Susan Kabwe completed a first degree in pharmacy programme abroad and returned to her native country Gambia with the hope of starting a pharmaceutical company. Gambia has been experiencing high graduate unemployment and Susan was very determined not to join the teaming unemployed youth in the country. Susan put together an excellent business plan and approached four other childhood friends who have also completed university to start Kabwe Pharmaceuticals Ltd for manufacturing of basic and essential drugs locally. After many months of hard work, the company finally commenced operations two years ago.
Susan Kabwe plays a dual role of the chief executive officer (CEO) and chairman of the Board of Directors, and the four other friends are all executive directors of the company. The board of the company is currently composed of five executive directors and two non-executive directors. The two non-executive directors are close friends of the executive directors without relevant work experience since they remained unemployed 3 years after completing university. There have been several board meetings held without the non-executive directors. This situation is largely due to a belief by the executive directors that non-executive directors are really not needed since they do not play any important role on the board. Susan and other executive directors participated in a seminar on corporate governance where the facilitator made the following statements on best practices of corporate governance:
“The roles of board chairman and chief executive officer should be held by two different individuals”
“The board chairman performs critical functions to ensure that the board functions effectively”
“The board should be composed of at least one-third of non-executive directors”
After the seminar the executive directors disagreed with some of the facilitator’s assertions. They claimed the statements are idealistic and not pragmatic. Susan Kabwe has approached you as a corporate governance expert to help provide clarity to the statements by the facilitator.
Required:
Discuss THREE justifications why the roles of the board chairman and chief executive officer should not be held by Susan Kabwe.
(a)Identify FOUR ways in which GPL’s concern for environmental and safety policy can impact on its performance.
(b)The Chairman of the company has recently attended a short course on strategic planning. He was particularly interested in the relevance of mission statements to the strategic management process. Explain in FOUR ways how a mission statement is relevant in strategic management.
(ci) Calculate the current return on investment (ROI) and residual income (RI) for each division for the current year. (cii) Assess the performance of each division and advise the management of Gusco Perry Ltd (GPL)
21
Swift Transit Solutions Introduction
Swift Transit Solutions (STS) is jointly owned by two Nordland-based conglomerates which manufacture many electronic and electrical products. In its own right, STS is regarded as a world leader in the installation and maintenance of railway transport signaling systems. The company is based in Nordland, where most of its manufacturing units are located, but it has established other plants and marketing facilities in Northlandia, Southlandia, Eastlandia, and Oceania.
Activities of the company
The company specialises in the supply of railway signaling and control systems and employs over 15,000 staff worldwide. In addition to these systems, STS also supplies advanced electronic equipment for safety signaling applications which can be added to systems which have already been installed. Passenger information systems are also manufactured and supplied by the company, which uses advanced technology to provide full displays on railway platforms in stations and on trains.
Over the last two decades, STS has experienced increasing competition within its Nordland and Northlandia markets.
Recent international activities
In addition to carrying out major signaling upgrade work for the Channel Tunnel rail link between Greatlandia and mainland Nordland, STS has recently equipped a high-speed rail line in Eastlandia with electronic equipment. Within Nordland, the company succeeded in winning the tender to build, equip, operate and maintain a rail link between a major Nordic City and its airport.
Research and development
The Chief Executive of STS has stated that the market-oriented approach of the company requires that it should maintain and develop its position as leader in “state of the art” technology. This is facilitated by a large established Research and Development unit which aims to improve product reliability and develop advanced computer software solutions in its business activities, all at lower cost, without compromising quality.
The reduction of life cycle costs and environmental damage, whilst at the same time pursuing technical developments, have been stated by the Chief Executive as key objectives of the company.
Financial position of STS
The latest annual report and financial statements declared that the financial year just ended produced results which were “disappointing”. The Chief Executive indicated that the company had experienced difficult trading conditions and encountered strengthening international competition. Whilst turnover increased, operating profit after tax and overall orders were lower than the previous year. At the year end, the number of orders in the order book was 8% below the level achieved at the previous year end.
Abridged comparative accounting information for the financial years ended 31 December 20X8 and 20X7 are as follows:
20X8
20X7
NC’000
NC’000
Value of orders
3,750
4,600
Turnover
4,400
3,900
Operating profit after taxation
310
320
Shareholders’ equity
935
850
STS had achieved on average a 20% growth in revenue and a 10% increase in operating profit after taxation over the preceding five-year period until the last financial year. The Chairman of one of the parents holding companies has expressed his concern regarding STS’s results in the last financial year. In response, the Chief Executive of STS has outlined his company’s strategy of international acquisition and joint ventures as a means of returning to sustained growth and profitability.
Proposed acquisition
A number of acquisitions and joint venture arrangements have been considered by the Board of STS, aimed at increasing the company’s profile outside Nordland. In particular, the acquisition of a small Westlandian electronics component manufacturer, Westland Transport Components Ltd (WTC) is being actively pursued. If acquired, WTC will provide the basis for STS to increase its range of products in what is considered to be an expanding market with high growth potential.
