Governance Stakeholders and Corporate Social Reponsibility

STRATEGIC BUSINESS LEADER/ STRATEGIC BUSINESS ANALYSIS - Governance
Main capabilities – Basis for exam question

Evaluate the effectiveness of the governance and agency system of an
organisation and recognise the responsibility of the board or other agents
towards their stakeholders, including the organisation’s social AGENCY
responsibilities and the reporting implications. STAKEHOLDER ANALYSIS
Contents AND SOCIAL
1) Agency RESPONSIBILITY
2) Stakeholder analysis and organisational social
responsibility
3) Governance scope and approaches
4) Reporting to stakeholders GOVERNANCE
5) The board of directors
6) Public sector governance
REPORTING TO
STAKEHOLDERS
DETAILED SYLLABUS
GOVERNANCE SCOPE
AND APPROACHES
1
Definitions • Performance : – If paid, directors have a contractual obligation to perform as Potential Problems of directors acting as
An agency relationship: - is a contract under which one or more persons ( agreed ( if unpaid, no such obligation ) agents:
the principals ) engage another person ( the agent ) to perform some service on • Obedience: - Directors should act strictly in accordance with the principal’s • Directors may choose to pursue strategies
their behalf that involves delegating some decision–making authority to the instructions more beneficial for their own interest
agent • Skill and care: - Directors should act with such a degree of skill and care as rather than the entity’s
Fiduciary duties: - A duty imposed upon certain persons because of the may reasonably be expected from a person with such experience and • Directors will almost certainly have a
position of trust and confidence in which they stand in relation to another qualifications different attitude to risk, and risk
• Personal performance; - Directors should only delegate their assignments management, since it is not their own
Agency Theory and Corporate Governance: -Because of the separation of where they have no reason to believe that the person to whom the work is investment which they are risking
powers between ownership and control, it is the agency theory is necessary. delegated is not capable of proper performance • if management have only a small
Directors act as agents of the shareholders. Corporate Governance tries to • Avoid conflicts of interest: - E.g. should not sell his own property to the beneficial interest in the entity ( or even
ensure that agency responsibilities are fulfilled as agents by requiring entity, even though it may be at an independent, arm’s length valuation none at all ) then they may well pursue
disclosure and by suggesting performance-related rewards. The duty placed • Confidence; - Agents should not disclose confidential matters about the activities which improve short term
upon directors as agents is more onerous than generally arises under a principal, even after the agency agreement has ended results ( therefore improving their current
contractual or tort relationship It requires full disclosure of information held • Accounting for benefits: - Agents must account to the principal for any bonuses ) to the exclusion of more far–
by the fiduciary, a strict duty to account for any profits received as a result of undisclosed benefit which they receive as a result of their office as agent sighted strategies which would be of
the relationship, and a duty to avoid conflicts of interest
greater benefit to the entity in the longer
Fiduciary duties are owed to the entity, not to individual shareholders.
However, because ownership of an entity is necessarily separated from the term
Therefore, directors must exercise their powers for the proper purpose management, problems may result • Ultimately, shareholders have the right to
decide who shall ( and who shall not ) be
directors of their entity But this is, in
practical terms, very much a theoretical
Nature and
• Discuss the nature of the principal GOVERNANCE : Duties of Directors as agents power Generally shareholders neither
Implications have the dynamism nor organisation to
/ agent relationship in the context AGENCY effect such a change in the composition
of the board
of governance.[3] Overcoming the problem – The solution to
Learning
• Analyse the issues connected with Outcome Seperation of ownership the agency problem lies in the alignment of
interests ( goal congruence ). This includes
the separation of ownership and s and Control : introducing incentives designed to align
Problems and Solutions interests such as :
control over organisation activity.[ • profit related pay
• Share issue schemes, for instance on the
occasion of a management buy–out
• Share option schemes
But for all of these there is a natural tendency
for management to adopt creative accounting
to manipulate the profit figure upon which
these incentives are based
2
Corporate governance is the systems by which companies • Compare rules versus principles based approaches to OECD Principles of corporate governance
are controlled and directed. Compulsory for listed and governance and when they may be appropriate.[3] The Organisation of Economic Cooperation Development (OECD) has put
public interest companies, the objectives a corporate • Describe the objectives, content and limitations of, forward some principles of corporate governance. It is then up to countries
governance framework is to ensure that companies are run governance codes intended to apply to multiple national to implement detailed laws or codes to implement these principles.
well in the interests of their shareholders and the wider jurisdictions.[2] • The corporate governance framework should promote transparent and
community. It concerns matters such as: fair markets, and the efficient allocation of resources. It should be
o i) Organisation for economic cooperation and
• Responsibilities of directors consistent with the rule of law and support effective supervision and
development (OECD) Report (2004)
• The appropriate composition of the board of directors enforcement.
o ii) International corporate governance
• The necessity for good internal control • The corporate governance framework should protect and facilitate the
network (ICGN) Global Governance
• The necessity for an audit committee exercise of shareholders’ rights and ensure the equitable treatment of
Principles (2014)
• Relationships with the external auditors all shareholders, including minority and foreign shareholders. All
shareholders should have the opportunity to obtain effective redress
Approaches to Governance: for violation of their rights. [For example, all shareholders should
There are two approaches to formulating and applying have access to the same information at the same time.]
corporate governance codes (and indeed ethical codes): GOVERNANCE • The corporate governance framework should provide sound
Learning
(a) Rules based: The rules based, or compliance based, Outcome AND incentives throughout the investment chain and provide for stock
markets to function in a way that contributes to good corporate
approach is based on specific checks and punishments
s APPROACHES governance. [This recognises that many private investors now invest
or sanctions. Controls are implemented, perhaps in companies indirectly, through institutional investors such as
requiring employees to sign-off that they have investment trusts. So, for example, the principles state that
complied with the rules and for directors and, perhaps institutional investors acting in a fiduciary capacity should disclose
auditors to sign off on corporate governance. This is their corporate governance and voting policies with respect to their
the approach taken in the USA by the Sarbanes Oxley Scope and Approaches
investments, including the procedures that they have in place for
Act. deciding on the use of their voting rights.]
The rules-based approach allows organisations to The OECD • The corporate governance framework should also recognise the rights
design the checks it thinks are needed and can provide of all stakeholders, not just share-holders, and should encourage active
evidence that employees have complied with the rules.
Governance Codes Principles cooperation between the entities and stakeholders in creating wealth,
However, it is unlikely that the organisation can check jobs and sustainability of financially sound entities.
compliance for every decision, both because of the • The corporate governance framework should ensure that timely and
enormous bureaucracy that would be needed and The Corporate Governance Code sets out standards accurate disclosure is made on all material matters regarding the
because it is difficult to foresee every ethical dilemma. of good practice in relation to issues such as board corporation, including the financial situation, performance,
(b) Framework based: The framework based, or composition and development, remuneration, ownership, and governance of the company.
integrity based, approach sets out guiding principles, accountability and audit, and relations with • The corporate the corporate governance framework should ensure the
and creates a culture that promotes ethical sound shareholders. The main governance code documents strategic guidance of the entity, effective monitoring of management
behaviour. This approach is taken in the UK and other are: by the board and the board’s accountability to the entity and their
European countries. • The UK Corporate Governance Code shareholders. [This covers requirements relating to the appointment of
• Organisation for economic cooperation and board members, ethical behaviour by board members and the
The integrity-based approach is much more flexible but development (OECD) Report (2004) application of care and due diligence]
does require the organisation to extend more trust to its • International corporate governance network The OECD’s principles then have to be put into action by participating
employees that they have the moral discernment to ’do (ICGN) Global Governance Principles (2014) countries and it is up to each country to decide how best to do this.
the right thing’.
3
UK Corporate Governance Code Leadership Effectiveness
The OECD principles are put into effect in a variety of ways in • Every company should be headed by an effective board which • The board should have an appropriate balance of skills,
different countries, but the UK Corporate Governance Code can be is collectively responsible for the long- term success of the experience, independence and knowledge. In large companies
taken as an example of best practice for corporate governance using a company. NEDS should be at least 50% of the board; in small companies
unitary board approach. • There should be a clear division … between the running of the there should be at least 2 NEDS.
The code states that the purpose of corporate governance is to facilitate board and the executive responsibility for the running of the • New directors should be appointed by a Nomination Committee
effective entrepreneurial and prudent management that can deliver company’s business. No one individual should have unfettered to ensure a formal, rigorous and transparent procedure for their
long-term success of the company. It then goes on to list the main powers of decision. This means that the roles of CEO and appointment. The Nomination Committee consists of NEDs.
principles of the code: Main principles Chairman should not be performed by one person as that This provision is to prevent directors appointing their friends
• Leadership concentrates too much power in that person. and colleagues to the board and ensures that the best people for
• Effectiveness • The chairman is responsible for leadership of the board the job are considered and appointed.
• Accountability • Non-executive directors (NEDs) must be appointed to the board • All directors should be able to allocate sufficient time to
• Remuneration and they should constructively challenge and help develop company business.
• Relations with shareholders Comply or explain proposals on strategy. NEDs sit in at board meeting and have • There should be induction on joining the board and a programme
full voting rights but do not have day-to day executive or to update and refresh directors’ skills and knowledge.
The code has no force in law and is enforced on listed companies managerial responsibility. Their function is to monitor, advise • The board should be supplied in a timely manner with necessary
through the Stock Exchange. Listed companies are expected ‘‘comply and warn the executive directors. information.
or explain’’ and this approach is the trademark of corporate governance • The board should undertake a formal and rigorous annual
in the UK. Listed companies have to state that they have complied with evaluation of its own performance and that of its committees and
the code or else explain to shareholders why they haven’t. This allows
some flexibility and non-compliance might be acceptable in some
Introduction UK CORPORATE •
individual directors.
All directors should be submitted for re-election at regular
circumstances. and Main GOVERNANCE intervals
Principles
CODE Accountability
• The board should present a balanced and understandable
Relationship with shareholders assessment of the company’s position and prospects.
Remuneration
• The board is responsible for determining the … significant risks
One of the problems with achieving good corporate was encouraging • Levels of remuneration should be sufficient to attract,
…and should maintain sound risk management and internal
shareholders to take an active interest in the company. Too often they did retain and motivate directors of sufficient quality… but
not fully participate at AGMs and would wave through motions. This control systems
avoid paying more than is necessary.
• The board should establish formal and transparent arrangements
passive attitude might well have been encouraged by directors to move • A significant proportion of executive directors’
power towards them and away from members. for applying the corporate reporting, risk management and
remuneration should be structured so as to link rewards
The code therefore specifies: internal control principles, and for maintaining an appropriate
to corporate and individual performance. In other
• There should be a dialogue with shareholders based on the mutual relationship with the company’s auditor. This means that an
words, profit related pay is encouraged. Directors
understanding of objectives. The board as a whole has responsibility Audit Committee (NEDs again) should be established to liaise
should not receive high pay irrespective of company
for ensuring that a satisfactory dialogue with shareholders takes with both internal and external auditors. Before audit
performance.
committees, the finance director liaised with auditors, but this
place. • There should be a formal and transparent procedure for
• The board should use the AGM to communicate with investors and was not satisfactory because the finance director was often the
developing policy on executive remuneration and for
to encourage their participation. person responsible for accounting problems. Therefore auditors
fixing the remuneration packages of individual
were often reporting problems to the person who caused them.
directors. No director should be involved in deciding
The directors are responsible for establishing an internal control
his or her own remuneration. This means that a
system and must review the need for internal audit.
Remuneration Committee (NEDs) should be formed to
fix directors’ remuneration.
4
Most corporate governance problems arose because of the way boards There is only one board and it appoints a mix of executive and The boards are:
were structured and run. There were particular dangers where a non-executive directors. The executive directors look after the • A supervisory board: This is elected by the shareholders and is usually
company was headed by a charismatic CEO. The word ‘charismatic’ day-to-day management of the company (like the management composed of more experienced senior members, and employee
was often used instead of more accurate descriptions such as board in the two-tier system); the non-executive directors warn representatives. The supervisory board is led by a chairman and it
‘domineering’ or ‘bullying’. Often the CEO would ensure that the and advise (like the supervisory board in the two-tier system). supervises and advises the management board. The Supervisory board is
board was filled with directors who would offer little resistance to the However, all votes are taken by the single board with each particularly involved in the long-term decision making, and strategic
CEO’s wishes and the CEO was then able to get away with outrageous executive and non-executive director having a vote. planning of the business. It is also in charge of hiring and dismissing
decisions and, occasionally, robbery. members of the management board.
Two approaches have been taken to try to introduce some supervision • A management board: The management board will meet regularly
to the board’s activities: unitary boards and two-tier boards. In the Two – Tier and is in charge of the day-to-day management of the business. It is
Unitary
European Union, the corporate governance codes in eight countries Boards led by a CEO (chief executive officer). Its responsibilities are tactical
recommend a unitary-board system and in ten countries the codes Boards issues (short term decisions), the everyday management of the
recommend a dual-board system. In the remaining nine countries, a business’s transactions.
hybrid system applies and companies can choose between a one or two-
tier approach
Supervisory Board
Supervises the management board and long-term
Introduction strategic decisions
TYPES OF
BOARD Advantages and Disadvantages Information,
Approval,
STRUCTURES Warnings and
Infiormation, Controls
Advantages of Two-tier Boards
(Disadvantages of unitary Boards) reports,
Disadvantages of Two-tier Boards (Advantages of • Clear separation of roles rsesults
unitary Boards) • The supervisory board can include a
• Poor information flows (Clear information flows) wide range of stakeholders eg
• Confusion over power and roles (Power and roles workers’ representatives
more clarified) • Greater independence of discussion
• Slower decisions and potential stalemates (Faster and decision making Management board:
decisions and quicker resolutions) Tactical decisions, day-to-day management and
organisation.
5
Corporate governance is about protecting the interest of various stakeholders:

