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Msf 501 Corporate Governance And Ethics Town Campus Question Paper
Msf 501 Corporate Governance And Ethics Town Campus
Course:Masters Of Science In Commerce
Institution: Kca University question papers
Exam Year:2014
UNIVERSITY EXAMINATIONS: 2013/2014
EXAMINATION FOR THE MASTERS OF SCIENCE (MSC) IN COMMERCE
(FINANCE AND INVESTMENT)
MSF 501 CORPORATE GOVERNANCE AND ETHICS TOWN CAMPUS
DATE: AUGUST, 2014
TIME: 3 HOURS
INSTRUCTIONS: Answer Question One and Any Other Three Questions
QUESTION ONE (31 MARKS)
TECHNOSAVVY INVESTMENTS PLC
Technosavvy Investments Plc was incorporated in 2000 by the government of Sakaja to spearhead its
investments in sectors that had hitherto not been able to attract adequate private investments, including
oil exploration and extraction; salt and sand mining; gemstone extraction; animal conservancy; and
water sports. Over the next ten years, the government would invest colossal sums of money that turned
the once moribund sectors into vibrant money-generating ventures with huge multiplier effects on
many sectors of the economy. For instance, the National Statistics bureau has reported cumulative
marginal employment figures of about 4 million over the period 2002-2012, all attributable to the
investments. This has effectively reduced national unemployment among the college graduates
population by about 15 percent over the same period. Other recorded statistics indicate a reduction of
about 35 percent of unemployment amount high school leavers and 40 percent among the unskilled
working population.
Arising from its meteoric performance over relatively short period of time, Technosavvy Investments
Plc is considered an indispensable player in the country’s efforts towards attaining the Millennium
Development Goals in 2015, and has attracted the attention of foreign investors in all its affiliate
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companies. The government is however, alive to the dynamics of the business environment, and the
fact that the sterling performance that has been realized thus far may not be sustained unless there is
deliberate effort to put in place a proper code of conduct and framework to facilitate good corporate
governance. Currently, the country is lagging behind in terms of adaptation of the OECD Code of
Ethics on corporate governance, and although all the affiliate companies formed under the
Technosavvy Investments Plc have Boards of Directors in place, they appear to rely mainly on good
judgment and intuition in governing the firms. Although there is not an iota of evidence so far to point
to any advertent corporate malfeasance, the government is worried (and rightly so) that governance is
too important a function to be left to the munificence of good men and women. There is therefore, a
deliberate effort on the part of government to engender good corporate governance in the economy as a
way of ensuring that the gains so far made are sustained.
Meanwhile, the organizations must continue with their operations even as the government continues to
grapple with the most viable approaches to corporate governance that would take into consideration the
idiosyncrasies of this multi-ethnic, culturally diverse society. It is the fact that firms are being
governed in the absence of reference framework and binding code of conduct that is of great concern to
the government and corporate governance experts. To this end, practitioners and scholars in this vital
field have taken it upon themselves to observe the ongoing corporate governance practices and, where
necessary, to conduct focused research and record the findings as a way of justifying the need for
corporate governance framework and a proper code of conduct for directors. The findings of the
research endeavors have now been made public. Some of aspects of board operations appear to be just
good while others require to be spruced up a little to bring them to par with international best practice.
In the oil exploration and extraction firms, there is a high presence of expatriates, who apparently have
previous experience and exposure in different jurisdictions and markets. Their specific industry
knowledge and experience are obviously invaluable in navigating the complex world of oil marketing.
The superior knowledge and skills possessed by the expatriates have ensured that all the Chief
Executive Officer and Board positions remain their preserve for the last ten years, and things appear
destined to remain so into the foreseeable future.
The corporate governance characteristics in the animal conservancy sector appear to strictly follow the
“exotic model” which postulates that locals have no use of wild animals other than hunting them down
for meat, and killing those that pose danger to their domestic animals. This school of thought gives no
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room for locals to participate in executive decision making. Their domain is largely in menial duties
like roving snares, assisting in animal relocation, and physically identifying abandoned infants to be
taken into safe custody. The boards of the animal conservancy firms largely comprise executive
employees within the firms, with few exceptions where spouses or grown children of the directors are
invited to the boards. The script is largely the same in other sectors. The gemstone sector brings on
board two types of directors: 1) senior directors who are mainly whites with voting powers; and 2)
junior directors, who are mainly locals with no voting powers in board meetings. This sector draws the
bulk of its casual employees from local communities, with a big presence of “expatriates” working in
the grading and marketing divisions. A key trait of this sector is director and CEO duality and
longevity. All the companies in this sector have had only one CEO who also doubles as Chairman with
immense powers to hire and fire other board members and chief managers.