This acquisition would enable advantage to be taken of the current opportunities for railway development in Westland, notably the Capital City – Port City commuter link, the development of the Western rail line and the Northern City to Border Town section of the national rail network. In addition, WTC would provide a base for further market penetration of other Central Continent countries. WTC is unquoted and owned by a diverse group of shareholders, with family interests in the company controlling 40% of the voting shares.
The directors of STS consider that WTC is under-capitalized. It is currently achieving a 2% return on revenue after interest and tax despite working at full capacity. WTC employs 2,000 people, who possess mixed abilities and skills. Mostly, however, the employees are unskilled or at best very poorly trained. As many as 25% of WTC’s products are rejected by customers because of faults and this proportion has steadily increased over recent years.
The directors of STS are aware that the Westlandian dollar is at risk of ongoing depreciation in value compared with the Nordic Currency, in which STS currently reports. The Westlandian dollar has continually fallen in value compared with the Nordic Currency over a long period and currently stands at an exchange rate of W$6.3 to NC1 whereas a year ago the exchange rate was W$5.3 to NC1.
Required:
(a) Explain the difficulties with which the parent companies may be confronted in assessing STS’s performance.
(b) Recommend and justify what financial and non-financial measures may be applied to assess the performance of STS.
(c) Discuss the strategic objectives and market opportunities available to STS which will be created by its acquisition of WTC.
(d) Discuss the managerial, cultural and financial considerations STS will need to examine before undertaking the acquisition of WTC
(e) Explain the difficulties STS may encounter in objectively assessing the performance of WTC post-acquisition.
Mr. Samuel Asare is the Marketing Director of Vita Furniture Solutions, a medium-sized company which specialises in manufacturing office furniture. The company is located in Tamale, because of the availability of timber.
Mr. Asare has proposed to the managing director the need for the company to diversify into the manufacture of household furniture. If the proposal is accepted, the company would have to develop a suitable marketing strategy in order to match the competition.
Required:
(a) As a strategist, advise the company on FOUR marketing strategies it can adapt to market its new product.
(b) Discuss how strategies can be used to create and sustain competitive advantage.
(a) BrightFuture Institute is a research organization with branches in five African countries. The majority shareholder, Mr. James, though not officially part of the management structure, is actively involved in management decisions. He gives directives and makes decisions that sometimes influence the management policies. Customers, employees, and management are often affected by these decisions of Mr. James.
Preparations are underway to get the company listed on the Accra Capital Market and a consultant is needed to advise on the improvement of its weak corporate governance structure.
Required:
(i) Identify FOUR stakeholders of the company and explain the nature of their interests in the company.
(ii) Explain to Mr. James what is meant by good corporate governance, including the problems it is intended to address.
(b) Mr. Kweku Amoako is the founder and managing director of StarBloom Foods Ltd. StarBloom is a private limited liability company, which was established six years ago. Its line of business include growing different kinds of fruits, processing, and distributing them to supermarkets across the country. Mr. Amoako, together with the company’s board, has intimated on the need for the company to expand beyond its current operations in Ghana. You have been consulted by a consultant by the company’s management to advise on its quest to participate in the global market.
Required:
Discuss FOUR factors that must be considered by the board of Star Bloom Foods and Processing Ltd. before choosing a suitable mode of entry into international markets.
The following statements were made by the chief executive officers of four companies about the corporate social responsibility stance of their respective companies, in Harmonyville, at a ball to honor companies that were socially responsible in the just ended year.
(i) “Bright Future Ltd has invested heavily in digital communities in villages of Harmonyville to create new market opportunities and promote community economic development. On the business side of the deal, Bright Future has partnered with local business leaders, community groups, and NGOs to create web-based services for education, healthcare, and agriculture needs of the people. Bright Future Ltd has created an executive level corporate citizenship committee and several tiers of multi-functional committees to support citizenship in the company’s lines of business.”
(ii) “Core Profit Ltd primary social responsibility is to assure our shareholders of the short-term financial success of the company. Expecting us to exercise social duties beyond this can undermine the authority of government. As a company we have met all government regulations concerning society and nothing more is expected of us.”
(iii) “GreenPath Ltd is increasingly moving from simply complying with environmental laws to taking more practical actions to winning the public’s trust through interactions and dialogue with other stakeholders. The company recognizes the fact that engaging and addressing concerns of other stakeholders will result in long-term financial benefit to the shareholders. We are aware that company’s operations sometimes affect society negatively and we take steps to promptly address issues stakeholders bring to our attention. This is currently enhancing our reputation.”
(iv) “Unity Corp Ltd has come to accept the legitimacy of the expectations of stakeholders other than shareholders and we have built their expectations into our organization’s stated vision, mission and strategic direction. We recognize that without appropriate relationships with groups such as suppliers, customers, employees, government and society at large, Unity Corp Ltd will not be able to function. As a company, our long-term survival depends on protecting our environment and promoting social equity as well as economic or financial performance.”
