College of Business, Hospitality and Tourism Studies

i i i i i i

School of Accounting & Law

i i i i

Department of Accounting i i

ACC704 – Business Ethics and Governance

i i i i i

Alternative Assessment, Semester 1, 2020

i i i i

Case iStudy iOne i15%

This iquestion icontributes i15% itowards iyour ialternative iassessment i(final iassessment/exam).

The idue idate iof ithe iassessment iis ion iSunday i31th iMay i2020 iby i11pm. iA idrop ibox iwill ibe

open iin iMoodle ifor iassessment isubmission. iYour ianswers ishould ibe iclearly iexpressed iand

well istructured. iPlease inote ithat imarks iwill ionly ibe iawarded iif iyou iare iable ito iidentify iand

discusses irelevant iparts iin ieach iof ithe irequirements ibelow. iYour idiscussion ishould ibe iof iat

least i1500 iwords.

Case iStudy i1 i15 imarks

In iearly i2018, ithe iremuneration icommittee iof iBoom iCo i(a ilisted icompany) imet ito
i determine ithe irewards ifor ithe iexecutive idirectors. iIt iwas ithe ipractice iof ithe
i committee ito imeet iannually ito idecide ion iexecutive irewards ifor ithe iforthcoming
i financial iyear. iIn iline iwith ibest ipractice, ithe icommittee iwas imade iup ientirely iof
i non-executive idirectors.When ithe iremuneration icommittee imet, iits ichairperson,
i Sarah iUmm, ireminded ithose ipresent ithat ithe icommittee ishould icomply iwith ithe
i guidance iof ithe irelevant icode iof icorporate igovernance. iShe iread iout ithe isection
i that ishe ibelieved iwas imost irelevant ito itheir idiscussions.

‘A isignificant iproportion iof iexecutive idirectors’ iremuneration ishould ibe istructured

i so ias ito ilink irewards ito icorporate iand iindividual iperformance. iThe iremuneration
i committee ishould ijudge iwhere ito iposition itheir icompany irelative ito iother
i companies. iHowever, ithey ishould iuse isuch icomparisons iwith icaution iin iview iof
i the irisk iof ian iupward imovement iof iremuneration ilevels iwith ino icorresponding
i improvement iin iperformance. iRemuneration ifor inon-executive idirectors ishould
i not iinclude ishare ioptions ior iother iperformance-related ielements.’She iexplained
i that ithe icommittee ishould ibalance iseveral iconcerns iwhen isetting irewards: ithe
i link iwith iperformance, imarket irates iand ithe icompany’s ioverall istrategy. iThe
i strategic ipriority iin ithe

next ifew iyears, ishe iexplained, iwas ito iincentivise imedium ito ilong-term igrowth
i whilst iretaining ithe iexisting iexecutive iboard iin iplace ias ilong ias ipossible.At ithe
i end iof ithe imeeting, ia inew imember iof ithe icommittee, iSam iSouth, iasked iwhether
i there iwere iany iperformance-related ielements iof inon-executive idirectors’
i rewards. iSarah iUmm iexplained ithat ithese iwere ionly iavailable ito iexecutive
i members iof ithe iboard iin iline iwith ithe iterms iof ithe icorporate igovernance icode.

Required:

(a) iExplain iwhat iis imeant iby ia i‘code iof icorporate igovernance’ iand idiscuss ithe
i general iPurposes iof isuch ia icode iin ilisted icompanies isuch ias iBoom iCo. i(7.5
i marks)

A icode iof icorporate igovernance iis ia idocument ithat ispecifies icertain istandards,
i principles, inorms iof ibehaviour ior ispecific iinstructions iover imatters iof icorporate
i governance. iSome ihave ievolved iover itime ias idifferent iprevious ireports iwere
i written ifor idifferent iaspects iof igovernance, iwhich iwere ithen ibrought itogether iin
i combined icodes. iCodes iof icorporate igovernance iare iissued iby iregulatory
i authorities iand iare istatements iof igeneral iprinciples iand idetailed iguidelines ion
i many imatters iof icorporate igovernance iof iBoom i& ico. iThey ican ibe iimplemented
i either ias ilisting irules ior iin ilaw. iThey itypically icover iall irelevant iaspects iof
i corporate igovernance iincluding ithe iroles iof ithe iboard, irisk imanagement, iinternal
i controls, iexecutive iremuneration iand icontracts, ireporting iissues iand isimilar
i relevant ithemes. iThe ipurpose iis ito iensure ithat icompanies iare iwell-run iand iin
i line iwith ishareholders’ iinterests. iThe ipurposes iof isuch icodes iare ias ifollows.
i First, ithey iguide iand ispecify ibehaviour iin imatters iof igovernance, iinternal icontrol
i and irisk imanagement iwith ithe iobjective ithat iby icomplying iwith ithe icode,
i corporate igovernance iwill ibe iimproved iand ienhanced. iSecond, ithey iaim ito
i encourage ibest ipractice iand ito iimprove imanagement iperformance iby ipreventing
i practice ithat imight ireduce ivalue iadded ior ishareholder ivalue. iThird, icodes iaim ito
i underpin iinvestor iconfidence iin ithat ihigh ilevels iof icompliance itend ito ibe
i appreciated iby ishareholders iand ipoor ilevels iof icompliance iare isometimes
i punished. iIt ienables iboards ito idemonstrate ithe ivalue ithey iplace iupon ithe
i agency irelationship iand ito imore iadequately idischarge ithe iagency
i responsibilities iplaced iupon ithem. iFourth, icodes iaim ito ireduce ifraud, iwaste ior
i inefficiency. iOne iof ithe imain icauses iof ithe idevelopment iof icodes i iwas iin
i response ito ihigh iprofile ifrauds, iand iit iwas ihoped iat ithe itime ithat icodes iwould
i address ithis. iFifth, iin iprinciples-based ijurisdictions, ithe iimplementation iof icodes
i is ithought ito ibe ia iway iof ireducing ithe ichances iof igovernmental ilegislation ibeing
i implemented. iGovernments iare imore ilikely ito ilegislate iwhere iother iregulatory
i failure iis ievident iand iso ian ieffective icode iapplied ias ilisting irules ishould i ireduce
i the ilikelihood iof ihaving iinflexible ilaws iapplied.
(b) iBriefly iexplain ithe igeneral iroles iof inon-executive idirectors iin ia ilisted
i company isuch ias iBoom iCo, iand idiscuss iwhy inon-executive idirectors ishould
i not ireceive iperformance-related ielements iin itheir irewards ias iSam iSouth
i enquired. i((7.5 imarks)

