees and

managers. External stakeholders could include auditors, investors and regulator.

Directors are responsible to control company in the best interest of stakeholders

and expect to receive pay, bonus, reputation and power.

Employees are responsible to comply with company’s internal controls and

expect to receive, pay, bonus, job stability and good working condition.

Managers are responsible to monitor company’s success and enforce internal

controls and expect to receive pay, bonus, status and career progression.

All these stakeholder groups have their own expectations that are likely to differ
from one another. As such, interest of one stakeholder might conflict with the
other.

Thus, it is not always possible to satisfy all these claims at the same time. The
company might find it difficult to deal with all of these claims and might fail and
disappoint these group of stakeholders especially if they have limited resources.

Further challenge will be faced by the company when failure to satisfy

stakeholders’ demands lead to their aggressive action on the company. These
stakeholders’ actions can affect the achievement of the company’s objectives
and affect its further decisions and actions. Thus, they should be managed
appropriately by the company.

Transaction cost theory

This theory highlights the aim of company to minimise the cost of exchanging
resources in the environment and managing this cost inside the company.

This theory based on the view that cost incurred when company get someone
else to do the work/activity.

To minimise the cost, the company should obtain control over resources. So to
obtain the control, company may choose between 2 methods :

a) Ownership of asset (hierarchy solution) where the decision over production,

supply and purchase made by managers and impose through hierarchy
b) Buying the use of asset (market solution) where the decision made by
individual/firm based on the market price

For example, a manufacturing company could obtain its raw materials from an
external supplier. This is called the market solution where the company would
purchase the raw materials from the open market. The company also could
make the raw materials itself or acquire the supplier that produce the raw
material. This is called the hierarchy solution.

Similarly for the labour, the company could hire self-employed contractors to do
work (outsource), or it could hire full-time employees (in-house).

Company’s decision about whether to arrange transactions in the open market or

whether to do the work in-house depends on which is cheaper. Transaction cost
are sometimes higher when a transaction is arranged in the market, and they are
sometimes higher when the transaction is done in-house.

Example of transactions cost includes :

a) Search and information cost eg cost incurred (include time and effort) to
find the most suitable suppliers
 b) Bargaining and decision cost eg discount received and commission paid to
get the best price and quality of assets
c) Policing and enforcement cost eg legal fees paid to bind the suppliers with
the company

15. What are the responsibilities of the Board of Directors? In your answer you
should describe a minimum of five (5) separate functions that the board is
responsible for according to the Corporate Governance Code? (10 marks)

The responsibilities of the Board of Directors in relation to the UK Corporate

Governance Code includes the following :

Section A Leadership
The board is to provide entrepreneurial leadership of the company within a
framework of prudent and effective controls which enables risk to be assessed
and managed.
The board should set the company’s strategic aims, ensure that the necessary
financial and human resources are in place for the company to meet its
objectives and review management performance.
The board should set the company’s values and standards and ensure that its
obligations to its shareholders and others are understood and met.
The board should meet sufficiently regularly to discharge its duties effectively.

Section B Effectiveness
The board should identify in the annual report each non-executive director it
considers to be independent.
The board should establish a nomination committee that will lead the process for
board appointments and make recommendations to the board.
All directors should be able to allocate sufficient time to the company to
discharge their responsibilities effectively.
All directors should regularly update and refresh their skills and knowledge.
Section C Accountability
The board should present a fair, balanced and understandable assessment of
the company’s position and prospects.
The board is responsible for determining the nature and extent of the principal
risks it is willing to take in achieving its strategic objectives. The board should
maintain sound risk management and internal control systems.
The board should establish an audit committee of at least three, or in the case of
smaller companies two, independent non-executive directors.

Section D Remuneration
The board should establish a remuneration committee of at least three, or in the
case of smaller companies two, independent non-executive directors that will
design appropriate remuneration package for executive directors, CEO and
chairman.
The directors through remuneration committee should develop a formal and
transparent procedure in designing policy and fixing remuneration package for
individual directors.
The board should determine the remuneration of the non-executive directors
within the limits set in the Articles of Association.

Section E Relation with shareholders

The board should ensure there is dialogue with shareholders based on the
mutual understanding of objectives. The board as a whole has responsibility for
ensuring that a satisfactory dialogue with shareholders takes place.
The board should use general meetings to communicate with investors and to
encourage their participation.

(Only 2 responsibilities under each section. Max 2 marks for each section)
16. Relation with shareholders

a) What are the UK Corporate Governance issues around

communicating with institutional investors? (5 marks)

The topic of relation with shareholders have been dealt with in the
Section E of the UK Corporate Governance Code.

The Code did not made distinction between difference types of

shareholders. However, institutional shareholders would be a key
constituency.

The main principle contained in the section include there should be a

dialogue with shareholders based on the mutual understanding of
objectives. The board is responsible in ensuring a satisfactory dialogue
took place.

While the Code recognises that the main point of contact for shareholders
is the managing director and the finance director, the chairman has to
ensure that views of shareholders are communicated to the board.

The board should keep in touch with shareholder opinion in whatever

ways are most practical and efficient.

