(b) Explain Kohlberg’s three levels of moral development and identify the levels of moral development
demonstrated by the contributions of Gary Howells, Vanda Monroe and Martin Chan. (12 marks)
(b) Explain Kohlberg’s three levels of moral development and identify the levels of moral development
demonstrated by the contributions of Gary Howells, Vanda Monroe and Martin Chan. (12 marks)
(c) Critically discuss FOUR principal roles of non-executive directors and explain the potential tensions between
these roles that WM’s non-executive directors may experience in advising on the disclosure of the
overestimation of the mallerite reserve. (12 marks)
(d) Draft a letter for Tim Blake to send to WM’s investors to include the following:
(i) why you believe robust internal controls to be important; and
(ii) proposals on how internal systems might be improved in the light of the overestimation of mallerite at
WM.
Note: four professional marks are available within the marks allocated to requirement (d) for the structure,
content, style. and layout of the letter.
(16 marks)
(c) Define ‘market risk’ for Mr Allejandra and explain why Gluck and Goodman’s market risk exposure is
increased by failing to have an effective audit committee. (5 marks)
(c) Mr Cobar, the chief executive of SHC, has decided to draft two alternative statements to explain both possible
outcomes of the secrecy/licensing decision to shareholders. Once the board has decided which one to pursue,
the relevant draft will be included in a voluntary section of the next corporate annual report.
Required:
(i) Draft a statement in the event that the board chooses the secrecy option. It should make a convincing
business case and put forward ethical arguments for the secrecy option. The ethical arguments should
be made from the stockholder (or pristine capitalist) perspective. (8 marks)
(ii) Draft a statement in the event that the board chooses the licensing option. It should make a convincing
business case and put forward ethical arguments for the licensing option. The ethical arguments should
be made from the wider stakeholder perspective. (8 marks)
(iii) Professional marks for the persuasiveness and logical flow of arguments: two marks per statement.
(4 marks)
2 The risk committee at Southern Continents Company (SCC) met to discuss a report by its risk manager, Stephanie
Field. The report focused on a number of risks that applied to a chemicals factory recently acquired by SCC in another
country, Southland. She explained that the new risks related to the security of the factory in Southland in respect of
burglary, to the supply of one of the key raw materials that experienced fluctuations in world supply and also an
environmental risk. The environmental risk, Stephanie explained, was to do with the possibility of poisonous
emissions from the Southland factory.
The SCC chief executive, Choo Wang, who chaired the risk committee, said that the Southland factory was important
to him for two reasons. First, he said it was strategically important to the company. Second, it was important because
his own bonuses depended upon it. He said that because he had personally negotiated the purchase of the Southland
factory, the remunerations committee had included a performance bonus on his salary based on the success of the
Southland investment. He told Stephanie that a performance-related bonus was payable when and if the factory
achieved a certain level of output that Choo considered to be ambitious. ‘I don’t get any bonus at all until we reach
a high level of output from the factory,’ he said. ‘So I don’t care what the risks are, we will have to manage them.’
Stephanie explained that one of her main concerns arose because the employees at the factory in Southland were not
aware of the importance of risk management to SCC. She said that the former owner of the factory paid less attention
to risk issues and so the staff were not as aware of risk as Stephanie would like them to be. ‘I would like to get risk
awareness embedded in the culture at the Southland factory,’ she said.
Choo Wang said that he knew from Stephanie’s report what the risks were, but that he wanted somebody to explain
to him what strategies SCC could use to manage the risks.
Required:
(a) Describe four strategies that can be used to manage risk and identify, with reasons, an appropriate strategy
for each of the three risks mentioned in the case. (12 marks)
(d) Corporate annual reports contain both mandatory and voluntary disclosures.
Required:
(i) Distinguish, using examples, between mandatory and voluntary disclosures in the annual reports of
public listed companies. (6 marks)
(b) Explain the meaning of Stephanie’s comment: ‘I would like to get risk awareness embedded in the culture
at the Southland factory.’ (5 marks)
4 Hogg Products Company (HPC), based in a developing country, was recently wholly acquired by American Overseas
Investments (AOI), a North American holding company. The new owners took the opportunity to completely review
HPC’s management, culture and systems. One of the first things that AOI questioned was HPC’s longstanding
corporate code of ethics.
The board of AOI said that it had a general code of ethics that HPC, as an AOI subsidiary, should adopt. Simon Hogg,
the chief executive of HPC, disagreed however, and explained why HPC should retain its existing code. He said that
HPC had adopted its code of ethics in its home country which was often criticised for its unethical business behaviour.
Some other companies in the country were criticised for their ‘sweat shop’ conditions. HPC’s adoption of its code of
ethics, however, meant that it could always obtain orders from European customers on the guarantee that products
were made ethically and in compliance with its own highly regarded code of ethics. Mr Hogg explained that HPC had
an outstanding ethical reputation both locally and internationally and that reputation could be threatened if it was
forced to replace its existing code of ethics with AOI’s more general code.
When Ed Tanner, a senior director from AOI’s head office, visited Mr Hogg after the acquisition, he was shown HPC’s
operation in action. Mr Hogg pointed out that unlike some other employers in the industry, HPC didn’t employ child
labour. Mr Hogg explained that although it was allowed by law in the country, it was forbidden by HPC’s code of
ethics. Mr Hogg also explained that in his view, employing child labour was always ethically wrong. Mr Tanner asked
whether the money that children earned by working in the relatively safe conditions at HPC was an important source
of income for their families. Mr Hogg said that the money was important to them but even so, it was still wrong to
employ children, as it was exploitative and interfered with their education. He also said that it would alienate the
European customers who bought from HPC partly on the basis of the terms of its code of ethics.
Required:
(a) Describe the purposes and typical contents of a corporate code of ethics. (9 marks)
(ii) Explain why the disclosure of voluntary information in annual reports can enhance the company’s
accountability to equity investors. (4 marks)
(ii) Identify the points that must be confirmed and any action necessary in order for capital treatment to
apply to the transaction. (4 marks)