Scope"A narrativ e r eport that relates to fi nanci al statem ents that have been pr epared i n acc ordanc e wi th IFR Ss. M anagem ent c omm entary provides us ers with historical ex planations of the am ounts pr es ented i n the fi nanci al statements, s pecific ally the entity's fi nancial positi on, financial performance and c as h fl ows. It als o provi des c ommentary on an entity's pros pects and other i nformati on not pr esented in the financial statements . Managem ent c ommentary also serv es as a basis for
understanding m anagem ent's obj ectiv es and i tategies for achi eving thos e obj ectiv es."
Scope
Shareholders: - The basic shareholder rights, including the right to information and participation through the shareholder meeting in
The Practice Statement should be applied by entities that
key company decisions. This requires disclosure of control structures, such as different voting rights, including the use of information
present management commentary that relates to financial
technology at shareholder meetings, the procedures for approval of related party transactions and shareholder participation in decisions
statements prepared in accordance with IFRSs. It applies only
on executive remuneration.
to management commentary and not other information
Institutional investors, stock markets and other intermediaries: - This requires the need for sound economic incentives throughout presented in financial statements or broader financial reports.
the investment chain, with a particular focus on institutional investors acting in a fiduciary capacity. Including the need to disclose
and minimize conflicts of interest that may compromise the integrity of proxy advisors, analysts, brokers, rating agencies and others Management commentary is defined as:
that provide analysis and advice that is relevant to investors. "A narrative report that relates to financial statements that
Other stakeholders: - Corporate governance should encourage active co-operation between corporations and stakeholders and have been prepared in accordance with IFRSs. Management
underline the importance of recognising the rights of stakeholders established by law or through mutual agreements. It should also commentary provides users with historical explanations of
support stakeholders’ access to information on a timely and regular basis and their rights to obtain redress for violations of their rights. the amounts presented in the financial statements, specifically
the entity's financial position, financial performance and cash
flows. It also provides commentary on an entity's prospects
REPORTING and other information not presented in the financial
Responsibilities to statements. Management commentary also serves as a basis
Stakeholders Meaning and Scope for understanding management's objectives and its strategies
MANAGEMENT for achieving those objectives."
COMMENTARY
Integrated Reporting Framework and Framework
(SEE BELOW) Elements of MC Presentation Management commentary should provide users of financial
statements (existing and potential investors, lenders and
other creditors) with integrated information providing a
ELEMENT USER NEEDS context for the related financial statements, including the
The knowledge of the business in which an entity is engaged and the entity's resources and the claims against the entity and its
The nature of the business resources, and the transactions and other events that change
external environment in which it operates
Management's objectives and its them.
To assess the strategies adopted by the entity and the likelihood that those Management commentary should be consistent with the
strategies for meeting those
strategies will be successful in meeting management's stated objectives following principles:
objectives
A basis for determining the resources available to the entity as well as • Provide management's view of the entity's
obligations to transfer resources to others; the ability of the entity to performance, position and progress (including forward
The entity's most significant looking information)
generate long-term, sustainable net inflows of resources; and the risks to
resources, risks and relationships
which those resource-generating activities are exposed, both in the near • Supplement and complement information presented n
term and in the long term the financial statements (and possess the qualitative
The ability to understand whether an entity has delivered results in line characteristics described in the Conceptual
The results of operations and with expectations and, implicitly, how well management has understood Framework for Financial Reporting)
prospects the entity's market, executed its strategy and managed the entity's Presentation
resources, risks and relationships Management commentary should be clear and
The critical performance measures straightforward and be presented with a focus on the most
The ability to focus on the critical performance measures and indicators
and indicators that management uses important information in a manner intended to address the
that management uses to assess and manage the entity's performance
to evaluate the entity's performance principles described in the Practice Statement thos e obj ectiv es."
against stated objectives and strategies

