Governance, Risk

and Ethics
June 2014
Time allowed
Reading and planning:

15 minutes

Writing:

3 hours

This paper is divided into two sections:

Section A:

This question is compulsory and MUST be

attempted.

Section B:

TWO questions ONLY to be attempted.

Do NOT open this paper until instructed by the supervisor.

This question paper must not be removed from the
examination hall.

Paper P1

ACCA REVISION MOCK

REVISION MO CK QUESTIONS

SECTION A
This question is compulsory
1

The YJ Group primary business involves oil exploration and extraction and is listed on a
European stock exchange. The YJ board have taken a strategic decision to increase its
international presence as a means of gaining global market share, and have identified AG as
a potential acquisition target. AG is based outside Europe in an oil industry growth area and
is seen by analysts as a good expansion opportunity for YJ, especially as its recent flotation
(75% of its share capital) provides potential access to a controlling shareholding through
the regional stock market where AG operates.
Although AG is a leading player in oil extraction, it has been responsible for considerable
contamination of land and the pollution of seas and rivers. Company policy is to only clean
up contamination if it is a legal requirement in the country of operation.
The directors of AG have a widely publicised environmental attitude which shows little
regard to the effects of their business on the environment. No provision for environmental
costs has been made in the financial statements of the company. AG has never felt the
need to promote socially responsible policies and practices or make positive contributions
to society because it has always maintained its market share. It is renowned for poor
customer support, bearing little regard for the customs and cultures in the communities
where it does business.
YJ Group was formerly a publically owned business. Since its privatisation it has been
managed by a unitary board, with Don Rogers as the current chief executive. At a recent
board meeting the proposed acquisition of AG featured highly on the agenda. Directors
raised a number of points with Don Rogers who has been leading the acquisition process to
date.
Al Murray, operations director, raised the concern that YJ could be exposed to a number of
risks resulting from the proposed acquisition of AG. He requested details on the risk
management policies operated by AG and any exposure to significant risks that the firm is
already facing. An industry colleague had told him of rumours circulating that AG was facing
investigation relating to its poor environmental record in a number of countries. Don stated
that he was unaware of such rumours but would seek further information on the risk
management process if the acquisition discussions progressed to the next stage.
The next agenda item was for Jane Seymour, the company secretary, to provide a summary
to the board on her analysis of the governance structure of AG. She stated that AG had
been family owned for most of its 23 year history, having been floated only 3 years ago.
Family members still play an active role in its governance through the use of a two tier
board structure, with family being on the upper tier. The remaining executives are the
department heads of the business.
Jane stated that she felt the family dominance remains prevalent within AG. Despite being
directors the department heads are not present at board meetings where strategy and
performance issues are discussed. This may lead to significant decisions being taken
without the input from those who will be required to deliver upon them. A recent comment
from an institutional shareholder of AG also indicated that the annual general meeting was
strictly controlled by the family directors, allowing for little discussion or questioning from
shareholders. Janes conclusion was that these matters create the impression that the
board of AG is not accountable to external shareholders, and would need to be rectified if
YJ were to become owner, or at least major shareholder, of the company.

P AP E R P1: G O VE R N A N C E , R IS K S A N D ETH IC S

The final item on the board agenda was a review of an environmental audit produced for
the audit committee of YJ by a firm of external environmental consultants. The report
referred to the environmental footprint of YJ Group. Jane Seymour stated that she was
unfamiliar with this term, though she fully supported the idea of providing additional
environmental information to shareholders.
This discussion prompted Al Murray to raise a further question in relation to the acquisition
of AG. In the light of the rumours of environmental issues within AG he asked whether it
would be possible to review their latest environmental statement. Don Rogers stated that
they did not produce any such reporting, but that further attempts should be made to
encourage this form of disclosure in future. YJ board agreed to discuss this matter further at
the next board meeting, along with the progress of negotiations with AG.
Required:
(a)

Describe the normative and instrumental views of stakeholders, and discuss the
views
AG demonstrates towards its stakeholders.

(10 marks)

(b)

Al Murray suggested that the acquisition of AG might expose YJ to a number of

risks. Define reputation risk and assess the potential effects of AGs poor
reputation on YJ if the acquisition were to go ahead.
(10 marks)

(c)

Explain the main responsibilities of a risk committee and assess the contribution
that such a committee could make to the confidence of shareholders in
YJ acquisition strategy.
(8 marks)

(d)

Construct the case for AG adopting a unitary board structure after the proposed
acquisition by YJ. Your answer should include an explanation of the advantages of
unitary boards and a convincing case FOR the AG board changing to a unitary
structure.
(10 marks)
(Including 2 professional marks)

(e)

Write a memo to Jane Seymour defining environmental footprint and briefly

explain the benefits of introducing environmental reporting for AG.
(12 marks)
(Including 2 professional marks)
(Total: 50 marks)

