PwCs Academy

Governance, Risk and Ethics

Question 1
Sixstreams Water provides tap water and sewage services for about 10% of the population of the
European country in which it is based. Internationally it provides consultancy services to water
suppliers in developing countries. It is the monopoly supplier in the region in which it operates
and consequently is heavily regulated by the national government. It has been listed on a
European stock exchange for about 20 years. Perceived by investors as a low risk, low return
investment its share price and the volume of trading in its shares increased significantly following
news that a water supplier, TAP Water, based in East Asia was considering making a takeover
offer for Sixstreams Water.
On news of the takeover regional politicians voiced concerns about a business that was of such
importance to the region being controlled by a foreign company. However these concerns did not
prevent the takeover of Sixstreams by TAP Water going ahead some weeks later.
On acquiring Sixstreams Water, TAP Water have retained all the executive director s but have
replaced the non-executive directors with three new non-executives (NEDs) who are all executive
directors of the holding company TAP Water.
Required
a. Explain the competing stakeholder claims of short-term shareholders, long-term investors
and customers of Sixstreams Water and recommend how conflicts between these claims
should be resolved.
(12 marks)
b. Briefly describe the role of non-executive directors and assess the decision to replace the
NEDs at Sixstreams.
(5 marks)
c. Compare and contrast the rules-based approach used to regulate Sixstreams Waters
operational activities with the principles-based approach used for corporate governance
of the company.
(8 marks)
(Total = 25 marks)

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Question 2
Felicia Galka works as the risk manager for a large European listed company which operates
public transport (rail, bus and ferries) in and between several European countries. She recently
attended an international conference on risk management. Most of the conference delegates were
risk managers but found that they came from a wide range of backgrounds and that their roles
differed widely from one organisation to another.
Practically all the delegates attended the opening session on reputation risk, which was described
as the risk of risks.
Felecia also attended a session on probity risk and another on derivative risk. These had both been
recent issues for her employer as it had tendered bids to various governments awarding operating
licences for train and ferry routes and had been considering forward contracts to manage the risks
of fuel price increases.
While networking with other conference delegates the main focus of discussion was on the
difficulty of getting anybody else in their organisations to take risk seriously. A common them e
was that the risk managers were perceived as Health and Safety Police.
Required
a. Define and explain the sources and impacts of the three common business risks discussed
at the conference seminars: reputation risk, probity risk and derivatives risk.
(12 marks)
b. Explain and assess the role of the risk manager in identifying and monitoring risk.
(8 marks)
c. Explain the importance of risk awareness at all levels in an organisation.

(5 marks)
(Total = 25 marks)

P1 Progress Test 1

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Question 3
Company details
Friar Holdings plc is a company based on the south coast of England specialising mainly in
property management, but with a large subsidiary, Renton Marine, specialising in boatbuilding.
Friar Holdings was floated on the Stock Exchange last year, and as a result its shareholding
pattern changed, although Chris Friar, its Chief Executive for the last ten years, still owns 22% of
the issued share capital. The Allied and Temple Merchant Bank owns 16% of the issued share
capital and no other shareholder owns more than 5%.
Board details
The board members of Friar Holdings are as follows:
Chris Friar Chief Executive
Gordon Underwood Finance Director
Tim Heward Operations Director
Jane Heward Sales Director
Kim Majors Marketing Director
April Ralph Non-Executive Director
Lorna Wade Non-Executive Director
Tim Heward and Jane Heward are married, and April Ralph is engaged to be married to Chris
Friar.
April Ralph was previously Managing Director of Renton Marine until her resignation two years
ago when Renton Marine was acquired by Friar Holdings. Lorna Wade is Managing Director of
Wade Boats, a company that sells top-of-the range yachts and has been supplied by Renton
Marine for a number of years. Gordon Underwood is the only board member with significant
financial experience and a professional qualification.
Up until 18 months ago Gordon Underwood was the partner in charge of the audit of Friar
Holdings until he left the auditors and joined the board of Friar Holdings.
April Ralph and Lorna Wilde were appointed as non-executive directors when Friar Holdings
obtained a listing; the other directors have been directors for a number of years.
The only board committee is the audit committee chaired by Gordon Underwood, which also
includes April Ralph and Lorna Wilde. Friar Holdings small internal audit department reports
to the audit committee.
Friar Holdings is about to prepare its first accounts after having been floated.
The following issues were discussed at a recent board meeting.
Corporate governance disclosures
Gordon Underwood indicated that as a listed company, Friar Holdings would have to fulfil
enhanced legal and stock exchange disclosure requirements, including disclosing failures to fulfil
corporate governance disclosure requirements. Chris Friar commented that clearly the codes gave
companies a choice. Friar Holdings only needed to comply with the governance requirements that
the board thought were appropriate, and could list the disclosure requirements with which it had
not complied.

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Directors remuneration
Chris Friar said that his own salary would increase by 10%, and that he would speak separately
with each director, telling them what their salary would be for the following year. As well as basic
salary and bonuses (determined by Chris Friar on the basis of what he believes appropriate for
each director) directors also have pension contributions paid into a directors pension scheme.
There is no staff pension scheme in Friar Holdings. Chris Friar appraises all other directors using
his own criteria and his decisions on salary and bonuses are made on the basis of those appraisals.
Redevelopment of boat yard
Chris Friar proposed closing the Merman boatyard that was run by Renton Marine on the grounds
that it was earning insufficient return. As the boatyard was located on the banks of the River
Humble, Chris Friar proposed turning the site into luxury flats and a leisure complex. He
commented that this represented a major strategic opportunity for Friar Holdings. The
shareholders would be happy with the high expected return on investment and that many people
would wish to buy luxury apartments and use the leisure complex. Chris Friar commented that
the development would also benefit the local economy, providing jobs in the leisure complex and
bringing more people into the area.
Shareholder concerns
At a recent board meeting of the Allied and Temple bank, concern was expressed about the
attitudes to corporate governance of the board of Friar Holdings, and the lack of communication
that between the board of Friar Holdings and the bank since the bank acquired its shareholding
when Friar Holdings was listed. The chairman of the bank also raised concerns about the
proposed development, since a leak to the local press had led to unfavourable publicity about the
plan. The Allied and Temple bank has marketed itself as the ethical bank and thus is very wary
of maintaining investments that may be connected with unethical behaviour.
The banks board is also aware of criticisms made by other institutional shareholders about the
level of remuneration paid to the directors of Friar Holdings.
As a result of its discussions, the banks board gave Sir James Soames, a member of the board,
responsibility for liasing with the board of Friar Holdings and communicating the banks
concerns.
Required
a. Evaluate Friar Holdings current corporate governance arrangements and explain why
they are likely to be considered inadequate by the Allied and Temple bank and other major
shareholders. Your answer should not include discussion of remuneration issues or
communication with shareholders.
(12 marks)
b. Write a memo to Sir James Soames recommending improvements in Friar Holdings
arrangements for determining remuneration and remuneration policies.
(10 marks) (Including 2 professional marks)
c. Discuss how the Allied and Temple bank and other institutional shareholders can increase
their influence over Friar Holdings.
(8 marks)
d. Construct a case for the board of Friar Holdings taking into account additional stakeholder
interests to those currently being considered, when deciding whether and how to pursue
the proposed new development.
(10 marks) (Including 2 professional marks)
(Total = 40 marks)
P1 Progress Test 1