The ifour igeneral iroles iof iNEDs iare: ithe istrategy irole, iscrutinising irole, irisk irole
i and ithe ipeople irole. iIn ithe istrategy irole, iNEDs imay ichallenge iany iaspect iof
i strategy ithey isee ifit iand ioffer iadvice ior iinput ito ihelp ito idevelop isuccessful
i strategy. iThe iscrutinising ior iperformance irole iis iwhere ithe iNEDs’ iindependence
i is iperhaps ithe imost iimportant. iNEDs iare irequired ito ihold iexecutive icolleagues
i to iaccount ifor idecisions itaken iand icompany iperformance. iIn ithis irespect, ithey
i are irequired ito irepresent ithe ishareholders’ iinterests iagainst iany ivested iinterests
i or ishort-term iexecutive ipressures. iThe irisk irole iinvolves iNEDs iensuring ithe
i company ihas ian iadequate isystem iof iinternal icontrols iand isystems iof irisk
i management iin iplace. iFinally, iin ithe ipeople irole, iNEDs ioversee ia irange iof
i responsibilities iwith iregard ito ithe imanagement iof ithe iexecutive imembers iof ithe
i board. iThis itypically iinvolves iissues iconcerning iappointments iand iremuneration,
i but imight ialso iinvolve icontractual ior idisciplinary iissues, iand isuccession
i planning. iNEDs iand iperformance-related ielements iThe imain ireason iwhy iNEDs
i are iusually inot iallowed ito ireceive ishare ioptions ior iother iperformance-related
i elements ias ipart iof itheir ireward ipackages i(as iSam iSouth iasked) iis ibecause iit
i could ithreaten itheir iindependence iand ihence itheir iusefulness ito ithe icompany’s
i shareholders. iWhereas iexecutive idirectors imay, ifor iexample, ibe iincentivised ito
i take iexcessive irisks ito imaximise itheir iown irewards, ia inon-executive, iwithout ithe
i performance-related ielement, iwill ihave ino isuch iincentive iand iwill ibe ilikely ito
i take ia imore iobjective iview iof ithe istrategy ibeing idiscussed. iIn iorder ito ibe
i effective iin itheir iroles, iNEDs ineed ito ibe imotivated iin idifferent iways ito itheir
i executive icolleagues iand itoo imuch isimilarity ican imean ithat ithe iscrutiny irole iis
i weakened. iIf iboth iexecutive iand inon-executive idirectors iare isimilarly imotivated,
i there iwill ibe iless iscrutiny iof iproposed istrategies ifor iwider iimpacts, irisks,
i complications iand istakeholder iimpacts, ibecause ithere iwill ibe ino-one
i incentivised ito iexercise ieffective iscrutiny. iIf ithey ireceived ia isimilar imix iof
i rewards ito iexecutives, ithey iwould ibe imotivated ito iact iin isimilar iways iand ithis
i might iinvolve ifavouring ishort-term imeasures iat ivariance iwith ilonger-term
i strategic iperspectives. iA iconcern iover ishort-term ishare iprice imovements, ifor
i example, imight itake ithe iNEDs’ ifocus iaway ifrom ilonger-term istrategic iissues iand
i make ithem imore iconcerned iwith imaximising imarket ivalue iin ithe ishort iterm.
i Because inon-executives icomprise ithe iremuneration icommittee, iit iwould ibe
i inappropriate ifor ithem ito idecide ion itheir iown irewards. iIt iwould ibe ian iabuse iof
i the iresponsibility iand itrust iinvested iin ithem iby ishareholders iwere iNEDs ito
i reward ithemselves itoo imuch ior iincentivise ithemselves iin ian iinappropriate iway.
i Accordingly, iit iis iusual ifor iNEDs ito ibe ipaid ia ifair irate ibased ion iexternal
i comparison ifigures i(often ia idaily irate ior isimilar), iso ithat ithere iis ino iquestion iof iit
i being iseen ias iexcessive. iA iNED’s ipay iis iusually ia ismall ifraction iof ithat ifor
i executive icolleague.

***End iof iAssessment***