Required:
Identify and discuss the corporate social responsibility stance each company is as stated by their respective CEOs. (b)
Establishment of internal audit function plays a crucial role in effective corporate governance system. Internal audit function exists to perform a number of activities including review of the accounting and internal control systems, identification of significant business and financial risks, performance of value-for-money audits and safeguarding company’s assets. External auditors may from time to time rely on the work of internal audit function in forming audit opinion. However, in doing so external auditors would have to assess the work of internal audit they want to place reliance on.
Required:
Discuss FOUR criteria that will determine the extent of reliance to be placed on the work of internal audit work by external auditors.
At its recent Annual General Meeting, management of NTM was highly criticized for two major scandals that occurred in the organization during the year. In one case, newspapers reported that the management of the company connived with officials at the port to undervalue imports in order to pay lower taxes. In the other case, it was reported that the accountant leaked information to his friend who was bidding for a contract in the company. The Board Chairman, who is also the Chief Executive Officer of the company apologized for these incidents but did not disclose that the company had been sued in respect of the first case. He went on to promise the shareholders that the fortunes of the company would change dramatically by the end of the new year as the company was going to start exporting its products to Europe within the next few weeks.
Required:
(a) Identify and explain THREE situations that are in conflict with the International Federation of Accountants (IFAC)’s Code of Ethics.
(b) Explain FOUR disadvantages of the CEO acting also as the Chairman of the Board.
(c) Identify FOUR principal duties of a Board of Directors.
The Boston Consulting Group (BCG) Matrix is a model which plots Strategic Business Units’ (SBUs) market growth and relative market share.
Many public sector organisations are now experiencing increasing levels of competition for the supply of their services. This competitive environment has resulted in the need for such public sector organisations to develop analytical techniques which previously operated mainly within the private sector.
Required:
(a) Explain how the BCG Matrix could be used to analyze, business portfolio and strategic options.
(b) Explain how a corporate parent can use envisioning and intervention as strategies for value creation for its Strategic Business Units.
(a)Assess the general environment in which Beta Pure Water Ltd operates
(b) Analyse the nature of competition faced by Beta Pure Water Ltd. (c) Advise management on the best option between lease or buy. Support your advice with relevant calculations. (d)Explain TWO other factors you will consider in reaching your conclusion in (c) above.
Background
Sunrise Bank (the Bank) is a West African clearing bank. It has 500 retail branches. It categorizes its business as retail and corporate. Each category currently accounts for half of the Bank’s revenue.
The Bank defines retail business as “banking for customers in their own right and small businesses where lending would not exceed GH₵1,000,000 in any one year”.
Corporate business is defined as “…where lending would exceed GH₵1,000,000 in any one year”. Corporate lending includes international lending.
Traditionally, corporate lending has been the most profitable business, yielding 70% of profit before taxation. Corporate lending has been carried out by six regional offices and a department at head office in Lagos. The Lagos office is also responsible for international lending. There are 200 staff employed in corporate lending.
Retail banking has operated in the following way.
The number of retail and small business customers at each branch has ranged from 500 to 5,000, although 2,500 is typical. The bank has employed the following Mission statement for its retail banking:
“Our Mission is to deliver a high-quality service to customers based on our managers’ personal knowledge of customers’ affairs.”
The Bank recognized that retail banking was relatively unprofitable. It was willing to operate a policy of cross-subsidization between corporate and retail as it hoped that some retail customers would become corporate ones. It saw its branch managers as assisting in this process because of their financing expertise and deep knowledge of their customers.
The Bank has operated each branch as a cost center. Managers have been provided with a three-monthly expenditure report which compared committed expenditure to budgeted expenditure. The Bank had not operated an accrual accounting system as regards branch expenditures for these three-monthly reports. However, year-end adjustments reconciled committed, actual and budgeted expenditures. These accounting operations were carried out by management accounting staff based at head office.
Required:
(a) The bank’s current mission statement for its retail services states an intention “to deliver a high-quality service to customers based on our managers’ personal knowledge of customers’ affairs”. The emphasis here is on high quality and personal attention. The new philosophy outlined by the managing director is different in several respects. The emphasis is on profitability, to be achieved through low-cost service. And “the days of the bank manager being a personal friend and adviser are over”. Discuss the implications of this change for staff, customers and shareholders.
(b) Until now, the bank has treated its retail branches as cost centers. Discuss the possible advantages and disadvantages for the bank in changing to a system where super branches operate as investment centers.
(c) (i) List the reports that super branch managers might need in order to carry out their new responsibilities.
(ii) Explain THREE qualitative indicators that should be monitored by super branch managers.
(d) Identify the most important stakeholders who should have been consulted about the proposed changes and explain why their involvement is important.
