UNIVERSITY OF DAR ES SALAAM

BUSINESS SCHOOL
DEPARTMENT OF ACCOUNTING
P. O. Box 35046
DAR ES SALAAM

SEMESTER TEST 31st January, 2016

Time: 60 Minutes AC 311: CORPORATE GOVERNANCE AND
SOCIAL RESPONSIBILITY
Reg. No. Surname First Names

Instruction:
This test has TWO (2) Questions, ATTEMPT ALL

Question 1 [CORPORATE GOVERNANCE]

PART A
Although in virtually all systems a board of directors is included as an essential mechanism
of corporate governance, there are many varieties of board structure and function that
nonetheless serve similar purposes. The following are some of the different approaches to
boards in the different regional corporate governance systems:

i] US boards: US boards are unitary and tend to be larger, and typically combine the
roles of chair and CEO. There is a predominance of non-executive directors many of
whom traditionally were CEOs of other companies.

ii] UK boards: UK boards are unitary, and separate the roles of chair and CEO. Non-
executive directors are in a majority. Boards are often small particularly in small
companies.

iii] European boards (Germanic): European boards as in the north European German
model tend to have two tiers, with stakeholder representation on supervisory boards,
but preclude the face to face accountability of executives on the management board
to board members from outside the company.

iv] European boards (Latin): European boards of the Latin variety tend to have a
large representation of owners and related interests on boards, with little separation
of ownership and control.

v] Asian boards: Asian boards tend to represent dominant family interests, or other
majority shareholders, and there is no separation of ownership and control.

vi] Japanese boards: Japanese boards traditionally were large nominal boards
composed of executives and former executives of the company. The board

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 performed largely ritualistic procedures to order and was based on long established
relationships.

Required:
Evaluate the effectiveness of each of the above approaches to boards [18 marks]

SUGGESTED SOLUTION AND MARKING SCHEME

i] US boards: Can be generally regarded as ineffective because of the following

 Being larger;
 Combination of the roles of chair and CEO jeopardise effectiveness of the
board.
 Existence of non-executive directors suggests that the board is effective;
however, there is a possibility that these non-executive directors favour each
other as they are working in different companies.

ii] UK boards: Can be regarded as effective because of the following:

 Unitary,
 Separate the roles of chair and CEO.
 Non-executive directors are in a majority.
 Boards are often small particularly in small companies.

iii] European boards (Germanic): Can be regarded as ineffective because of the

presence of two tiers, with stakeholder representation on supervisory boards, but
preclude the face to face accountability of executives on the management board to
board members from outside the company.

iv] European boards (Latin): Can be regarded as ineffective because of the

following:

 Large representation of owners and related interests on boards,

 Little separation of ownership and control.

v] Asian boards: Can be regarded as ineffective because of the following:

 Presence of dominant family interests, or

 Presence of other majority shareholders,
 Absence of separation of ownership and control.
vi] Japanese boards: Can be regarded as ineffective because of the following reasons:

 Large nominal boards;

 Inappropriate board composition: Board composed of executives and former
executives of the company.
 The board performed largely ritualistic procedures to order

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  Board based on long established relationships.
NB: [3@=18 marks. Comment on the effectiveness warrants 1 mark and probable
reasons are awarded 2 marks]
PART B:
ARCELOR AND MITTAL MERGER, 2006
The merger of steel makers Arcelor and Mittal in 2006 produced the world’s largest steel
company, with 330,000 employees and forecast earnings of US$15.6 billion. Arcelor had
fought a long defensive battle against the hostile takeover, valued at around US$35 billion.
Arcelor was incorporated in Luxembourg and had adopted European governance
architecture, with a supervisory board, including employee representatives, and a
management board. Mittal was a family company with a tradition of growth through
acquisition, in which the founding family still played the dominant role. Arcelor had criticized
Mittal for its inadequate controls, because it had many Mittal family members and few
independent directors on its board. In the merged Arcelor Mittal company the Mittal family
retained 43.5 percent of the voting equity. The new board was eighteen strong, with
chairman Joseph Kinsch, who was previous chairman of Arcelor, president Lakshmi Mittal,
nine independent directors, plus employee representative directors and nominee directors to
represent the interests of significant shareholders. The General Management Board was
chaired by the CEO Roland Junck, with son of Lakshmi Mittal, Aditya Mittal as Chief Finance
Officer (CFO).
Required:
i] What is your opinion of this board structure? [8 marks]
ii] With eighteen members, is the board likely to prove a viable vehicle for strategic
discussion or active management supervision? [12 marks]
iii] Since the Mittal family retain 43.5% of the voting equity, can an institutional investor
make a significant contribution to the governance of the company? [12 marks]

SUGGESTED SOLUTION AND MARKING SCHEME

i] In my opinion, the board structure is not appropriate. This is due to the following:

 Employee representatives suggest that membership of the board is not based

on experience, skills and competence
 Existence of the management board
 Existence of many family members and few independent directors in the
board
 Existence of eighteen (18) members of the board
 Composition of the members which cast doubt on the membership criteria
[Any 4 points@2=8 marks]

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 ii] With eighteen members, the board can not be effective to allow strategic discussion
or active management. Actually, more time will be needed to arrive at board
consensus on certain issues something which suggests that board is ineffective

[12 marks]

iii] The fact that Mittal family retain 43.5% of the voting equity, an institutional investor
can not make contribution to the governance of the company. Mittal family will still
be majority in the board room. [12 marks]

Question 2 [CORPORATE SOCIAL RESPONSIBILITY]

PART A
Below is the modified table on stakeholders’ views of CSR as provided by Carroll (1995, p.
51).
Stakeholders views on CSR aspect
CSR component Owners Consumers Employees Community
CSR: Economics 1 4 2 3
CSR: Legal 3 2 1 4
CSR: Ethical 4 1 2 3
CSR: Philanthropic 3 4 2 1
Number in the cells indicate how particular stakeholder view significance of a particular form
of CSR (The ranking is 1 for highest and 4 for lowest).

