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RSK4802 EXAM PACK 2023
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RSK4802EXAM PACK
2023
QUESTIONS AND
ANSWERS
, RSK4802/201
Dear Student,
The purpose of the tutorial letter is to provide you with answers to Assignment 01. Please
note that I have provided you with extensive explanations to all the questions. You were
not always expected to include all the facts in your answers. If a question counted out of 5
and you provided 5 correct facts (even if there are more) you will obtained the 5 marks.
Remember your year mark, based on the average mark obtained for the two compulsory
assignments (Assignment 01 and Assignment 02); contribute 30% towards your final mark,
while your examination mark contributes 70%.
The combined weighted average of your year mark and examination mark must be 50% or
higher for you to pass the module/subject. However, you must obtain a minimum of 40% in
the examination, regardless of your year mark. If you obtain less than 40% in the
examination your year mark will not be taken into account and you will fail.
QUESTION 1
You act as a consultant on corporate governance matters and have recently received the
following enquiries:
Enquiry 1 The four executive directors of a mining company have to visit new prospects in
Africa. Due to logistical problems they will have to travel together on certain routes. In view
of fierce competition in the market, this strategic trip will not be publicised.
Enquiry 2 Mr Lincoln acts as the executive chairperson of his company and sits on the
remuneration committee. Mr Lincoln is a major shareholder in the company. His son acts
the Chief Executive Officer of the company, which is listed on the JSE Securities Exchange
SA. The enquiry was received from a minority shareholder.
Enquiry 3 The company has awarded shares and options on shares to its non-executive
directors. The option prices are well below market prices.
Enquiry 4 Mr Clinton is a non-executive director of a company and attends the monthly
management tender committee meetings. A newspaper reported that Mr Clinton did not
recuse himself from a meeting which awarded a major contract to his niece.
Comment on the 4 enquiries, taking into account good corporate governance practices as
envisaged by King III. [15 marks]
ANSWER
Enquiry 1
• Not good CG practice
• Risk in travelling together that corporate knowledge may be destroyed
• What succession planning in place
• What impact on the company and share price if information is disclosed in advance or
not disclosed and something happen.
, RSK4802/201
(SOME STUDENTS ALSO REMARKED ON THE NUMBER OF EXECUTIVE
DIRECTORS)
Enquiry 2
• Not good CG
• Chairperson should be non-executive and independent
• Independent directors and CEO on remuneration committee
• Family ties on board, although not disallowed, must be clear with no interference
Enquiry 3
• Not good CG
• Award of shares and options to non-executive directors prohibited as remuneration
should not be listed to share performance
• Option prices should be market related
Enquiry 4
• Not good CG
• Non-executive director should be independent and not involved in the management of
the company.
• Recuse not an issue in view of the above
• Association with beneficiary should be properly disclosed
• Investigate whether proper tender procedures were followed
Enquiry 1-4
Additional valid comments accepted. Bonus mark(s) for specific King references
QUESTION 2 [20]
a) The Organisation for Economic Co-operation and Development (OECD) published the
following document in a document in June 2009: Corporate Governance and the Financial
Crisis: Key Findings and Main Messages. Analyse the four areas immediately linked to the
financial crisis. (8)
ANSWER:
This report addresses four areas of corporate governance that the Group considered
closely linked to recent failures:
1 remuneration/incentive systems;
2 risk management practices;
3 the performance of boards; and
4 the exercise of shareholder rights.
The four areas are also closely related: if remuneration has been excessive and/ or not
structured properly, why have the boards allowed this state of affairs to occur? If risk
management has failed to manage risk oriented remuneration systems, why have the
boards apparently stood back or are we expecting simply too much of boards in large
complex companies which are to a great extent themselves a product of board and
shareholder decisions? Why have shareholders not been able to ensure accountability? It
also covers the issue of implementation of existing corporate governance standards.
, 1. Remuneration/incentive systems
Depending on the characteristics of the company, remuneration and incentive systems that
should be the focus of board (and sometimes regulatory) oversight need to be considered
broadly and not just focused on the chief executive officer and board members.
• The governance of remuneration/incentive systems have often failed because decisions
and negotiations are not carried out at arm‟s length. Managers and others have had too
much influence over the level and conditions for performance based remuneration with the
board unable or incapable of exercising objective, independent judgment.
• In many cases it is striking how the link between performance and remuneration is
very weak or difficult to establish. For example, companies have often used general
measures of stock price rather than the relative performance of the individual firm. Factors
not within the control of the CEO have often been emphasised.
• Remuneration schemes are often overly complicated or obscure in ways that camouflage
the situation. This is particularly the case with hard to value pension schemes. They are
also asymmetric with limited downside risk thereby encouraging excessive risk taking.
Transparency needs to be improved which goes beyond simply more disclosure that has
improved in recent years. Corporations should be able to explain the main characteristics of
their performance related remuneration programs in concise and non-technical terms. This
should include the total cost of the program; the performance criteria used, and; how
remuneration is adjusted for related risks.
• The goal needs to be remuneration/incentive systems that encourage long term
performance and this will require instruments that pay-out after the longer term
performance has been realised. These might include share rather than cash payments with
lock-up provisions, claw backs, deferred compensation etc. It is important to assess the
programme ex-post. Such schemes are complex and it is not likely that legal limits such as
caps and some fiscal measures will be able to achieve this purpose. There is also a risk of
a shift towards excessive fixed remuneration components that would weaken alignment of
incentives with the long term success of the company.
• The tax system has an important influence on both the level and structure of
compensation but whether the outcomes are desirable for the perspective of corporate
governance is often far from clear. Further analysis is often required.
• Steps must therefore be taken to ensure that remuneration is established through a sound
governance process where the roles and responsibilities of those involved, including
consultants and independent directors, are clearly defined and separated. Any
remuneration consultants might need to be hired by the nonexecutive members of the
board rather than by management. Executive board members should not participate since
they have an inherent conflict of interest.
• It should be considered good practice that remuneration policies are submitted to the
annual meeting and as appropriate subject to shareholder approval.
• Financial institutions are advised to follow the Principles for Sound Compensation
Practices issued by the Financial Stability Forum
4
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