against stated objectives
6
Scope"A narrativ e r eport that relates to fi nanci al statem ents that have been pr epared i n acc ordanc e wi th IFR Ss. M anagem ent c omm entary provides us ers with historical ex planations of the am ounts pr es ented i n the fi nanci al statements, s pecific ally the entity's fi nancial positi on, financial performance and c as h fl ows. It als o provi des c ommentary on an entity's pros pects and other i nformati on not pr esented in the financial statements . Managem ent Scope"A narrativ e r eport that relates to fi nanci al statem ents that have been pr epared i n acc ordanc e wi th IFR Ss. M anagem ent c omm entary provides us ers with historical ex planations of the am ounts pr es ented i n the fi nanci al statements, s pecific ally the entity's fi nancial Scope"A narrativ e r eport that relates to fi nanci al statem ents that have been pr epared i n acc ordanc e wi th IFR Ss. M anagem ent c omm entary provides us ers with historical ex planations of the am ounts pr es ented i n the fi nanci al statements, s pecific ally the entity's fi nancial positi on,
commentary also s erves as a basis for understandi ng manag ement's objec tives and it ategies for ac hievi ng those objectives." Scope"A narrativ e r eport that relates to fi nanci al statem ents that have been pr epared i n acc ordanc e wi th IFR Ss. M anagem ent c omm entary provides us ers with historical ex planations of the am ounts pr es ented i n the fi nanci al statements, s pecific ally the entity's fi nancial positi on, financial performance and c as h posi tion, financial perform anc e and cash flows . It also pr ovides comm entary on an enti ty's pr os pec ts and other inform ation not pres ented in the financial s tatem ents. Manag ement comm entary als o s erv es as a basis for understanding m anagem ent's obj ectiv es and itategies Scope"A narrativ e r eport that relates to fi nanci al statem ents that have been pr epared i n acc ordanc e wi th IFR Ss. M anagem ent c omm entary provides us ers with historical ex planations of the am ounts pr es ented i n the fi nanci al statements, s pecific ally the entity's fi nancial positi on, financi al performanc e and c as h fl ows. It als o provides c ommentary on an entity's prospects and other i nformation not pres ented i n the fi nanci al statements. M anagem ent c omm entary als o s erves as a basis for unders tandi ng managem ent's objec tives and it ategies for ac hieving thos e
flows. It als o provi des c ommentary on an entity's prospects and other i nformati on not pr es ented i n the fi nanci al statements . M anagem ent c ommentary als o s erves as a basis for understandi ng management's objec tives and it ategies for ac hieving those obj" financi al performanc e and c as h fl ows. It als o provides c ommentary on an entity's prospects and other i nformation not pres ente d i n the fi nanci al statements. M anagem ent c omm entary als o s erves as a basis for unders tandi ng managem ent's objec tives and it ategies for ac hieving
for achi evi ng thos e obj" obj"
those obj"
Sustainability Reporting - Introduction: - Global Reporting Initiative (GRI) – a ECONOMIC: - LABOUR PRACTICES AND HUMAN RIGHTS: -
In general, sustainability reporting is aimed at a wide, comprehensive set of social, • Economic Performance – DECENT WORK: - • Investment and Procurement
multistakeholder audience and forms an integral part of economic, environmental, and Buying and selling • Employment Practices
a company’s overall stakeholder engagement and governance indicators, including a • Market Presence – market • Labor/Management • Non-discrimination
communications strategies. In recent years, international sub-set on stakeholder engagement. share Relations • Freedom of Association and
reporting standards for business have begun to include The Global Reporting Initiative • Indirect Economic Impacts – • Occupational Health and Collective Bargaining
requirements for reporting on stakeholder engagement (GRI) provides a standardized set of job creation etc Safety • Abolition of Child Labor
activities and performance. In many cases companies indicators against which companies • Training and Education • Prevention of Forced and
will already be in compliance with these standards, or can measure their sustainability ENVIRIONMENT: - • Diversity and Equal Compulsory Labor
require only minimal modifications in how they measure performance. Indicators include the • Materials Opportunity • Complaints and Grievance
and report out. For others, new policies and procedures following topics: • Energy Practices
for stakeholder engagement and performance reporting • Economic • Water SOCIETY: - • Security Practices
will need to be put in place. Meeting such standards can • Environment • Biodiversity • Community • Indigenous Rights
benefit companies by helping them to access new • Labour Practices and Decent • Emissions, Effluents, and • Corruption
markets (for example, by meeting global vendor and Work PRODUCT
Waste • Public Policy
supplier requirements), secure eligibility for socially • Society • Products and Services RESPONSIBILITY: -
• Anti-Competitive Behavior
responsible investment (SRI) listings, and improve their • Human Rights • Compliance •
• Compliance Customer Health and Safety
standing compared with their competitors. Various • Product Responsibility • • Transport • Product and Service Labeling
reporting frameworks have been developed including: • Marketing Communications
• Global Reporting Initiative (GRI) • Customer Privacy
• Integrated Reporting Introduction
Global Reporting Initiative (GRI) • Compliance
• Management Commentary
Matters to consider
• Discuss the factors that determine REPORTING TO • Materiality – focusing in detail on the company’s
organisational policies on reporting to Learning Sustainability key economic, social, and environmental risks,
stakeholders, including stakeholder power STAKEHOLDERS
Objectives Reporting activities and impacts, and how they are being
and interests.[3] managed, rather than reporting many activities
• Assess the role and value of integrated superficially
reporting and evaluate the issues Companies that undertake sustainability reporting cite a number of benefits which vary • Stakeholder responsiveness – providing
concerning accounting for by country and sector, and include: information that responds to actual stakeholder
sustainability.[2] • Increased trust and support from key stakeholders (e.g. customers and local expectations and interests, rather than only what
• Advise on the the guiding principles, the communities) the business would like its stakeholders to know
• Improved brand and reputation (see Manila Water Company example) or “thinks” they want to know
typical content elements and the six
• Better relationships with governments and investors • Context – reporting information that is
capitals of an integrated report, and • Boost to staff morale and loyalty (staff are often cited as key audiences for reports) contextualized so that proper judgments can be
discuss the usefulness of this information • Enhanced ability to bounce back from reputational crises made as to their significance.
to stakeholders.[3]. • Attractiveness to socially responsible investors Benefits • Completeness – providing sufficient coverage of
• Examine how the audit of integrated • Opportunities to improve corporate systems and efficiency issues to enable stakeholders to draw their own
reports can provide adequate assurance of • Product and service innovation (as a result of better understanding of stakeholder conclusions about a company’s performance
the relevance and reliability of needs)
organisation reports to stakeholders.[2] • Added ability to differentiate in the marketplace
7
Meaning : - Integrated reporting is concerned with conveying a wide Meaning : -In 2013 the Integrated Financial capital: raised or generated from Debt, Equity, Retained earnings,
Grants
message on organisational performance. It is fundamentally concerned with Reporting Council (IIRC) introduced the
reporting on the value created by the organisation’s resources. Resources integrated reporting framework. It refers Manufactured capital - Non-current assets / PPEs bought or constructed –
are referred as capitals, and value is created or lost through the way in to an organisation’s resources as usually from financial capital
which capitals interact with one another. The aim of integrated reporting is “capitals”. Capitals are used to assess Intellectual capital – Knowledge based on intangibles such as knowledge,
to encourage a holistic view when assessing organisational performance value creation. Increases or decreases in patents, licences, systems and procedures
these capitals indicate level of value Human capital – People’s competences, capabilities and expertise and their
Rise of integrated reporting creation or lost over a period. Integrated motivations to innovate, including alignment, ability to understand, loyalties
• Increasing demand on stewardship and accountability of resources on reporting refers to SIX types of capital: and motivations
the part of management 1) Financial capital
• Traditional corporate reporting is mainly focused on financial Social and relationship capital – Institutions and the relationship within
2) Manufactured capital and between communities, groups and stakeholders, and the ability to share
performance which is only part of the story 3) Intellectual capital information to enhance individual and collective well being
4) Human capital
Short term vs Long term – integrated reporting forces management to 5) Social and relationship capital Natural capital – All renewable and non-renewable environmental
balance the organisation’s short-term objectives against longer -term plans, 6) Natural capital resources and processes that provide goods and services that support the past,
Producing a holistic view of the organisational performance will lead to current or future prosperity of an organisation. This includes air, water, land,
improvement management decision making, ensuring that decisions are not Value creation minerals and forests
taken in isolation Interaction – These capitals continually interact with another in creating and
“Capitals destroying value. For example decision to invest in IT system (intellectual)
Meaning and rise of integrated reporting would improve an entity’s manufactured capital while decreasing its
creation financial capital in form of cash resources
Learning objectives Integrated reporting

