exam

1. Case 1
At a recentinternational meetingof businessleaders,SeamusO’Briensaidthatmultijurisdictional
attemptsto regulate corporate governance were futile because of differencesinnational culture.He
drewparticularattentiontothe Organisation forEconomicCooperationandDevelopment(OECD)
and International CorporateGovernance Network
(ICGN) codes,sayingthattheywere,‘sillyattemptstoharmonise practice’.He saidthatinsome
countries,forexample,there were‘familyreasons’formakingthe chairmanandchief executive the
same person.Inothercountries,he said,the separationof these rolesseemedtowork.Another
delegate,AlliyaYongvanich,saidthatthe rolesof chief executive andchairmanshouldalwaysbe
separatedbecause of whatshe called‘accountabilitytoshareholders’.
One delegate,VincentViola,saidthatthe rightapproachwasto allow eachcountryto set up itsown
corporate governance provisions.He saidthatitwas suitable forsome countriestoproduce and
abide by theirown‘verystructured’corporate governance provisions,butinsome otherpartsof the
world,the local culture wasto allowwhathe called,‘local interpretationof the rules’.He saidthat
some culturesvaluedhighlystructuredgovernance systemswhile othersdonotcare as much.
Required:
(a) Explainthe rolesof the chairmanincorporate governance.
(b) Assessthe benefitsof the separationof the rolesof chief executiveand chairmanthat Alliya
Yongvanicharguedforand explainherbeliefthat ‘accountabilitytoshareholders’isincreasedby the
separationof these roles.
CASE 2
There has beenadebate inthe country of Geelandforsome yearsaboutthe most appropriate way
to regulate corporate governance.Several yearsago,there were anumber of majorcorporate
failuresand‘scandals’causedinpartby a numberof single powerfulindividualsdominatingtheir
boards.Businessleadersandpolicy-makerswere sceptical aboutarules-basedapproach,andthis
ledthe Geelandstockexchange toissue guidance inthe ‘GeelandCode’asfollows: ‘Goodcorporate
governance isnotjusta matterof prescribingparticularcorporate structuresandcomplyingwitha
numberof rules.There isa needforbroad principles.All stakeholdersshouldthenapplythese
flexiblytothe varyingcircumstancesof individual companies.’
Giventhe causesof the Geelandcorporate governance failures,there wasadebate aboutwhether
the separationof the rolesof chairmanand chief executive shouldbe made alegal requirement.This
resultedinthe stockexchange issuingguidance thatwhilstarules basedor‘box ticking’approach
wouldspecifythat‘the rolesof chairmanandchief executive officershouldneverbe combined...We
do notthinkthat there are universallyvalidanswersonsuchpoints.’
One companyto take advantage of the flexibilityin Geeland’s principles-basedapproachwasAnson
Company.InJuly2010, AnsonCompanyannouncedthatithadcombineditsrolesof chairmanand
chief executive inasingle role carried outbyone individual.Inaccordance withthe Geelandlisting
rules,itmade the following‘complyorexplain’statementinits2011 annual report: ‘Throughoutthe

2. yearthe companycompliedwithall GeelandCode provisionswiththe exceptionthatfrom1 July
2010 the rolesof chairman andchief executivehave been exercisedbythe same individual,William
Klunker.We recognise thatthishasbeenoutof line withbestpractice.We understandthe concerns
of shareholdersbutbelievethatwe have maintainedrobustgovernance while atthe same time
benefitingfromhavingMr Klunkerincontrol.On31 July2012 Mr Klunkerwill stepdownas
executivechairman,remainingaschairmanuntil we conclude oursearchfora non-executive
chairmanto succeed him,nolaterthan March 2013.’
Required:
(a) Brieflydistinguishbetweenrulesandprinciples-basedapproachestocorporate governance.
Criticallyevaluate the Geelandstockexchange’sguidancethat‘all stakeholdersshouldthenapply
these flexiblyto the varyingcircumstancesof individual companies.’
(b)Assessthe ‘complyorexplain’statementmade byAnsonCompanyinits2011 annual report.
CASE 3
Duringthe global economicrecessionthatbeganinmid2008, manycompaniesfoundit difficultto
gainenoughcreditinthe form of short-termloansfromtheirbanksandother lenders.Insome
cases,thiscausedworkingcapital problemsasshort-termcashflow deficitscouldnotbe funded.
Ultra-UberLimited(UU),a large manufacturerbasedinan economicallydepressedregion,had
traditionallyoperatedavoluntarysupplierpaymentpolicyinwhichitwasannounced thatall trade
payableswouldbe paidator before 20 days andthere wouldbe no late payment.Thiswasoperated
despite the normal paymenttermsbeing30 days.The companygave the reasonforthisas ‘a desire
to publiclydemonstrate oursocial responsibilityandsupportourvaluedsuppliers,mostof whom,
like UU, alsoprovide employmentinthisregion’.
In the 20 yearsthe policyhadbeeninplace,the UU website proudlyboastedthatithad neverbeen
broken.BrianMills,the chief executiveoftenmentionedthisasthe basisof the company’ssocial
responsibility.‘Ratherthantryingtodelayour paymentstosuppliers,’he oftensaid,‘we support
themand theircashflow.It’sthe rightthingto do.’Most of the otherdirectors,however,especially
the finance director,thinkthatthe voluntarysupplierpaymentpolicyisamistake.Some saythatitis
a meansof BrianMillsexercisinghisownethical beliefsinawaythat isnot supportedbyothersat
UU Limited.
WhenUU itself came undersevere cashflow pressureinthe summerof 2009 as a result of itsbank’s
failure toextendcredit,the finance directortoldBrianMillsthatUU’s liquidityproblemswouldbe
greatlyrelievedif theytookanaverage of 30 ratherthan the 20 days to pay suppliers.
In addition,the manufacturingdirectorsaidthathe couldofferanotherreasonwhythe short-term
liquidityatUU wasa problem.He saidthatthe creditcontrol departmentwaspoor,taking
approximately50 daysto receive paymentfromeachcustomer.He alsosaidthathisown inventory
control couldbe improvedandhe saidhe wouldlookintothat.Itwas pointedouttothe
manufacturingdirectorthatcost of goodssoldwas 65% of turnoverandthisproportionwas

3. continuouslyrising,drivingdowngrossandprofitmargins.Due topoor inventorycontrols,
excessivelyhighlevelsof inventorywere heldinstore atall stagesof production.The long-serving
salesmanagerwantedtokeephighlevelsof finished goodssothat customerscouldbuyfrom
existinginventoryandthe manufacturingdirectorwantedtokeephighlevelsof raw materialsand
work-in-progresstogive himminimumresponse timeswhenanew ordercame in.
One of the non-executive directors(NEDs) of UU Limited,BobNdumo,saidthathe couldnotwork
out whyUU was insuch a situationasno othercompanyinwhichhe was a NED was havingliquidity
problems.BobNdumoheldanumberof otherNED positionsbutthese were mainlyinservice-based
companies
1- Define ‘riskembeddedness’andexplainthe methodsbywhichriskawarenessand
managementcan be embeddedinorganisations.
2- Examine the obstaclestoembeddingliquidityriskmanagementatUU Limited
3- Define ‘liquidityrisk’andexplainwhyitmightbe a significantrisktoUU Limited.