Corporate governance characteristics in the salt and sand mining sector are even more unique given the
fact that most of the extraction workers were unskilled, with minimal negotiation and marketing
acumen. This is the only sector where expatriates have not taken a keen interest on the boards, leaving
them to be populated by the industry players. Naturally, the boards are full of illiterate or at best semi-
illiterate locals whose only concern is to protect their natural heritage from the thieving foreigners. The
key players in this sector are equally suspicious of educated elites who they accuse of adopting
dangerous western ways of doing business. The sector is currently a key employer of unskilled locals,
but has great potential to market its products beyond its national borders. The current remuneration
structures at the board level are so arbitrary, and largely depend on the acreage of land with sand and
salt deposits that each board member controls. In fact, the member with the largest land acreage is
entitled to the Chairman’s position. The board member selection criterion is held sacrosanct and so
well understood to all the industry players that no one has dared to interrogate its appropriateness in a
dynamic business environment.
As society takes a more keen interest in corporate governance, especially after the high profile
corporate failures that claimed the lives of such corporate giants as Enron Corporation, WorldCom,
Pramalat, China Aviation and Royal Dutch Shell among others, scholars and practitioners have their
jobs well cut out. There is need for deeper research into corporate failures with a view to unraveling its
underlying causes. Hopefully, this blemish in social advancement will be brought to an end.
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REQUIRED:
(a)
Identify and critically discuss the corporate governance concerns at Technosavvy Investments
Plc.
(b)
(21 Marks)
Suggest practical remedies for the concerns in (a) above (10 Marks)
QUESTION TWO: (23 MARKS)
(a) Briefly explain the relevance of “ownership identity” in corporate governance
(b) “Firm ownership concentration is a critical aspect of corporate governance.” Clearly distinguish
(9 Marks)
between “managerialist” and “oversight” approaches that have been used to analyze the effects
of ownership concentration on firm performance.
(14 Marks)
QUESTION THREE: (23 MARKS)
(a) Briefly explain the concept of “Transfer Pricing” as used in international business. (5 Marks)
(b) XY Limited, a Kenyan subsidiary of XYZ Plc, a UK based oil and gas giant requires
additional financing of about Kenya Shillings 1,000,000,000 only, to strengthen its local
operations. Rather than approach Barclays Bank of Kenya, its Kenyan bankers, for a loan at a
cost of 15% p.a., it uses XYZ Plc to negotiate with Barclays Bank Plc on its behalf at a
concessionary cost of 5%. The full loan is then channeled to XY Limited through XYZ Plc.
Curiously, XY Limited discloses in its books of accounts that the loan was obtained at 15%.
Required:
i)
Demonstrate the tax loss to Kenya arising from the transaction described above (note:
prevailing corporation tax rate for foreign companies is 37.5%)
ii)
(10 Marks)
Critically explain the motivation and implication of the transaction described above.
(8 Marks)
QUESTION FOUR: (23 MARKS)
(a)
“Whenever the interests of agents significantly diverge from those of the principals, managers
often make sub-optimal decisions.” Comment on this statement, and critically explain any three
such sub-optimal decisions and their implications for firm performance.
(b)
(17 Marks)
Briefly explain any three mechanisms that principals may use in an attempt to remedy sub-
optimal decision making by agents.
(6 Marks)
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QUESTION FIVE: (23 MARKS)
(a)
Some scholars have argued that the Chief Executive Officer of a company is an employee and
therefore, has no business participating in the Board of Directors’ deliberations. Others have,
however supported such participation. Articulate your personal position on this important
matter of corporate governance.
(b)
(15 Marks)
The modern “Board of Directors” is required to take on more hands-on role in the affairs of the
company in order to forestall corporate malfeasance. Is this requirement consistent with the
principal of separation of responsibilities between the “Board” and “Management”? (8 Marks)
QUESTION SIX: (23 MARKS)
(a) Briefly explain signs of distress in a company at the shareholders’ level.
(b) Discuss the factors that you would consider as a potential investor in a diffusely owned
company
(12 Marks)
(11 Marks)
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