Principles of integrated reporting
Implications
➢ Explain the role of integrated Strategic focus and future orientation -
reporting in communicating • Organisational strategy with particular emphasis on how The IIRC identified
Stakeholder relationships - Interaction with value can be created over the short, medium term and long seven Guiding
strategy and strategic
various stakeholders to improve the transparency term Principles which
performance support the preparation
and accountability of organizational reporting • Significant risks and opportunities available to the
organization, with the associated detail of how such issues of an integrated report:
Materiality - Focus on matters likely to impact on 1) Strategic focus and
IT costs – Necessary upgrades of organisation’s ability to create value and showing can be reduced or exploited
• How current strategy has been shaped by past experiences, future orientation
systems and improving infrastructure how the organization intends to combat risks 2) Connectivity of
including Prospective legal and / or regulatory matters which
Conciseness – Should be concise and to the point information
Time staff / costs – Time to collect may impact on the organizations ability to achieve its
– avoid irrelevant information objectives 3) Stakeholder
and collate data, may affect morale Reliability and completeness - Information relationships
Connectivity of information
should be free from material error and complete 4) Materiality
Consultancy costs – Need for • Joining up the flow of information to allow to users to
supported by a sound system of reporting 5) Conciseness
external expert help, can be expensive understand how the resources are being used in the pursuit of
Consistency and comparability – Same type of 6) Reliability and
organizational strategic aims and how organization is
completeness
Disclosure – of sensitive, confidential information to be presented form period to period adapting to environmental changes
7) Consistency and
information – exposure to competition to allow easier comparison with other entities • Report on both positive and negative movements in capital
comparability
and reasons
8
CONSOLIDATION QUESTIONS. (Suggested solutions are provided at the end of the chapter)
1) State the problems and the solutions to the agency issue in corporate governance
2) Provide THREE examples of the typical role of an effective board
3) Explain the difference between a principle-based governance code and rule-based code
4) Explain the difference between a one-tier (unitary) and a two-tier board
5) State the basic components of a sound corporate governance code
6) Explain with an example the meaning of each of the Six capitals included in an integrated report
EXAM TYPE QUESTION (Suggested solutions are provided at the end of the text)
1. RAIL COMPANY – GETTING YOU THERE
Exhibit 1
Rail Co ‘Getting you there, on time, in comfort’
Our mission is to provide a high quality, efficient and costeffective rail service to all our passengers.
Our vision is to become the world leader in providing reliable, profitable and safe train passenger services in a climate which embraces new
technology and diversity of ideas.
Our board
The Rail Co board is responsible for the strategic direction of Rail Co. It is responsible for supervising the operational activities of the business
and providing leadership and strategic direction.
Our Chief Executive reports directly to the Minister for Transport on our leadership and long-term performance and success. The board
comprises:
• Henrik Kilde, non-executive chair – Appointed to the board in 2011
• John Rose, Chief Executive – Appointed to the board in 2002
• Helga Baum, Finance Director – Appointed to the board in 2006
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• Milo Strauss, Director of Projects & Infrastructure – Appointed to the board in 2012
• Filip Axis, non-executive director – Appointed to the board in 2009
• Felix Erikson, non-executive director – Appointed to the board in 2014
• Harvey Flood, non-executive director – Appointed to the board in 2015
• Salma Khan, non-executive director – Appointed to the board in 2010
• Kim Lun, non-executive director – Appointed to the board in 2012
• Anders Rosburg, non-executive director – Appointed to the board in 2016
Our executive committee
Operational management is delegated to members of our executive committee. The executive committee is chaired by the Chief Executive and
comprises the Finance Director, the Director of Projects and Infrastructure and five other executive managers:
Lara Cook, Passenger services director – Appointed in 2004

Jasper Edberg, Asset management director – Appointed in 2007
George Fill, Director of Safety and Engineering – Appointed in 2013
Tomas Kline, Director of IT – Appointed in 2012 Brenda Suter,
HR Director – Appointed in 2006
Our board committees

Our four board committees, made up of non-executive directors, assist the board with its responsibilities.
Safety, health and environment (SHE) committee

This committee monitors the integrity of the methods used to carry out SHE responsibilities. The committee evaluates whether policies and
strategies are adequate and effective taking into account relevant legislation and standards.
Audit and risk committee

This committee monitors the integrity of the financial reporting and the audit process and reviews the internal control systems including risk
management, regulation and compliance.
Remuneration committee
This committee is empowered under the articles of association of Rail Co to determine remuneration for directors. This responsibility reflects the
business aim to provide independence of the decision-making process for remuneration and incentive schemes.
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Nomination and corporate governance (NCG) committee

This committee reviews the size, structure and composition of the board and committees. The committee identifies and nominates candidates for
appointment to the board and ensures that appropriate succession planning is in place.
Rail Co Trust Board

The Rail Co Trust Board is an independent statutory body, with powers vested by the Government of Beeland in its members. The Trust Board
consists of ten members, all of whom are appointed by the Minister for Transport, for a fixed term of up to three years. Our board is accountable
to the Rail Co Trust Board.
The Trust Board is our supreme governing body which holds us to account for delivering what we promise. It sets us a range of performance
targets each year and holds the board to account for its effective and efficient use of the funds allocated to Rail Co by Government and by the
fare paying passengers. The board is also accountable to the Rail Co Trust Board for our health and safety performance.
Our Chief Executive is personally accountable to the Government for Rail Co’s stewardship of the public funding it receives.
You are a non-executive member and chairman of the nominations and corporate governance (NCG) committee. The recently
appointed chairman of the Rail Co Trust Board has requested that you provide him with information relating to the governance of Rail
Co and the roles and responsibilities of the non-executive directors.
Required:
You have been asked to prepare a briefing paper for the Rail Co Trust Board which:
a) Identifies and explains the agency relationship of the parties involved in Rail Co and discusses the rights and responsibilities of those
parties. (8 marks)
Professional skills marks are available for demonstrating communication skills in clarifying the agency relationships involved in Rail
Co. (2 marks)
b) Assesses the role and value of non-executive directors on the board of Rail Co, as a public sector company. (6 marks)
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Professional skills marks are available for demonstrating evaluation skills in assessing the role and value of non-executive directors in a
public sector environment. (2 marks)
2. DCS – LOUIS GOSSI
You are Louis Gossi, a management consultant leading a small team which has been commissioned to prepare a consultancy report for
the Data Communications Services (DCS) Company directors to help them plan for the next three years. You are a qualified accountant
and your assistant Bruce Sheldon and you have collected and analysed the following information about DCS Company to help you
prepare the consultancy report.
Exhibit 2 Transcript from interview held between you and Java Peraya, the CEO of DCS Company.
You : Thank you very much Mr Peraya for showing me around the offices and factory. I found your staff and their comments very
interesting.
First of all, could I ask you to tell me how you would describe how your company is structured and managed?
Java : I would describe DCS as fairly highly centralised. I suppose in ‘management speak’
we would describe the DCS management structure as a ‘functional bureaucracy’. We prefer not to allow too much managerial or
departmental autonomy, for their own good of course, to ensure that they act in the best interest of DCS and to avoid irresponsible
risk taking, which unfortunately has happened occasionally in the past.
We expect middle managers to respect and respond positively to senior management requests or directives and not to question these
unless they are very sure of their facts. This is probably a legacy from the pre-flotation era, where much of the strategic direction
was always decided by me and my closest senior directors, most of whom were my family and trusted friends.
You : Would you mind explaining how your company is directed by describing your corporate governance arrangements to me please?
Java : Yes I can – please look at this chart. Java hands you an extract of the organisational chart represented below:
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CEO and Chairman – Java Peraya
Marketing Production / IT Finance Director HR Director – Non-Executive