Required:

For each stakeholder, provide any TWO (2) rationales for ranking of the respective CSR
components [16 marks]

SUGGESTED SOLUTION AND MARKING SCHEME

i] Owners
 More interested with profit
 Less interested with ethical issues as they might reduce profit attributed to
owners
ii] Consumers
 More interested with ethical issues as they might have implications in the
quality of products
 Less interested with economic and philanthropic issues as they might increase
the prices of products/goods
iii] Employees
 More interested in legal issues as they might have implications in work place

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  Relatively interested with the rest of the components as they are supposed to
abide with the organizational rules and regulations on the same

iv] Community
 More interested with philanthropic issues as they have direct implications on
their well-being
 Less concerned with legal issues as they might not aware of them.

[Each rationale@2=16 marks]

PART B
TUCHIMBE TWENDE COMPANY, IBINZAMATA, SHINYANGA, TANZANIA

TUCHIMBE TWENDE COMPANY Ltd (TUTWECO) is a Tanzanian registered company dealing

with exploration of minerals in Ibinzamata, Shinyanga. The Company embarked on a
prominent CSR programme. Together with national infrastructure support programmes, as
well as various NGOs and donor-funded projects, the company has been involved in capacity
building for effective service delivery and in numerous other initiatives, including small
business support. In accordance with the privatization agreement reached with the
Government of Tanzania (GoT), TUTWECO developed social and environmental
management plans, which were meant to facilitate and represent the company’s CSR
commitment. The social management plans were developed internally using the principles of
the sustainable livelihood approach, emphasizing a multi-stakeholder approach to defining a
development strategy for the nearby communities. The Company also put in place
responsible person who dedicated to CSR issues only and report directly to the Chief
Executive Officer (CEO). It is also noteworthy that TUTWECO published a comprehensive
report on its sustainable development performance in 2010.These initiatives were widely
commended; for instance, in 2011, TUTWECO won the Special Award in recognition of its
contribution to sustainable economic development.

However, though these CSR initiatives are commendable, they have not been able to
fundamentally introduce accountability and fairness into the development process.
TUTWECO’s decision-making processes have by definition been dominated by economic
incentives. Within the broader context of being private company and the accompanying
social costs, the CSR initiatives have played primarily an ameliorative role. Accountability
and fairness have not been their primary intention, nor have they been within their power.
For example, social policies, generally considered international best practice in this regard,

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insisted that two villages be relocated many years prior to the development of a new deep
mine in the area. However, in 2012, the Company withdrew from the area on account of the
declining price and the resulting drop in profitability of the mines. This withdrawal has made
the development of the new mine very unlikely, with the result that the resettlement was
probably pointless (though the development of the new mine is not ruled out and depends
on the future price). Even though the resettlement was undertaken with significant expense
and according to high social criteria, the long-term social costs incurred by the resettlement
are unaccounted for. Most especially, the fact that the life of the existing mines is limited (to
about 2020) means that the villagers will be without a stable income to sustain the new
villages, even though the mining company and donors have initiated development projects
aimed at decreasing villagers’ dependence on the mine. This example illustrates how CSR
policies and practices have little sway over the fundamental business decisions based on
profitability, which often have the most significant social impacts.

Required:
i] Briefly elaborate any FIVE (5) CSR issues addressed or to be addressed by
TUTWECO Ltd [12 marks]

ii] Which CSR wave is represented by the case above? Justify [10 marks]

iii] As CSR expert from the Department of Accounting, University of Dar es Salaam
Business School (UDBS), design CSR programme to be adopted by TUTWECO Ltd
[12 marks

SUGGESTED SOLUTION AND MARKING SCHEME

i] Five (5) Corporate Social Responsibility (CSR) issues addressed or to be addressed
by TUTWECO Ltd:
 Capacity building programs such as business support
 Social and environmental management plans
 Accountability programmes
 Fairness programmes such as resettlement plans to the communities
 Other non-mining income generating activities or programmes to the
communities
[@2.4=12 marks]
ii] Since the company has put in place responsible person who dedicated to CSR issues
only and report directly to the CEO, therefore, it is operating in the third wave [10
marks]
iii] CSR Programme should focus, among others, the following areas:
 Capacity building programs

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  Environmental protection
 Provision of social services such as health and education to the communities
 Income generating activities
 Fairness programmes such as resettlement plans
 Accountability programmes

[Any 5@2.4=12 marks]

%%%%%%%%%%%%%%%THANK YOU%%%%%%%%%%%%%%

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