【正确答案】Confl ict of interest Confl ict of interest A confl ict of interest is a situation in which an individual has compromised independence because of another countervailing interest which may or may not be declared. In the case of non-executive directors, shareholders have the right to expect each NED to act wholly in the shareholders’ interests whilst serving with the company. Any other factors that might challenge this sole fi duciary duty is likely to give rise to a confl ict of interest. Does the director pursue policies and actions to benefit the shareholders or to benefi t himself in some other way? Confl icts of interest in the case John has a longstanding and current material business relationship with KK Limited as CEO of its largest supplier. This creates an obvious incentive to infl uence future purchases from Soria Supplies over and above other competitor suppliers, even if the other suppliers are offering more attractive supply contracts as far as KK is concerned. It is in the interests of KK shareholders for inputs to be purchased from whichever supplier is offering the best in terms of quality, price and supply. This may or may not be offered by Soria Supplies. Similarly, a confl ict of interest already exists in that Susan Schwab, KK’s fi nance director, is a NED on the board of Soria Supplies. Soria has a material business relationship with KK and Susan Schwab has a confl ict of interest with regard to her duty to the shareholders of KK and the shareholders of Soria Supplies. His appointment, if approved, would create a cross directorship with Susan Schwab. As she was appointed to the board of Soria Supplies, any appointment from Soria’s board to KK’s board would be a cross directorship. Such arrangements have the ability to create a disproportionately close relationship between two people and two companies that may undermine objectivity and impartiality in both cases. In this case, the cross directorship would create too strong a link between one supplier (Soria Supplies) and a buyer (KK) to the detriment of other suppliers and thus potentially lower unit costs. John’s brother-in-law is Ken Kava, the chief executive of KK. Such a close family relationship may result in John supporting Ken when it would be more in the interests of the KK shareholders for John to exercise greater objectivity. There should be no relationships between board members that prevent all directors serving the best interests of shareholders and a family relationship is capable of undermining this objectivity. This is especially important in public listed companies such as KK Limited.

【正确答案】Advantages of appointing non-executives to the KK board The case discusses a number of issues that were raised as a result of the rapid expansion. An effective NED presence during this period would expect to bring several benefits. In the case of KK, the NEDs could provide essential input into two related areas: monitoring the strategies for suitability and for excessive risk. In monitoring the strategies for suitability, NEDs could have an important scrutinising and advising role to fulfil on the ‘aggressive’ strategies pursued by KK. All strategy selection is a trade off between risk and return and so experience of strategy, especially in risky situations, can be very valuable. NEDs could also monitor the strategies for excessive risk. The strategy role of NEDs is important partly because of increasing the collective experience of the board to a wide range of risks. With KK pursuing an ‘aggressive’ strategy that involved the ‘increasingly complex operations’, risk monitoring is potentially of great importance for shareholders. There is always a balance between aggression in a growth strategy and caution for the sake of risk management. The fact that some of the other executive directors are both new to the company (resulting from the expansion) and less experienced means, according to the case, that they may be less able and willing to question Mr Kava. Clearly, an effective non-executive presence would be able to bring such scrutiny to the board. They may also place a necessary restraint on the strategic ambitions of Mr Kava. They could provide expertise on the foreign investments including, in some cases, country-specifi c knowledge. It is careless and irresponsible to make overseas investments based on incomplete intelligence. Experienced NEDs, some of whom may have done business in or with the countries in question, could be very valuable. Experienced NEDs capable of offering specifi c risk advice, possibly through the company’s committee structure (especially the risk committee) would be particularly helpful. Investors are reassured by an effective non-executive presence on a board. The fact that investors have expressed concerns over the strategy and risk makes this factor all the more important in this case. An experienced and effective NED presence would provide shareholders with a higher degree of confi dence in the KK board so that when large overseas investments were made, they would be more assured that such investments were necessary and benefi cial. Finally, through an effective nominations committee, the NEDs could have involvement in the recruitment and appointment of executive and non-executive directors through the nominations committee structure. Specifi cally when the business is growing the need for new people is at its height and the appointment of specialists at board level in such periods is strategically important. Through the use of contacts and through the experience of recruiting directors for many years, experienced NEDs could make a worthwhile contribution. [Tutorial note: this is a case analysis task. Do not reward the four roles: people, strategy, risk, scrutiny unless clearly used to analyse the case]

【正确答案】Corporate governance report Best practice CG report Several corporate governance codes of practice prescribe the content for a report as part of an annual report. Although these vary slightly, the following are prominent in all cases. Information on the board and its functioning. Usually seen as the most important corporate governance disclosure, this concerns the details of all directors including brief biographies and the career information that makes them suitable for their appointment. Information on how the board operates, such as frequency of meetings and how performance evaluation is undertaken is also included in this section. This section is particularly important whenever unexpected or unanticipated changes have taken place on the board. Investors, valuing transparency in reporting, would always expect a clear explanation of any sudden departures of senior management or any signifi cant changes in personnel at the top of the company. Providing investor confi dence in the board is always important and this extends to a high level of disclosure in board roles and changes in those roles. The committee reports provide the important non-executive input into the report. Specifi cally, a ‘best practice’ disclosure includes reports from the non-executive-led remuneration, audit, risk and nominations committees. In normal circumstances, greatest interest is shown in the remuneration committee report because this gives the rewards awarded to each director including pension and bonuses. The report on the effectiveness of internal controls is provided based in part on evidence from the audit committee and provides important information for investors. There is a section on accounting and audit issues with specifi c content on who is responsible for the accounts and any issues that arose in their preparation. Again, usually a matter of routine reporting, this section can be of interest if there have been issues of accounting or auditor failure in the recent past. It is often necessary to signal changes in accounting standards that may cause changes in reporting, or other changes such as a change in a year-end date or the cause of a restatement of the previous accounts. These are all necessary to provide maximum transparency for the users of the accounts. Finally there is usually a section containing other papers and related matters which, whilst appearing to be trivial, can be a vital part of the accountability of directors to the shareholders. This section typically contains committee terms of reference, AGM matters, NED contract issues, etc. Fin Brun’s information needs Fin Brun is voicing a reasonable and realistic concern to Mr Kava because it is usually diffi cult to determine the contributions of individual directors (unless there has been some other publicity, positive or negative, throughout the year). The bonuses awarded to each director are, however, disclosed in the report of the remuneration committee and this gives an indication of the committee’s view on each director’s performance. The biographies of all directors, including NEDs, is included in a best practice disclosure and that can also provide information on the type of person the director is and an indication of his or her fi tness for the job. [Tutorial note. The study texts approach this content in slightly different ways (different headings). Allow for variations in expression of ideas].