Director – Director – - Director –
Trish Hopkins
Jules Debrey Toy Norbury “Tosh” Mondal Asaf Pirelli
Java : Since 2006 DCS has been governed by a board of directors with me acting as CEO and chairman, giving me sufficient control to
effectively direct the company and take strong leadership over the board, encouraging debate and driving the agenda. The board
comprises a marketing director, Jules. He was my original sales manager employed by the company, who I have known a long time
now. We also have a production and IT director, Tony, who has been with the company for over 10 years. He has a strong
background in data communications hardware components. Tosh is our finance director. He joined the company just before the
company was listed on the national stock exchange. Trish Hopkins is our female HR director and we also benefit from an
independent non-executive member of the board. We were very fortunate to appoint Asaf because he is a very talented businessman
and also an executive director of one of our two largest suppliers. This means that he has a really good knowledge of our business
and of the data communications industry.
You : That is really useful background Mr Peraya. So what about standing governance committees which presumably report to the board?
Java : We have an audit committee constituted of three experienced network engineers who focus on and investigate internal control and
quality failures when they arise. To promote more independence, we have also appointed a non-executive director as chairman on
this committee who is a former compliance officer at an airport, whose background is in air traffic control and aviation regulation,
but she is also a telecommunications expert.
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You : What about a risk committee and do you have nominations or remunerations committees?
Java : DCS has no separate board appointed risk, remuneration or nominations committees. All strategic and long-term planning initiatives
are initiated and decided upon by the main board led by myself and, of course, our management structure and culture is such that
we embed risk management through having that close control over staff that I mentioned to you previously. As for salary, we
strongly believe that all board members should be on a fixed salary to encourage them to take a longer term perspective rather than
rewarding them with short-term performance bonuses.
As far as recruitment, remuneration and succession planning is concerned, I personally approve and manage all middle to senior
staff recruitment and staff promotions, so there is no need for formal induction processes for our directors or senior management.
You : Now that you are a listed company, how do you report to and engage with your shareholders, particularly institutional shareholders?
Java : DCS does not have special governance or reporting structures to engage with shareholders, including institutional shareholders, but
of course we do meet our minimum company law obligations in relation to statutory reporting to shareholders, shareholder
democracy, voting and other constitutional rights.
You : That was all very useful Mr Peraya, but what I would like now is more data on the overall performance of DCS and a copy of the
October board report, which I know was considering the strategic options facing DCS.
Java : Certainly, I will ask Tosh Mondal to send you our summarised integrated reporting data attached on a spreadsheet. I will also ask
the marketing director to send you the board report for October. You: Thank you very much Mr Peraya.
You are now reviewing the transcript of the interview you held with Java Peraya, the CEO of DCS Company and you identify some key
weaknesses relating to the governance of DCS Company which you want to include in the consultancy report.
Required:
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Explain the key weaknesses of the current governance structure of DCS Company since it became a public limited company,
recommending how they should be addressed. (12 marks)
Professional Skills marks are available for demonstrating scepticism skills in identifying key weaknesses from the information given
3. DCS COMPANY – HOI LUI
You are Hoi Lui, a management consultant leading a small team which has been commissioned to prepare a consultancy report for the Data
Communications Services (DCS) Company directors to help them plan for the next three years. DCS Company has two product areas. The
largest area is the manufacture of data communications components which it mainly sells to original equipment manufacturers (OEM). The
other smaller and less developed area is based on supply and support contracts for specialist IT management network systems, mainly to
domestic medium-sized enterprises. You are a qualified accountant and your colleagues are Danny Leman, a company researcher, and Freddie
Lithium who is a part-qualified finance professional. You and your team have collected and analysed the following information about DCS
Company to help you prepare the consultancy report.
Exhibit 3 Extracts of the integrated reporting data (2012–2015) from the finance director – Tosh Mondal
Financial performance: (all figures in $m)

Financial periods: 2015 2014 2013 2012
Sales revenue (domestic and international) 6·95 7·40 6·80 4·75
Cost of sales 4·97 4·85 4·25 2·62
Gross profit 1·98 2·55 2·55 2·13
Overhead expenses 1·12 1·51 1·41 1·30
Profit before tax and finance costs 0·86 1·04 1·14 0·83
Finance costs 0·69 0·38 0·37 0·14
Tax expense 0·02 0·06 0·08 0·15
Profit for the year 0·15 0·60 0·69 0·54
Other data: 2015 2014 2013 2012

Number of employees 127 135 143 150
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Staff turnover (%) 10% 7% 5% 4%
% of orders delivered late 10% 8% 7% 5%
Forward contract order book (number of orders) 2,500 3,750 4,150 3,505
Customer complaints as a percentage of total orders and existing contracts 3·4% 2·4% 2·0% 1·5%
Employee satisfaction survey score (100% max) 61% 65% 68% 72%
Investment in non-current manufacturing equipment as a percentage of
sales revenue 7% 8% 8% 10%
R&D expenditure as a percentage of sales revenue 3% 5% 5% 6%
Carbon emissions in kg per $1,000 sales revenue 80 75 65 60
Requirements:
From the information you have collated, draft a section of the consultancy report for the directors of DCS Company to include the
following: An evaluation of the overall performance of DCS Company between 2012 and 2015 from an integrated reporting
perspective.
(12 marks)
Professional Skills marks are available for demonstrating evaluation skills relating to DCS Company’s environment and
performance. (2 marks)
4. ZEMBABWE
After a recent financial crisis in the country of Zembabwe, there had been a number of high profile company failures and a general loss of
confidence in business. As a result, an updated corporate governance code was proposed, with changes to address these concerns.
Before the new code was published, there was a debate in Zembabwe society about whether corporate governance provisions should be made
rules-based, or remain principles-based as had been the case in the past. One elected legislator, Robert Chidza, whose constituency contained a
number of the companies that had failed with resulting rises in unemployment, argued strongly that many of the corporate governance failures
would not have happened if directors were legally accountable for compliance with corporate governance provisions. He said that ‘you can’t trust
the markets to punish bad practice’, saying that this was what had caused the problems in the first place. He said that Zembabwe should become a
rules-based jurisdiction because the current ‘comply or explain’ was ineffective as a means of controlling corporate governance.
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Mr Chidza was angered by the company failures in his constituency and believed that a lack of sound corporate governance contributed to the
failure of important companies and the jobs they supported. He said that he wanted the new code to make it more difficult for companies to fail.
The new code was then issued, under a principles-based approach. One added provision in the new Zembabwe code was to recommend a reduction
in the re-election period of all directors from three years to one year. The code also required that when seeking re-election, there should be
‘sufficient biographical details on each director to enable shareholders to take an informed decision’. The code explained that these measures were
‘in the interests of greater accountability’.
However, since the new code was proposed and issued, it has generated a lot of debate among legislators, especially those that are not entirely
familiar with corporate governance. Mr. Chidza has suggested that the Institute of Directors of Zembabwe should be approached to further clarify
some of the more contentious issues of the new code
Required:
As the current executive director of the Institute of Directors of Zembabwe, draft a report in which you should
a) Examine how sound corporate governance can make it more difficult for companies to fail in Zembabwe, clearly explaining how the
proposed new provisions for shorter re-election periods and biographical details might result in greater accountability
(8 marks)
Professional Skills marks are available for demonstrating evaluation skills relating to DCS Company’s environment and
performance. (2 marks)
b) Critically comment on the assertion by Robert Chidza that Zembabwe should become a rules-based jurisdiction because the current ‘comply
or explain’ approach is ineffective as a means of controlling corporate governance. (6 marks)
Professional Skills marks are available for demonstrating scepticism skills in identifying the shortcomings of the rules-based approach
from the information given (2 marks)
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Answers to consolidation questions
1) Problems and the solutions to the agency issue in corporate governance

Potential Problems of directors acting as agents:
• Directors may choose to pursue strategies more beneficial for their own interest rather than the entity’s
• Directors will almost certainly have a different attitude to risk, and risk management, since it is not their own investment which they are risking
• Director’s may pursue short term profits at the expense of long-tem growth
Overcoming the problem – The solution to the agency problem lies in the alignment of interests ( goal congruence ). This includes introducing
incentives designed to align interests such as :
• profit related pay
• Share issue schemes, for instance on the occasion of a management buy–out
• Share option schemes
But for all of these there is a natural tendency for management to adopt creative accounting to manipulate the profit figure upon which these incentives
are based
2) THREE examples of the typical role of an effective board

• Monitoring the effectiveness of the company’s governance practices and making changes as needed.
• Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.
• Aligning key executive and board remuneration with the longer- term interests of the company and its shareholders
3) Difference between a framework-based governance code and rule-based code

There are two approaches to formulating and applying corporate governance codes (and indeed ethical codes):
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(a) Rules based: The rules based, or compliance based, approach is based on specific checks and punishments or sanctions. Controls are implemented,
perhaps requiring employees to sign-off that they have complied with the rules and for directors and, perhaps auditors to sign off on corporate
governance. This is the approach taken in the USA by the Sarbanes Oxley Act.
The rules-based approach allows organisations to design the checks it thinks are needed and can provide evidence that employees have complied with
the rules. However, it is unlikely that the organisation can check compliance for every decision, both because of the enormous bureaucracy that would
be needed and because it is difficult to foresee every ethical dilemma.
(b) Framework based: The framework based, or integrity based, approach sets out guiding principles, and creates a culture that promotes ethical sound
behaviour. This approach is taken in the UK and other European countries.
The integrity-based approach is much more flexible but does require the organisation to extend more trust to its employees that they have the moral
discernment to ’do the right thing’.
4) Difference between a one-tier (unitary) and a two-tier board

