HOMEWORK2

A/ Questions:

1. Why do corporate entities need a constitution ?

A corporate charter allows your company to: Pre-define the rights and obligations of
stakeholders, along with corporate policies and procedures. It gives you much more flexibility and
certainty in administration, and allows you to have more control as your company grows or
changes over time.
-> To define the right and dutirs of members and to pay down the rules about the way it is to be governed

2. What is the fundamental difference between a private company and a public

company?
Private companies are owned by founders, executive management, and private investors.
Public companies are owned by members of the public who purchase company stock as well as
personnel within companies (founders, managers, employees) who possess shares of company
stock as a result of the IPO and purchases.

3. Explain the difference between governance and management.

Corporate governance is the process by which companies are directed and controlled
Governance involves setting clear objectives, policies, and procedures, ensuring accountability
and taking decisions in the best interests of the organization and stakeholders. Management
involves day-to-day operations, setting goals, organizing resources, and overseeing operations to
achieve organizational objectives.

4. What are two aspects of the work of the Board of Directors that can provide a
paradox for the unitary Board ?
- Balancing Strategic Direction and Oversight
The board is responsible for setting the strategic direction of the organization, which requires a
forward-looking, visionary approach. At the same time, it also has the duty of oversight, involving
a more cautious, risk-managing perspective. These two roles can sometimes conflict
- Combining Support and Supervision of Management
Board members must maintain a supportive relationship with the executive management,
providing guidance, advice, and resources. Simultaneously, they must supervise and sometimes
challenge management, holding them accountable for their performance and decisions.

B/ Case study The Sunbeam Corporation

In 1996, Sunbeam, a US appliance manufacturer, was in serious financial trouble. Al Dunlap,
known as Chainsaw Al for his approach to cutting staff, was appointed to save the company. Over
the next two years, the business reported dramatically improved results. Investors chased after
the shares as the price rocketed. There was talk of a bid, which would make the investors, and
particularly Dunlap and his colleagues, a lot of money. But no bid came.

By 1998, some outside directors were uneasy and launched an inquiry. They did not like what
they found and Mr Dunlap was fired. The SEC subsequently charged him, other senior executives,
and the audit partner at Arthur Andersen, who had approved the accounts, with fraud. The SEC
alleged that,on his arrival, Mr Dunlap identified massive previous losses, which he wrote off,
giving him a 'cookiejar' to dip into to inflate subsequent results.Then he shipped out more goods
through his distribution channels than they could possibly sell,taking credit for the revenues, but
pushing forward the problem to the next financial year. Returnedgoods were overlooked. Other
efforts were made to boost sales artificially: record numbers of outdoor barbecues were reported
sold during the winter months.In 2001, Andersen agreed to pay US$110 million to the Sunbeam
shareholders in settlement of a lawsuit alleging that the auditors had failed to identify the
problem.

Discussion questions

1. Directors have a fiduciary duty to protect the interests of shareholders. In this case,
they apparently failed. Why?

Al Dunlap lacked oversight of the company's operations and finances.

2. When good results were posted and there was talk of a bid, the share price rocketed.
But some of the independent outside directors were uneasy and launched an inquiry,
which discovered a disastrous situation. How could this have been avoided?
- "Strengthen Internal Controls": Robust auditing can detect irregularities earlier, including more
rigorous checks on inventory and sales.

- "Enhanced Due Diligence by Directors": Question and scrutinize management's decisions and
data supporting these decisions.

- "Cultural Shift": Foster a corporate culture that values ethical behavior and transparent
reporting over short-term gains.

- "Independent Review": Regular, independent reviews of financial and operational practices can
provide an unbiased view of the company's health.

3. Can directors rely on the report of the independent outside auditors?

They can rely on the reports of independent external accountants but it takes greater vigilance,
better supervision, a stricter legal framework and sometimes, deeper financial expertise of the
directors to Ensure that financial reports accurately reflect the company's financial position