CORPORATE GOVERNANCE AND ETHICS APRIL 2022 PAST PAPER

WEDNESDAY: 6 April 2022. Morning ,paper.                                                                             Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Do NOT write anything on this paper.

QUESTION ONE

MILLENIUM CARNATIONS LIMITED (MCL)

Millennium Carnations Limited (MCL) was founded in the year 1985 in Naivasha, one of the largest flower farming regions in Kenya. Its headquarters are in Naivasha although it has satellite offices and farms in the suburban areas of Nairobi such as Kajiado and Athi River. Although MCL produces flowers mostly for export with Europe being its largest market, it also markets its flowers locally to the hospitality industry mostly to hotels and event organisers. Despite its World class flowers being the best-known products to consumers, MCL also operates a horticultural training institute in Naivasha. Currently, MCL directly employs about 7,000 employees and indirectly contributes to the employment of more than 20,000 people through its value chain. MCL also supports a rehabilitation center for gender based violence (GB V) victims run by a consortium of local faith-based organisations. The company is dedicated to advancements in horticultural productivity and commits approximately 5% of its total revenue each year to research and development in collaboration with local universities and public sector agricultural institutions. MCL is consistently one of the top companies to be awarded the greatest number of local and international horticultural awards and actively participates in local and international flower fairs. In the year 2018, MCL’s net Sales were estimated at Sh.120 million but this declined to Sh.65 million in the year 2020 due to a difficult trading environment occasioned by the outbreak of the COVID-19 pandemic.

MCL invests a lot Of effort into corporate social responsibility (CSR) and its associated reporting. It publishes a sustainability report annually. Additionally, the company makes public a lot of information in relation to its compliance with different local and international standards, regulatory requirements and adherence to the Code of Ethics and Governance of the Flower Council, an industry association to which MCL is a member. This information is found in MCL’s annual reports, most corporate literature and can also be found on its website. However due to the difficult prevailing economic conditions, MCL had to review its budget on CSR activities which saw a reduction of about 45%. In 2015, MCI introduced a CSR strategy aimed: “MCL and the Community:- Working together for Prosperity”. The company has a CSR policy and a specialist unit within the corporate relations department with its own CSR mission statement. To ensure organisation wide commitment to CSR, MCL has instituted as part of its terms of reference to both external financial and governance auditors a requirement to report on MCL’s CSR activities and compliances. The external auditors are required to use MCL’s CSR reports and performance as a basis for developing their opinions. ICUs sustainability reports cover four main areas namely; reduction of greenhouse gases, stakeholders engagement, environmentally-friendly agriculture regulatory compliance and CSR.

In the year 2021, MCL restructured and changed work processes in order to be better aligned to the changing operating environment and especially the effects of Britain’s exit from the European Union (Brexit), the COVID-19 pandemic, rising energy latices affecting international freight costs and declining profits.  Soon a pattern of stress related health problems started being reported in MCL’s farms and processing centres. Preliminary investigations by the human resources department aided by health professionals were able to establish a correlation with changes in the organisation internal systems and increasing pressure to perform. Restrecturing had also resulted in a number of job losses and anxiety, fear and low morale could be noticed in some of the employees. This caused many challenges for farm managers, business managers, human resources and increased the workload for other employees leading to MCL initiating the development of a policy on workplace stress management. While carrying out research for the policy and unrelated with what was happening at MCL, the government through the Ministry of labour was also carrying out a national Study on the impact of the COVID-19 pandemic on occupational health and effect of change in work practices on business performance. MCL took advantage of this development to work with the government and gain wider insights on the challenges it was facing.

To improve throughput in its farms and processing centres,. MCL introduced a number Of workplace practices. Smoking breaks were reduced from three in a day to one The elevated seats used by packers in its processing centres were removed and employees were required to stand during their work. It was reasoned that Making employees stand not only saved money but increased productivity and enhanced employee interactions. The investigations commissioned by MCL after the reported illnesses called into question whether -making-employees to stand While working enhanced productivity in the long run. Preliminary findings showed that employees felt under pressure when not allowed to sit down or when allowed less time to rest as indicated by the reduction in smoking breaks. The investigations also indicated that Work- related stress had a negative effect on MCL’ e working process and that good management should be focused, on preventing stressful situations at the work place. This was the same conclusion that was communicated • to MCL by the trade union representing the employees.