Unitary Board
There is only one board and it appoints a mix of executive and non-executive directors. The executive directors look after the day-to-day
management of the company (like the management board in the two-tier system); the non-executive directors warn and advise (like the
supervisory board in the two-tier system). However, all votes are taken by the single board with each executive and non-executive director
having a vote.
Two-Tier Board
There are two boards:
• A supervisory board: This is elected by the shareholders and is usually composed of more experienced senior members, and employee
representatives. The supervisory board is led by a chairman and it supervises and advises the management board. The Supervisory board
is particularly involved in the long-term decision making, and strategic planning of the business. It is also in charge of hiring and dismissing
members of the management board.
• A management board: The management board will meet regularly and is in charge of the day-to-day management of the business. It is
led by a CEO (chief executive officer). Its responsibilities are tactical issues (short term decisions), the everyday management of the
business
5) Basic components of a sound corporate governance code
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a. Leadership – There should be an effective board led by a non-executive chairperson with a clear vision on how to provide
oversight
b. Effective Board – The board should have an appropriate balance of skills and should comprise more non-executive members.
The members should be subjected to annual performance evaluation. The Board may be supported by committees such as audit
and risk committees
c. Accountability – The board should present a balanced and understandable assessment of the financial and business performance
of the organisation
d. Remuneration – the remuneration should be sufficient, set based on a transparent policy. Most of the remuneration should be
attributed to performance
e. Relations with shareholders – There should be continuous dialogue with the shareholders. Meetings such as AGM’s should
properly take place in accordance with articles of the company
6) Six capitals included in an integrated report

a) Financial capital: raised or generated from Debt, Equity, Retained earnings, Grants
b) Manufactured capital - Non-current assets / PPEs bought or constructed – usually from financial capital
c) Intellectual capital – Knowledge based on intangibles such as knowledge, patents, licences, systems and procedures
d) Human capital – People’s competences, capabilities and expertise and their motivations to innovate, including alignment, ability to
understand, loyalties and motivations
e) Social and relationship capital – Institutions and the relationship within and between communities, groups and stakeholders, and the
ability to share information to enhance individual and collective well being
f) Natural capital – All renewable and non-renewable environmental resources and processes that provide goods and services that support
the past, current or future prosperity of an organisation. This includes air, water, land, minerals and forests
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Meaning – Purpose for which Goal – Intention behind the
• Discuss and critically assess • Ignored in practice mission • Shareholders - different
organization is formed in terms
• Usually done as a public Objective – Expression of goal in objectives, dividend
the concept of stakeholder of products and services requirements
relations exercise which it can be measured
power and interest using the Elements: • Full of generalisations • Management – Short-
• Done as an after- thought – post
Format term perspective – self
Mendelow model and apply • Purpose
S - Specific interest
this to strategy and • Strategy hoc
M - Measurable • Goal Congruence
• Policies and standards of • Not enough consultation/
governance. communication with other
A - Attainable (Departments, Levels)
behaviour R – Relevant / Realistic
• Evaluate the stakeholders’ • Values stakeholders
T – Time bound
roles, claims and interests in •
Format – Brief and distinctive • Rational Analysis – reasoning
an organisation and how they
Problems with mission Meaning and
T elements based on mission / strategy?
may conflict.[3] Economic • Bargaining
• Demands and Supply issues • Satisficing – win win
• Explain social responsibility • Inflation, Interest Levels
Meaning and Goals and Sources • Sequential Attention
and viewing the organisation • Tax Levels, Government • Prioritising
elements Mission Objectives
as a ‘corporate citizen’ in the Spending
And format • Business Cycle
Trade
context of governance.[2] Conflict• Fiscal Policy
offsand Monetary Process:
STAKEHOLDER ANALYSIS Policy
• Identify stakeholder group / individual
AND SOCIAL • Identify interest and extent of interest –
Learning RESPONSIBILITY low or high
Objectives • Identify power and extent of influence –
Process and classifications low or high – participate in decision
making?
Stakeholder management • Mapping
Meaning and broad types – Mendelow Mapping:
Classification and response:
Limitations o Key Players (High interest, High
MEANING - Any person or group that has a
VALUE power) – Should be
legitimate interest in the affairs of the entity – directly
or directly-. Their impact/interest is measured on the • Employee and customer loyalty engaged/consulted
basis of their power and influence. • Continuity and stability o Keep Satisfied (Low interest, High
• Responsibility towards customers and power) – Provide interest
BROAD TYPES OF STAKEHOLDER
suppliers • Too many – Difficult to map o Keep Informed (High interest, Low
GROUPS/INFLUENCE AND POWER
power) – Provide relevant
• INTERNAL (Management and Employees) • Conflicts – in interest and power
MEASURING VALUE information
• CONNECTED (Shareholders, Bankers, Customers • Response – may not always be easy o Minimal Effort ( Low interest, Low
and Suppliers) – The task or operating environment • Staff turnover
• Accident rates to determine power
• EXTERNAL (Central government, Local
authorities, Professional bodies, Pressure groups • Pollution measures, energy efficiency,
(NGO’S, Civil society) rate of stock-outs etc
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You’re a member of the Executive team of the Football Association of Zambia (FAZ). In relation to the performance of the senior national
football team
a) Identify FOUR other stakeholder groups relevant to FAZ
(i) For each group identify their interest and justify whether the interest would be low or high
(ii) For each group identify their power and justify whether the power would be low or high
b) Classify the stakeholders in accordance with Mendelow Mapping.
c) Recommend how each stake holder group should be managed by FAZ
5. JEVA PERAYA
Exhibit 6
Notes from the middle management focus group meeting
Having read the integrated reporting data and studying the transcript of the conversation you had with Java Peraya, you needed more
background information about some of the key issues which had come to your attention. You therefore invited a representative team of
middle managers to a focus group meeting and asked them key questions, from which the following comments were noted:
Quote 1 from a management accountant in the finance directorate

‘When undertaking capital investment appraisal we have a strict policy of evaluating investments or projects over a maximum of three
years and to ignore cash flows beyond that date, to ensure that any investment we make must pay back within that time period. This ensures
that we do not accept unviable projects.’
Quote 2 from an engineer in the network supply division:

‘What really annoys me is the fact that in 2011, the CEO and HR director introduced an annual staff survey. Although they promised
anonymity, the survey required us to give details of our age, ethnicity, length of service and the department in which we are employed. I
was called to a meeting last year by the production manager who implicitly threatened me and made comments such as ‘if you don’t like
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working here, why not look for another job?’ It was made very clear to me that this meeting was private and was to be kept confidential. I
was not permitted to discuss the existence or outcomes of these meetings with other members of staff, or there would be consequences.’
Quote 3 from a technician in the data communications components division:

‘I felt the staff satisfaction survey was designed in a way which dissuaded negative feedback and key issues known to be of concern to staff
obtained from the informal ‘grapevine’ were deliberately omitted from the survey questions. In addition, the way the results were presented
by managers, and the visual graphics used, seemed to play down the negative feedback and concentrated only on the positive factors. For
example, emphasis was made of how well staff regarded their own performance, and that of their team members, which seemed to have
more favourable feedback, compared with other questions about confidence in the leadership of the company. I didn’t think this presented
the true picture of our feelings.’
Quote 4 from a sales support engineer:

