AUE2602-Graded-Questions-And Answers. Must Have.

AUE2602-Graded-Questions-And Answers. Must Have. 1 TOPIC 1: CORPORATE GOVERNANCE AND STATUTORY MATTERS 2.9 Requirements of sound corporate governance pertaining to board of directors and board committees (25 Marks-34 Minutes) Scenario The list of senior executives and officers of Bevington (Pty) Ltd, a large manufacturer of children’s clothing, is as follows: 1.Virat Amla - Chairman and non-executive director 2.Frans Klewsner - Deputy chairman and chief executive officer 3.Noddy Nkwe - Financial director B.com 4.Mary Smith** - Human resource director B.A 5.Marshall Gibbs** - Production director B.Sc 6.Mills Ndou*** - Marketing director (formally a CA(SA) before moving into marketing). 7.Eric Hougaard - Non-executive director (former production manager at Bevington (Pty) Ltd). 8.Victor Botha* - Company Secretary C.I.S 9.Ashley Willemse* - Chief audit executive CA(SA) 10.Russell Brent - Independent non-executive director (Practicing chartered accountant and registered auditor) 11.Serena Court - Independent non-executive director and fashion editor of a national magazine B.A (journ) 12.Bongi Zulu - Independent non-executive director and chairwoman of her own toy company Playme (Pty) Ltd 13.Chris Eubank - Independent non-executive director and retired businessman *Victor Botha and Ashley Willemse are not directors. **These directors have a limited understanding of integrated reporting and related processes and controls. ***Mills Ndou has a sound Knowledge of integrated reporting and related processes and controls as he has maintained his interest therein. The board considers sound corporate governance to be important and wishes to follow the recommendations of King IV. In view of this, it has decided to appoint an audit committee as the company is required to have its AFS externally audited by virtue of its public interest score. Required Qa) Identify the factors the board should consider to determine the appropriate number of members of the board. (4) Ans:(a) Factors to consider to determine the appropriate number of members of the board: 1. The collective skills, knowledge and experience needed for the board to meet its responsibilities. (1½) 2. The appropriate mix of executive, non-executive and independent non-executive directors. (1½) 3. The need to have sufficient qualified members to serve on board committees. (1½) 4. The need to secure a quorum at meetings. (1½) 5. Regulatory requirements, e.g. JSE regulations state that a listed company must appoint a financial director. (1½) 6. Diversity targets (experience, age, race and gender). (1½) Qb) Comment on the composition of the Board of Bevington (Pty) Ltd in terms of recommendations of King IV. (8) Ans:(b) Composition of the board: 1. The roles of chair and chief executive officer are held by different people, which is in accordance with principle 7. (1½) 2. However, the chair, Virat Amla, does not appear to be an independent, non-executive director as recommended by the principle 7.31. (1½) 3. It appears that no lead independent non-executive director has been appointed by the board. One of the functions of a “lead independent, non-executive director” is to act as chair in situations where the chair’s independence is questionable or impaired (the chair is conflicted) (principle 7.32). (1½) 4 4. The fact that the deputy chair is also the senior executive officer is not in accordance with the recommendations of the King IV Report. 4.1 The roles of CEO and chair should be independent of each other, but whenever the deputy chair acts as chair, this requirement will not be met (principle 7.34). (1½) 4.1 It will present a problem with the succession plan as the deputy chair should not be appointed chair until three years have elapsed since his or her resignation as CEO (principle 7.34). (1½) 5. There is an appropriate mix of executive and non-executive directors on the board, particularly in view of the fact that non-executive directors are in the majority and four of the six non-executive directors are independent non-executive directors (principle 7.8). (1½) 6. Although he should not be the deputy chair, the fact that the CEO is on the board complies with the King IV recommendations that the CEO be appointed to the board. King IV also requires that “at least one other executive director be appointed to the board”. This requirement has been satisfied (principle 7.9). (1½) 7. Judging by the experience, occupations and qualifications, gender and race of the directors there is enough collective skill, knowledge and experience for the board to meet its responsibilities and satisfy diversity targets (principle 7.7). (1½) 8. There also appears to be an appropriate number of directors to be an effective board but some difficulty may arise with satisfying committee requirements, e.g. audit. (1½) 2 Qc) Indicate in terms of recommendations of King IV giving a brief reason, whether each of the above 1.Is eligible for appointment to the audit committee 2.Should normally attend meetings of the audit committee. (10) Ans:(c) Composition of the audit committee: Name Eligible Reason Attend meetings Virat Amla No (½) Chair of the board and not independent (½) May attend by invitation (½) Frans Klewsner No (½) Executive director (½) No (½) Noddy Nkwe No (½) Executive director (½) No, but may be invited for specific matters on the agenda (½) Mary Smith No (½) Executive director (Note 1) (½) Not normally (½) Marshall Gibbs No (½) Executive director (Note 1) Not normally (½) Mills Ndou No (½) Executive director (Note 1) Not normally (½) Eric Hougaard No (½) Not independent non-executive director (½) Not normally (½) Victor Botha No (½) Not a director - company secretary (½) Yes, to record minutes (½) Ashley Willemse No (½) Not a director - chief audit executive (½) May attend by invitation (½) Russell Brent Yes (½) Independent non-executive director (½) Only if appointed (½) Serena Court Yes (½) Independent non-executive director (½) Only if appointed (½) Bongi Zulu Yes (½) Independent non-executive director (½) Only if appointed (½) Chris Eubank Yes (½) Independent non-executive director (½) Only if appointed (½) Note 1: The presence or lack of financial expertise of these directors does not affect their eligibility, it is the fact that they are executive directors. Qd) Indicate who you would recommend be appointed to the audit committee, assuming that it will consist of three members. Justify your choice. (6) Ans: (d) Composition of the audit committee: Of the thirteen individuals listed, only four are eligible for appointment as none of the others satisfies the basic requirements to be appointed: independent and non-executive and a director. (1½) Of the four available candidates: 1. Russell Brent satisfies the basic requirements and is likely to have the necessary expertise, skills, competency and financial literacy to fulfil his function on the audit committee and ask probing questions about the company’s financial reporting and related processes, risks and internal controls. I would recommend his appointment. (1½) 2 I would not recommend Serena Court as it is very unlikely that she would have the necessary knowledge of financial reporting to fulfil the role and duties of an audit committee member. In all likelihood she sits on the board to provide fashion insights to the children’s clothing market. (1½) 3 This leaves just Bongi Zulu and Chris Eubank. They both clearly have business experience and probably some understanding of the necessity for and role of an audit committee. (1½) 4 However, there is no guarantee that simply because she is the chair of a company that Bongi Zulu will have the necessary financial expertise or knowledge of integrated reporting to make a meaningful contribution. (1½) 5 Likewise Chris Eubank is retired and there have been major developments in financial reporting matters. Will he be up to date? Furthermore being a “business” man does not equate to having the necessary expertise on reporting matters. He may be experienced in other aspects of business. (1½) 6 With regard to the necessary expertise required by the audit committee, King IV requires a collective ability. Even though Russell Brent appears to have the ability, he cannot be a “one man band”. The other members must be able to contribute to the audit committee in meeting its responsibility. (1½) 7 I would therefore recommend that one of either Bongi Zulu or Chris Eubank be appointed (preferably Bongi Zulu on the evidence available) and that the company appoint an additional independent non-executive director who has the specific expertise needed to give the committee the collective knowledge, skills and competency it requires. (1½)