While the health concerns were coming to light, a fishermen association had gone to the Environment Court to petition the government to close all flower farms discharging untreated effluent into the lake leading to mass deaths of fish and at the same time endangering livelihoods. The main cause was believed to be runoff from flower farms containing residual pesticides. MCL was one of the respondents in the suit as well as the environmental management agency.

Since its founding and cognisant of the importance of chemicals hi the horticulture industry, 114CLIas–promoted “Health Me’ as one of its principles by adopting responsible chemical usage. Even in the MCL sustainability repot of year 2019, it was reported that MCL carried out sensitisation workshops for its employees and suppliers on occupational and noncommunicable diseases. With the government emphasis on health-promoting policies and laws, MCL conducts health checks and tests for its employees at periodic intervals. Based on the incidences of reported workplace health concerns and: fish poisoning claims, MCL has set out to review its workplace and environmental management practices: Based on the investigations results, all MCL farms and processing centres have. set common numerical targets with the aim of preventing workplace-related diseases. The focus of MCL is on prevention, rather than the treatment Of problems. .A clear shift from reactive to proactive management has been made. This is clearly evidenced by the communication in the MCI,: website. MCL has taken the opportunity to develop action-based policies: to enhance .sustainability. The company has also created the position of a community representative in its Board. In October 2421, MCL launched a new policythat- covered areas such as: Work-life balance, health and safety at the workplace, stress management, respect and tolerance, nutrition and exercise.

The sustainability report- of year indicates that MCL organised workshops for managers on best workplace practices, community engagement and regulatory compliance: MCL has also initiated a review of its CSR policy in light of financial challenges facing the company and Shareholder pressure to show a business case for CSR.  One of the proposed interventions for MCL is to register. charitable foundation to coordinate its CSR activities.

Required:

1.         Assess five benefits to MCL of registering a charitable foundation to manage its Corporate Social Responsibility (CSR) activities.                                                                                                                                     (10 marks)

2.       Discuss. MCL’s directors’ responsibilities in respect to sustainability in light of the challenges facing the organisation?      (10 marks)

3.        Examine, the three ESG components that MCL needs to address* in-developing its sustainability strategy. (6 marks)

4.         Predict four ethical dilemmas MCL is likely to face in implementing its CSR programmes.                                         (8 marks)

5.        Assess six good governance practices by MCL.                                                                                      (6 marks)

(Total 40 marks)

 

QUESTION TWO

1.         Identify five .objectives of a code of corporate practice and ‘conduct in promoting good corporate governance. (5 marks)

2.        Capital Market Regulators play an important role in sensitising investors.

With regard to the above statement, explain the importance of investor education in promoting governance.  (5 marks)

3.         “All boards are not created equal. There are fundamental differences in how they work and how people in them work. Defining the type and role of your board is essential to its functioning since its governance features vary according to the model you choose”. With reference to the above statement, suggest five factors to consider while selecting a board governance model.         (5 marks)

(Total: 15 mark)

 

QUESTION THREE

1.        Analyse five common law and equitable duties of directors of a company.                                             (5 marks)

2.       Summarise five methods that an organisation could use to manage, risks.                                              (5 marks)

3.       Identify five qualifying disclosures that an employee could use as a defense in case of unfair dismissal for whistleblowing.                  (5 marks)

(Total: 15 marks)

 

QUESTION FOUR

1.        Discuss the process, of stakeholder management in corporate governance.                                             (5 marks)

2.       Highlight five principles of stakeholder theory.                                                                                        (5 marks)

3.        Explain five contents of articles of association.                                                                                       (5 marks)

(Total: 15 marks)

 

QUESTION FIVE

1.     Examine live principles of good corporate governance.                                                                           (5 marks)

2.     Explain the term “oversight” as used in corporate governance.                                                 (2 marks)

Summarise three oversight roles of the Board of governance..                                      (3 marks)

3.     You have been appointed as a member of the nominating and governance committee of your organisation.

Required:

Design a framework of issues to be included in the Board evaluation report..                                         (5 marks)

(Total: 15 marks)

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