‘We are rushed off our feet. Due to key staff leaving, our sales areas are getting larger and it is difficult to get around to all our customers.
This means we have difficulty getting our orders in on time and are often late to appointments. Although sales productivity might be
improving, because fewer of us are covering a greater geographical area, customers are not as satisfied as they used to be and are making
more complaints.’
After this meeting you went back to your office and scheduled a meeting in the following week with Danny and Freddie, to start preparing the
consultancy report findings for DCS Company.
You have highlighted from your interview with Java Peraya and from your notes from the middle management focus group meeting,
that there are some key stakeholder management and engagement issues at DCS Company. You are now preparing working notes, with
relevant visual aids, which will form a key part of your presentation of the overall consultancy report.
Required:
a) Using appropriate stakeholder analysis, evaluate how the relative power and interests of the following three stakeholder groups and
the strategies for engaging with them should have changed after DCS Company became a public limited company. – Shareholders; –
Employees; – Lenders. (9 marks)
Professional Skills marks are available for analytical skills for assessing the relative power and interest and how to engage with these
stakeholders before and after flotation. (2 marks)
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b) Criticise the CEO’s and HR director’s ethical and professional behaviour relating to the design, conduct, and reporting of the staff
satisfaction survey. (5 marks)
Professional Skills marks are available for scepticism skills in identifying ethical and professional issues in the conduct of the survey and
communicating these criticisms to the client in a way that is appropriate. (2 marks)
6. CLYMBONE DISTRICT
Clymbone District is a large region with a rugged, beautiful coastline where rare birds have recently settled on undisturbed cliffs. Since mining
ceased 150 years ago, its main industries have been agriculture and fishing. However, today, many communities in Clymbone District suffer high
unemployment. Government initiatives for buildings through tourism have met with little success as the area has poor road networks, unsightly
derelict buildings and dirty beaches. Klyshape Explorations, a listed company, has a reputation for maximizing shareholder returns and has
discovered substantial tin reserves in Clymbone District. With new technology, mining could be profitable, provide jobs and boost the economy.
A number of interest and pressure groups have, however, been vocal in opposing the scheme.
Klyshape Explorations, after much lobbying, has just received government permission to undertake mining. It could face difficulties in proceeding
because of the likely activity of a group called Clymbone District Protection Alliance. This group includes wildlife protection representatives,
villagers worried about the potential increase in traffic congestion and noise, environmentalists, and anti-capitalism groups.
Required:
The government is not sure about the ethical and other social implications associated with this decision and how to balance the interests and power
between the different groups. Your name is Josh Lagoon and you are a business consultant who has been requested to draft a report in which
a) Evaluate the ethical issues that should have been considered by the government when granting permission for mining to go ahead. Explain
the conflict between the main stakeholder groups. (10 marks)
Professional Skills marks are available for evaluation skills in identifying ethical and professional issues in granting permission for
mining to go ahead (2 marks)
b) Using appropriate stakeholder analysis, evaluate how the relative power and interests of the different stakeholder groups and
the strategies for engaging with them in granting permission for mining to go ahead (9 marks)
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Professional Skills marks are available for analytical skills for assessing the relative power and interest and how to engage with these
stakeholders before and after flotation. (2 marks)
7. MINEB MUSEUM
The Mineb Museum (PM) was established in 1967 to house collection of art, textiles and metal ware for the nation. It remains in its original
building which is itself of architectural importance.
Funding and structure
The PM is currently 90% funded by direct grants from government. The rest of its income comes from a normal admission charge and from private
sponsorship of exhibitions. The direct funding from the government is based on number of factors but the number of heritage collections held by
the museum is a significant funding influence. Departments with heritage collections tend to be allocated a larger budget
There are five directors, 3 of which belong to collection sections. The position of Director of collections is an important position and enjoys many
privileges including a large office, a special section heads dining room and a dedicated personal assistant (PA) the heads of sections which have
heritage collections also hold the title of professor from the University of Zambia.
Appointment of new Director General and new proposals

The role of the Director General has been a part-time post. However, the funding changes introduced by the government and the need to produce
a strategy document, has spurred the Board of Trustees to appoint a full-time Director General from the private sector. The new Director General
was previously the CEO of a major chain of supermarkets. The new Director General has made the following proposals:
(1) Allocating budgets (from the following budgeting period) to sections based on visitor popularity. The most visited collections will receive the
most money.
(2) Removing the head of sections’ dining room and turning this into a restaurant for visitors. An increase in income from catering is also
proposed in the document and removing the head of section’s personal assistants
(3) All internal issues should remain confidential and should be dealt with by the Board
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(4) Increasing the display of exhibits. Only 10% of the museums’ collection is open to the public. The rest is held in storage. Only one
directorate has been designated for collections
(5) Increasing commercial income from selling posters, postcards and other souvenirs.
Reaction to the proposals
Employees have reacted furiously to the Director General’s suggestions. The idea of linking budgets to visitor numbers has been greeted with
dismay by the Director of Art and Architecture, commenting “it is absurd to compare art collections to fashion” Other directors have tried to lobby
members of the trustees to object the proposals, others have appeared on television criticizing the proposals.
Required:
(a) Using an appropriate model identify the existing culture at Mineb Museum (10 marks)
(b) The failure of the Director General’s strategy has been explained by one of the trustees as ‘a failure to understand our organisational culture;
the way we do things around here’.
Based on the existing culture identified in (a) above, assess the underlying organizational cultural issues that would explain the failure
of the Director General’s strategy at the national Museum. (10 marks)
(Total 20 marks)

a) FOUR other stakeholder groups relevant to FAZ
• Fans/supporters
• Ministry of Sport
• FIFA
• The players
b) Level of interest and power for each group
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Fans/supporters – Fans are interest in the entertainment provided by the team playing, particularly in the team performing relatively well
compared to other competitor national teams. Interest is high as they are emotionally involved in the performance of the national team.
However, their power is likely to be low as they do not participate in the decision-making process at FAZ. They may increase their influence
by lobbying through the press and other avenues, especially if they are formally organised as a club or entity
Ministry of Sport – The ministry is also interested in the performance of the team as a matter of national pride. The performance of FAZ
would be considered as a high priority in the assessment of success of sport in Zambia. For this reason, their interest may be considered as
being high. Additionally, the ministry is likely to be involved in the funding of FAZ and determining overall policies relating to sport.
Accordingly, their power would be relatively higher
FIFA – FIFA would be interested in the participation and organisation of football in the country. Whether the national team performs well or
not is of little consequence to FIFA – therefore the interest would be low. However, depending on the financial and other support given by
FIFA to FAZ, and especially that FIFA would stop government interfering in the operations of FAZ, FIFA’s power would be considered as
being relatively high
The players – The players are interested in FAZ as their employer that provides them with an opportunity to promote their careers globally.
For this reason, their interest would be considered high. However, their influence would be low as they do not participate in the decision-
making process.
Level interest
Low High
Low Quadrant A Quadrant B- Keep informed
Power /Influence
Fans and supporters
High Quadrant C – Keep satisfied Quadrant D – Key player

FIFA Ministry of Sport
27
c) Management of each stakeholder group
Fans/supporters – High interest / Low power – Keep informed

The fans would need to be kept informed about what is going in FAZ, especially if the performance is below expectations. Information such
as players available, preparations and strategies might be relevant to them
Ministry of Sport – High interest / High Power

Apart from accounting for any resources provided to it by the ministry, it will be important for FAZ to make sure that the ministry is closely
involved in all major decisions relating to the affairs of the national team
FIFA – Low interest / High Power

FIFA would be interested in the participation and organisation of football in the country. Whether the national team performs well or not is
of little consequence to FIFA – therefore the interest would be low. However, depending on the financial and other support given by FIFA to
FAZ, the power might be high, and also considering that FIFA is the overall regulator of football in the world. Accordingly, FAZ would need
to make sure that there is proper accountability with regard to any assistance provided and that the set policies and procedures are followed
The players – High interest / Low Power

The players would be interested in information relating to their chances of playing in games on a regular basis and the related levels of
compensation
28
Common features of CSR

Meaning: - A popular definition of corporate social responsibility (CSR) is: • Directors and managers have a legal duty to their company’s
‘the continuing commitment by business to behave ethically and contribute to • An integration of social concerns into business
operations shareholders to maximise shareholders’ wealth and not to society
economic development while improving the quality of life of the workforce
• Voluntary actions on behalf of the organisation at large
and their families as well as of the local community and society at large’.
CSR is concerned with the ways in which an organisation exceeds the • Operating in ways that exceed ethical, legal and • How do directors decide on which CSR projects money should
minimum obligations to stakeholders, specified through regulation and societal expectations be spent. Are they simply spending money on areas that are of
corporate governance. This includes considerations of how the conflicting • Making a positive difference to society interest to them?
demands of different stakeholders can be reconciled, particularly with regard
Examples CSR activities • Companies spending generously on CSR reduce their profits and
to non-contractual stakeholders such as the society at large. Although CSR is reduce the government’s tax income. If shareholders really want
not specifically defined • Making donations and supporting football teams
• Pay all workers well about the minimum legal to contribute more, they can make personal charitable donations
CSR and Ethics: wage to wherever they please out of their dividends.
CSR and ethical behaviour are not necessarily the same thing. You can be • Go further than required to reduce pollution and • Justification of CSR depends on the amounts spent on it. Some
ethical (honest and professional) without exceeding minimum its carbon foot-print can be justified. For example; providing child care facilities for
responsibilities. And you can be a person of questionable integrity and yet • Provide excellent health care for staff staff could be an important way to attract and retain good
make donations to worthy causes. • Provide child-minding for staff.
employees who might otherwise find it impossible to go out to
employment.
Integration into the strategic Meaning of CSR, Ethics
planning and development process: and CSR Common Features of CSR and Examples The corporate governance
Process arrangements determine whom the
• Select stance (See next) organisation is there to serve and how
• Consider and include in Mission, goals Difficulties / Disadvantages the purposes and priorities should be
and Objectives (Develop Stance) Corporate Social decided. The tendency to make
of CSR
• Environmental/Social audit to identify Responsibility organisations more visibly
factors
(CSR) CSR and Corporate Governance accountable to a wider range of
• Develop strategy stakeholders has placed a demand on
• Implement corporate governance to embrace
• Review and Monitor Short term shareholder interest Longer- term shareholder
interest (STSI) – Aims to CSR as part of its code. As stated
(STSI) – Aims to maximise
earlier, this has led to the need to
The extent to which an Meaning profitability in the short term – maximise profitability in the
integrate sustainable long- term
strictly obeying the minimum longer term – strictly obeying the
organisation recognises its success into corporate governance.
standards of the law minimum standards of the law
obligations to society and Sustainable success can be defined as
other stakeholders. This is Ethical stances / positions/ choices: the combination of the economic,
done by the organisation (Johnson, Scholes and Whittington): Shaper of society– environmental, and social
determining a particular • Short – term shareholder interest Ideologicaly driven and sees its performance of an organization that
ethical and social (STSI) vision as being the focus ofr its determines overall stakeholder value
• Longer-term shareholder interest Multiple stakeholder obligation (MSO)
responsibility stance – see actions. Financial and other and allows the organization to
(LTSI) – Takes the view that all organisations
next stakeholder’s interest
29 are succeed and prosper in the long term.
• Multiple stakeholder obligation (MSO) have a role to play in society and so they
secondary. must take account of all the stake holder’s
• Shaper of society
interests – have purpose beyond
profit/financial
a) Describe and assess the social and environmental impacts that economic activity can have (in terms of social and environmental ‘footprints’ and
environmental reporting).
b) Describe the main features of internal management systems for underpinning environmental and sustainability accounting including EMAS and ISO
14000.
8. DCS – ENVIRONMENTAL REPORTING
You are Hoi Lui, a management consultant leading a small team which has been commissioned to prepare a consultancy report for the Data
Communications Services (DCS) Company directors to help them plan for the next three years. DCS Company has two product areas. The
largest area is the manufacture of data communications components which it mainly sells to original equipment manufacturers (OEM). The
other smaller and less developed area is based on supply and support contracts for specialist IT management network systems, mainly to
domestic medium-sized enterprises. You are a qualified accountant and your colleagues are Danny Leman, a company researcher, and Freddie
Lithium who is a part-qualified finance professional. You and your team have collected and analysed the following information about DCS
Company to help you prepare the consultancy report.
Exhibit 3 Extracts of the integrated reporting data (2012–2015) from the finance director – Tosh Mondal
Financial performance: (all figures in $m)

