To: Board of Directors, Nkata Plc.
Subject: Corporate Governance, Shareholder Conflicts, and Bond Covenants

a. Role of Non-Executive Directors in Corporate Governance (4 Marks)
Non-executive directors (NEDs) play a critical role in enhancing corporate governance within public companies:

1. Oversight and Monitoring: NEDs provide independent oversight of management actions, helping ensure decisions align with shareholders’ interests.
2. Strategic Guidance: NEDs bring external insights and expertise, contributing to strategic direction without being involved in day-to-day operations.
3. Risk Management: NEDs assess and advise on risk management policies to safeguard the company’s financial stability and reputation.
4. Stakeholder Representation: They represent the interests of minority shareholders, helping to balance power and prevent conflicts of interest.

b. Areas of Conflict Between Directors and Shareholders (6 Marks)
Three areas where directors’ interests may conflict with shareholders include:

1. Executive Compensation: Directors may prioritize personal benefits by setting high compensation levels, which could reduce dividends and lower shareholder returns.
2. Growth vs. Dividends: Directors may prefer to reinvest earnings for company expansion to increase power and job security, even if shareholders prefer higher dividend payouts.
3. Risk-Taking Decisions: Directors might engage in high-risk projects to achieve personal incentives (e.g., bonuses linked to performance) that may not align with shareholders’ risk tolerance.

c. Bond Covenants: Examples, Advantages, and Disadvantages (5 Marks)

1. Debt-to-Equity Ratio Limit:
   • Advantage: Helps maintain financial stability by limiting excessive debt.
   • Disadvantage: Restricts the company’s ability to leverage for growth opportunities.
2. Dividend Restriction:
   • Advantage: Ensures cash is available to meet bond obligations.
   • Disadvantage: Limits shareholder returns and may discourage equity investment.
3. Asset Disposal Restrictions:
   • Advantage: Protects the bondholder by ensuring asset security.
   • Disadvantage: Reduces flexibility for the company to divest or restructure.
4. Financial Reporting Requirements:
   • Advantage: Enhances transparency and ensures lenders are informed of financial health.
   • Disadvantage: Increases administrative burden and may incur additional costs.
5. Restriction on Additional Debt:
   • Advantage: Prevents dilution of existing bondholders’ claims.
   • Disadvantage: Limits the company’s ability to pursue growth through new debt financing.