REVISION MO CK QUESTIONS

SECTION B
Two questions only to be attempted
2

First4Fish is a small private company operating from a remote and sparsely populated area
of a major European country Wetland. The companys main business is packaging of fresh
seasonal seafood supplying major supermarkets and other more specialist retailers. The
company employs 400 people, mainly in packing related departments. Cleaning,
preparation and packing of the output of First4Fish is highly labour intensive due to the
nature of the business.
Supplies of seafood are obtained from the local fishing fleet that have operated in the area
for centuries and, whose only significant customer is First4Fish. Given that there are only
approximately 10,000 people living in the area, this makes the company one of the islands
major employers. Concern is now gathering that the increased demand for seafood
(reflecting consumer trends towards a more healthily diet) is causing over-fishing of a
number of fish species and that as a result the population of these fish may decline
irreversibly in the near future.
In the last month, the board of directors of First4Fish have made a strategic decision to
transfer the majority of the packing of seafood to another country. The seafood will be
moved by refrigerated ships to the other country, packaged by workers there and then
moved back by ship to First4Fish for resale as before. The rationale behind this move is that
labour costs are only 13% of the costs on the island. Even taking into account
transportation (and related) costs, this move will reduce the overall packing costs of
First4Fish by approximately 55%. As a result of the move, the directors of First4Fish can
reduce the workforce on the island from 400 to 50 people.
This strategic decision has resulted in a large amount of adverse publicity for First4Fish.
However the reaction from their customers has been positive as the company can now
offer reduced prices on many of its products.
Required:
(a)

Using Gray, Owens and Adams viewpoints on social responsibility as a framework

for your answer, evaluate the decision to transfer packing of seafood to another
country.
(12 marks)

(b)

Explain Mendelows theory of stakeholder power. Identify the stakeholders

involved in the decision to transfer packing of seafood to another country, and
discuss the response of each group to this decision.
(13 marks)
(Total: 25 marks)

P AP E R P1: G O VE R N A N C E , R IS K S A N D ETH IC S

Axe is an international logging company, which cuts down timber to supply to saw-mills
where the timber is seasoned and then cut to appropriate sizes for use in a range of
industries. Axe will work with any timber, ranging from softwoods used in construction or
paper manufacture to exotic hardwoods used in expensive furniture.
The companys usual approach is to secure the rights from land owners or in some cases a
national government, to cut timber. This often involves the payment of a large initial cash
deposits to the owner, money which Axe usually borrows. A logging team then cuts down
the trees as quickly as possible and hauls the timber to a convenient river where it is
floated to a saw-mill. Moving on rapidly to the next site, the loggers usually leave
considerable surface damage behind them.
Since an increasing proportion of the companys work has been in the tropical rainforest, it
has recently come under pressure from environmental groups who believe that it socially
irresponsible to act in this way. Whilst the softwood forests can be regenerated in a couple
of decades by replanting, hardwoods in tropical forests take far longer to mature.
The Chief Executive of Axe has argued that he is not concerned about these protests since,
as far as he is concerned, the company always acts ethically, as it has the agreement of the
national government in any country in which it operates.
A recent development in the timber industry has been the harvesting of timber from the
bottom of reservoirs which have been created by flooding valleys. Although the capital
equipment required for this approach is significantly more expensive than that used in
conventional logging, the operating costs are lower. Waterlogged trees in reservoirs have
balloons attached, are cut, float to the surface and are towed to a saw-mill. The underwater
process is quieter and less disruptive to wildlife and the environment.
It has been estimated that there are over half a billion trees, or 20 years supply,
submerged in reservoirs across the world, but it can take considerable research and
expense to find them.
As long as the timber has remained submerged deeply enough, it is of the same quality as
timber harvested from the land. There is currently only one company conducting
underwater logging, although a number of other companies are also considering this
development.
Some of the board of directors feel that Axe should pursue this underwater approach and
abandon land based logging. The Chief Executive and one other director feel that the
underwater approach carries too many risks. The other directors are keen to carry out a risk
assessment to see if this is indeed the case.
Required:
(a)

Discuss the ethical dilemmas resulting from Axes current operations.

(6 marks)

(b)

Explain the concept of risk perception, and relate it where possible to Axes
operation.
(4 marks)

(c)

Describe a framework to assess the risks associated with the new underwater
approach.
Your answer should include a diagram to represent the framework.
(6 marks)

(d)

Using information from the case, assess THREE risks resulting from pursuing the
underwater approach.
(9 marks)
(Total: 25 marks)

REVISION MO CK QUESTIONS

Middleman owns a country wide chain of supermarkets that account for almost 35% of
national household expenditure on general groceries. Recently, faced with the prospect of
foreign companies entering its home markets Middleman has sought to raise capital by
floating shares on the local stock exchange, the monies raised being used to acquire local
competitors and create critical mass to defend against any foreign competition.
You are a Non-Executive Director at Middleman and have been employed in order to
ensure that the company fully complies with rules-based regulation legally enforceable for
all listed companies in the country. The governance regime is almost identical to SarbanesOxley Act used in the US.
Following the floatation, a controlling interest in the company has been retained by the
Middleman family. It is now headed by the oldest surviving male heir JR Middleman due to
the death of the founder, although the redistribution of shareholding among the two sons
and their uncle is a source of bitter contention, currently being played out in a very public
court room battle.
As a long term family friend, JR Middleman has privately confided in you that he has been
approached by a large European retailer and asked if he might be willing to sell the
company to them. In response, JR has been secretly purchasing the companys shares in the
hope of making a substantial fortune once he decides to inform the market of the approach
and, as a result, the stock price inevitably rises.
Mr Middleman believes this to be a more favourable solution to the current situation since
to date, very few investors have taken up the investment opportunity created through the
Middleman floatation. Privately, he would like to retire from retail and concentrate on his
other great passion, buying football clubs.
None of this is known to Mr Middleman step brother (Robert) who has sought your advice
as to how the company can improve the attractiveness of its share offering and so raise the
much needed capital to expand its retail operations.
Required:
(a)

With reference to the scenario, identify and assess THREE possible areas of non
compliance with the rules-based regulatory regime.
(9 marks)

(b)

Evaluate the continued existence of the company as a family based structure.

(8 marks)

(c)

Provide advice as to how the company might improve the attractiveness of its
share offering.
(8 marks)
(Total: 25 marks)