Financial periods: 2015 2014 2013 2012
Sales revenue (domestic and international) 6·95 7·40 6·80 4·75
Cost of sales 4·97 4·85 4·25 2·62
30
Other data: 2015 2014 2013 2012
Number of employees 127 135 143 150
R&D expenditure as a percentage of sales revenue 3% 5% 5% 6%
Carbon emissions in kg per $1,000 sales revenue 80 75 65 60
You have noted from information you have gathered that DCS Company has an increasing carbon footprint, which it estimates in total, but is
failing to control adequately. As part of the consultancy report you are considering recommending to DCS Company that it commissions a
specialist environment and sustainability consultancy company to assess these issues at DCS Company.
Required:
Draft a concise section of the consultancy report which constructs the case for commissioning an environmental and sustainability
audit of DCS Company, from both a financial and environmental perspective, suggesting ways in which the consultants might assist
DCS Company managers to become more sustainable in the management of the DCS Company carbon footprint.
(5 marks)
Professional Skills marks are available for demonstrating commercial acumen in identifying how DCS Company could benefit from
the findings of the audit. (2 marks)

a) Social and environmental impacts that economic activity can have (in terms of social and environmental ‘footprints’ and environmental
reporting).
Whilst economic activity can create jobs and improve the availability of goods and services, it can often result in adverse social and
envirionmental consequences. This explains why most countries would demand for a social and environment impact assessment to be
undertaken before a company can be allowed to start operations. Economic activities such as tourism can generate social exchanges between
tourists and locals that may not include cultural understanding resulting in local traditions being lost.. Further, cChild labour and sex trade are
ongoing concerns resulting in certain economic activieis.
For manufacturing companies, adverse impacts include land clearing and loss of vegetation, habitat, biodiversity as well as increased pollution
in various forms (greenhouse gasses, fertilisers (nitrogen, phosphorus)
31
b) Main features of internal management systems for underpinning environmental and sustainability accounting including EMAS and ISO 14000.
Beyond ISO 14001 - EMAS as the premium environmental management tool EMAS is the most credible and robust environmental management
tool on the market, adding several elements on top of the requirements of the international standard for Environmental Management Systems EN
ISO 14001:2004 (Hereafter: ISO 14001).
What sets EMAS apart from ISO 14001? The ISO 14001 Environmental Management System requirements are an integral part of EMAS (Annex
II). However, EMAS takes into account additional elements to support organisations that continuously improve their environmental performance.
These additional elements are illustrated below
Main differences between EMAS and ISO 14001 Elements EMAS and ISO 14001
Criteria EMAS ISO 14001
GENERAL ASPECTS
Legal status European Regulation (EC) No 1221/2009 International, commercial standard under private law Participation
Participation Voluntary Voluntary
Geographical Outreach Globally applicable Globally applicable
Focus and objective Focus on continual improvement of environmental performance of the organisation Focus on continual improvement of the Environmental Management
System Planning Environmental aspects
PLANNING ASPECTS
Environmental aspects Comprehensive initial environmental review of the current status of activities, products and Requires only a procedure to identify environmental aspects • Initial
services review is recommended, but not required
Legal compliance Proof of full legal compliance is required Only commitment to comply with applicable legal requirements
No compliance audit
Employees involvement Active involvement of employees and their representatives Not required (ISO 14001 and EMAS both foresee training for
employees)
Suppliers and contractors Influence over suppliers and contractors is required Relevant procedures are communicated to suppliers and contractors
External Communication • Open dialogue with external stakeholders is required • Dialogue with external stakeholders not required
• External reporting is required on the basis of a regularly published environmental statement • External reporting is not required
CHECKING ASPECTS
External Communication • Open dialogue with external stakeholders is required • Dialogue with external stakeholders not required
• External reporting is required on the basis of a regularly published environmental statement • External reporting is not required
32
CHECKING ASPECTS
Internal Environmental • Environmental Management System audit Includes only the Environmental Management System audit of the
Auditing • Performance audit to evaluate environmental performance requirements of the standard
• Environmental compliance audit
Verifier/Auditor • Environmental verifiers are accredited/licensed and supervised by governmental bodies • Certification bodies are accredited through a national
• Independence of the environmental verifier is required Accreditation body
• Independence of the auditor is recommended
Audits • Inspection of documents and site visits to be carried out according to Regulation • No certification rules in standard (other standards for auditing and
• Check for improvement of environmental performance certification)
• Data from environmental statement needs to be validated • Check of Environmental Management System performance, but
no frequency specified or required
Derogations (partial • Extension of verification intervals from three to four years No derogations foreseen
exemption or relaxation) for • Updated environmental statement needs to be validated only every two years (instead of every
SMEs year)
• Environmental verifier takes into account special characteristics of SMEs
Official registration by Publicly accessible register records each organisation • Each registered organisation receives a No official register
authorities registration number
Logo Yes No
33
34

Governance Stakeholders and Corporate Social Reponsibility

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STRATEGIC BUSINESS LEADER/ STRATEGIC BUSINESS ANALYSIS - Governance

Main capabilities – Basis for exam question

Corporate governance is about protecting the interest of various stakeholders:

against stated objectives and strategies

Learning objectives Integrated reporting

1. RAIL COMPANY – GETTING YOU THERE

Lara Cook, Passenger services director – Appointed in 2004

Our board committees

Safety, health and environment (SHE) committee

Audit and risk committee

Nomination and corporate governance (NCG) committee

Rail Co Trust Board

2. DCS – LOUIS GOSSI

CEO and Chairman – Java Peraya

Marketing Production / IT Finance Director HR Director – Non-Executive

3. DCS COMPANY – HOI LUI

Financial performance: (all figures in $m)

Other data: 2015 2014 2013 2012

Answers to consolidation questions

1) Problems and the solutions to the agency issue in corporate governance

2) THREE examples of the typical role of an effective board

3) Difference between a framework-based governance code and rule-based code

4) Difference between a one-tier (unitary) and a two-tier board

5) Basic components of a sound corporate governance code

6) Six capitals included in an integrated report

Notes from the middle management focus group meeting

Quote 1 from a management accountant in the finance directorate

Quote 2 from an engineer in the network supply division:

Quote 3 from a technician in the data communications components division:

Quote 4 from a sales support engineer:

Appointment of new Director General and new proposals

Answers to consolidation questions

b) Level of interest and power for each group

Fans and supporters

High Quadrant C – Keep satisfied Quadrant D – Key player

c) Management of each stakeholder group

Fans/supporters – High interest / Low power – Keep informed

Ministry of Sport – High interest / High Power

FIFA – Low interest / High Power

The players – High interest / Low Power

Common features of CSR

8. DCS – ENVIRONMENTAL REPORTING

Financial performance: (all figures in $m)

Answers to consolidation questions

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