Page 9 - CIMA SCS Workbook February 2019 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

CHAPTER FIVE – P3

EXERCISE 1 – ANALYSIS OF CORPORATE GOVERNANCE

Vita is a consumer electronics company in Newland. It has recently listed on the Newland stock
market and so therefore needs to comply or explain to corporate governance guidelines. As the
listing was fairly recent they may still be improving their governance procedures and as the
company continues to grow good governance will be essential.

Corporate governance guidelines exist so that the needs of shareholders are met. Monitoring
exists so that directors are kept ‘in check’ and minimising any problems arising from the agency
relationship between principals (shareholders) and agents (directors).

We are not told about the shareholdings of any of the directors, but presumably some of the
Board, and most likely the two co-founders still own some of the shares, this will reduce the
agency issue at Vita. If the Board were not to act in the best interests of the shareholders they
would be jeopardising their own interests. If this is the case there should be a reduction in the
need (and costs) of monitoring the Board.

Applying corporate guidelines for good governance, the following are considerations worth
noting.

Board Balance

A Board should be balanced in terms of skills, experience and diversity. Such a structure will help
enable the Vita Board to deal with strategic and operational issues. We know nothing about the
skills or experience of the Board.

We can comment on the roles listed on the Board, there appears to be a good mix of roles with
CEO, COO & lots of core functions represented at a strategic level (Finance, HR, Technology and
Marketing).

There is one area of business operation that does not appear to be well served by the Board, and
that is legal affairs, despite litigation featuring on the risk register, albeit with a fairly low risk
rating. Should any issues occur the impact could be very serious and costly for Vita if they do not
have appropriate expertise in this area.

Vita have three Non-Executive Directors (NEDs), again we know nothing about their experience.
Under corporate governance guidelines a Board should be balanced in terms of the number of
executive and NED roles. There should be the same number of NEDs as executives (excluding the
Chair), that is executive directors should not outnumber the NEDs. In addition, in order to ensure
the NEDs represent the interests of the shareholders they should be independent. A smaller
company should have at least two independent NEDs.

Vita only has three NEDs versus the six directors (this excludes the chair) therefore the main
criteria is not met. The NEDs may not be independent (again we have no information on this) but
they will hopefully be able to provide sound business advice to aid the running of the company.
NEDs are meant to challenge the executives and act on behalf of the shareholders. This is less
likely to happen at Vita as firstly, there are not enough NEDs but also if there is any reason why
they are not independent.

KAPLAN PUBLISHING 49