In this case, the board should listen to and understand the concern raised
by the investment managers. It is very likely that there is a
communication problem between board and shareholders. Thus, it is very
important for the board to clearly communicate its strategy, action plan,
and risk appetite so that the shareholders, in this case, the institutional
investors understand better the company positioning.

b) Do the board of directors have responsibilities to company

shareholders. How best do you think they might address the
shareholders demands? (10 marks)

Company’s responsibilities towards shareholders

According to agency theory, board of directors have responsibilities to act
in the best interest of the company and shareholders.
However, in this case, the responsibilities of the board of directors should
be towards the shareholders as a whole, not to the one particular
shareholders ie institutional investors.
If directors act on the wishes of a group of shareholders, and the events
subsequently take a turn for the worse, a claim that they were acting on
shareholder wishes is unlikely to stand up in court, nor are the
shareholders, in such a situation, likely to come to the defence of the
directors.
Shareholders’ demands
It is generally assumed that the interests of the company and those of its
shareholders are aligned but this is not always the case.
The non-alignment sometimes arises because the shareholder is the
legal but not the beneficial owner of the shares. Institutional shareholders
fall into this category.
Managers working in institutional-shareholder organisations may have
short term goals in terms of their next bonus, which may be in conflict
with their investee companies and their clients.

Boards and companies are required by law to have a longer term

perspective.
In relation to institutional shareholders managing pension monies, the
ultimate beneficiaries, ie the current and prospective pensioners, require
a long-term perspective.
This may be at variance with investment managers’ next-bonus
perspective.
A further issue with this dilemma is the institutional shareholders’ desire
to dictate, expecting the directors to act on their instructions, and making
threats if they do not.

Board of directors can address the shareholders demand by the

following :

Communication between board of directors and shareholders

The board has to be sensitive to the views of key institutional investors.
The board needs to listen to and understand investor concerns.
This dilemma highlights a problem of communication between a board
and the shareholders.

Communicating company’s risk appetite

The institutional investors claim the company is being too conservatively
managed, i.e., is too risk averse.
The risk appetite of the company is likely to be lower than of the
institutional investors who manage so many investments that they can
diversify their risk in a way that the board cannot.
The board has to set the risk appetite of the business, keeping in mind
the needs of all shareholders and company survival.
The board, through the chairman and/or managing director, need to
clearly communicate the risk appetite of the business to the institutional
shareholders to help them understand how the board arrived at such a
risk appetite.

Use of general meetings

If shareholders have a say in running the company, they can express
their views at annual and other general meetings of the company.
Shareholders also have statutory decision-making powers including:
approving at the annual general meeting, dividends proposed by the
 directors, the financial statements, directors’ report, auditor’s report,
electing the directors, appointing the external auditors, fixing the
remuneration of the external auditor (normally the shareholders authorise
the directors to fix the remuneration of the auditors), amending the
memorandum and articles of association, calling an extraordinary general
meeting, where shareholders holding more than 10% of share capital can
request so from the directors.
Certain large transactions must also have to be approved by
shareholders.
The law implicitly assumes shareholders will not do anything to harm their
companies, as to do so would harm themselves.

c) Do you think the company should be concerned about poverty in

third world countries? Make suggestions as to how this might be
addressed. (10 marks)

Shareholders concern
The extent to which a board decides to follow philanthropic stakeholder-
oriented activities is a judgement issue.
A stakeholder-orientated approach is more difficult than a purely
shareholder-orientated approach, as it involves trade-offs between
stakeholder groups.
The concern of the investors regarding the investment in the developing
countries is because the investment is not profitable, thus might affect in
the share price and subsequently the managers’ remuneration.
The investors’ demand that the company provide the shareholders with
the best return on their capital and threat to sell their shares sound like a
selfish approach.
If company give in to the pressure of the investors, it will make the
company to look as a bad company, not caring about the serious poverty
problem in the developed countries.

According to stakeholders theory, company has commitment to

conducting its business taking into account its impact on society, the
environment, and various stakeholders beyond just shareholders.
Companies have a moral obligation to contribute positively to the well-
being of the global community. Poverty is a significant humanitarian issue,
and addressing it aligns with ethical principles.
Addressing poverty in third-world countries is not only a moral imperative
but can also be beneficial for companies in various ways.
By engaging in initiatives that help alleviate poverty, companies can
contribute to global sustainable development, build goodwill, and
potentially open up new markets, improved brand image, increased
customer loyalty, attracting and retaining top talent, and reducing risks
associated with social and environmental issues.
 Addressing the shareholders concern
There might be dialogue with institutional shareholders to persuade them
of the value from a long-term perspective of the third-world project.
Board of directors should openly communicate the reasons behind the
decision to invest in developed countries by explaining the potential
benefits, such as market stability, infrastructure, and skilled labor.
Directors also can provide a clear and well-documented business case
that outlines the expected return on investment and the long-term
strategy for the move.
Finally, if the directors accede to the threat by the institutional managers,
they cede power to that group.
It is important to let the shareholders know that it is the directors that
should run the company, as they were appointed to do so by the
shareholders as a whole at the annual general meeting of the company.
In the long-run, the board will garner more respect by not giving in to
pressure arising from investment decisions driven by incentives.

[The answers are not exhaustive. Any valid points that answered the
questions also attract marks.]