CORPORATE GOVERNANCE AND ETHICS APRIL 2023 PAST PAPER

TUESDAY: 25 April 2023. 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

NAMIKHOLO SUGAR MILLS (NSM)

Poor governance, heavy borrowing and investments in projects that never give returns are some of the causes of trouble at the ailing Namikholo Sugar Mills (NSM). A report by a taskforce on the revival of the giant miller also blames the high cost of production and a poor farming model. The taskforce had been appointed by Jones Waragi, the Governor of Namikholo County.

The report by the taskforce further points out at malpractices by staff at the miller that resulted in loss of millions as another cause of the financial turmoil, the once premier sugar miller is currently facing. The malpractices include double procurement, single sourcing, overstating of books of account, inflated commercial activities and printing of books and fliers by faceless fraudulent companies compounded by poor record keeping.

“The Namikholo Sugar Mills Board, management staff, and suppliers have over time engaged in unprofessional malpractices that contributed immensely to the current state of the miller. The board did not have an audit committee and the internal audit functions were performed by the accounts division. The commercial department diverted ethanol meant to be sold in a neighboring country and also the imported molasses tankers never arrived at the milling factory,” reads the report on page 10. The report further reveals that the agriculture department fraudulently acquired fields, some of which only existed on paper, paid ghost farmers in collaborations with the Information Technology (IT) staff, and overstated acreage farm inputs in collusion with the survey section. The management staff also diverted farm inputs meant for farmers.

The staff sold sugar to black markets, defrauding the miller. They inflated prices, offered sugar discounts beyond acceptable limits and participated in the purported sugar export of year 2018 to 2021. The report further reveals that the miller’s financial status started dwindling in year 2017 largely due to mega projects that the miller engaged in and whose return on investment has never been realised. This took away the much-needed cash to pay cane farmers for their deliveries, leading to delays in payment that demoralised them to the extent of uprooting the crop from their farms.

Farmers received delayed payments due to the collusion by staff who paid ghost farmers instead of the real farmers. All these were made possible by the management’s failure to institute performance measurement, evaluation and control tools.

The report also reveals that the company’s management started projects they could not complete. These include CCTV surveillance, Enterprise Resource Planning (ERP), Ethanol production, new sugar bagging machine procurement and Hyper Transport (HT) clocking system. The management also recruited staff unprocedurally, failed to control board of directors’ expenditure and colluded with board members to open an account oversees that was used to deposit illegally acquired customer funds.

While receiving the report, the Governor agreed with the findings, saying that it unearthed what the management had already noted and handed the matter to relevant County authorities for action. “We are working together and complementing each other to revive the miller because Namikholo is bigger than the board or management,” he said.

The miller is technically insolvent as per the audited accounts for 2021/2022 financial year which puts the current liabilities at Sh. 190 million with the assets base at Sh.100.5 million. The report recommended a raft of interventions to turn around the once vibrant miller. Among the recommendations is the involvement by the county government in the development of cane and promotion of an ethical culture at NSM and appointment of an audit committee of the board. The report also recommended lodging a caveat on community land hosting assets of the miller to prevent them from being grabbed.

In its last paragraph, the report concluded that the sugar mill could only be revived if the revival plan prioritises change of governance, investment in cane development, engagement with lenders and creditors on viable debt payment plan and pursue of capital injection for key areas of operation.

Required:

1.  Examine FIVE roles of NSM Board in managing the Miller’s staff ethical behavior. (10 marks)

2. Among the recommendations was the appointment of an audit committee at NSM.

Advise the board on the role of the recommended committee. (10 marks)

3. Evaluate FIVE dysfunctional characteristics of NSM board. (10 marks)

4. NSM was not conducting performance appraisals.

Analyse FIVE benefits they could have acquired from conducting such appraisals. (10 marks)

(Total 40 marks)

QUESTION TWO

1.  The two-tier board model is a governance structure in some jurisdictions where a company has two separate boards: a supervisory board and a management board.

With reference to the above statement, outline FOUR characteristics of this board model. (4 marks)

2. The universality of ethics refers to the belief that certain moral principles are valid and apply universally, regardless of cultural, individual, or historical differences.

With reference to the above statement, explain FIVE principles of universality of ethics. (5 marks)

3.  Legitimacy theory and stakeholder theory are both frameworks used to understand the relationships between organisations and their stakeholders. However, there are some key differences between the two.

Analyse the THREE distinctions. (6 marks)

(Total: 15 marks)

 

QUESTION THREE

1.  Good corporate governance dictates that the Board shall establish and put into effect a whistle blowing policy for the organisation.

Highlight TWO purposes of this policy. (2 marks)

2. Explain TWO differences between ethics and morals. (2 marks)

3. An external auditor is an independent professional hired by an organisation.

In view of the above statement, evaluate FIVE roles that he plays with regard to corporate governance.
(5 marks)

4. Analyse the triple bottom line concept in the context of corporate governance. (6 marks)
(Total: 15 marks)

 

QUESTION FOUR

1.  Outline THREE types of corporate social responsibility activities that an organisation could engage in.
(3 marks)

2.  Summarise THREE compliance strategies that may be adopted by organisations in adherence to corporate laws and regulations. (6 marks)

3. A tainted reputation can cripple even the most well-known establishments.

With reference to the above statement, explain SIX factors that contribute to the overall corporate reputation of a company. (6 marks)

(Total: 15 marks)

 

QUESTION FIVE

1.  Identify FIVE considerations involved in effective management of risks. (5 marks)

2.  Explain FIVE benefits which could accrue to an organisation from regular risk reporting. (5 marks)

3.  Summarise FIVE stakeholder dispute management techniques. (5 marks)

(Total: 15 marks)

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