Answer

1. • CORPORATE GOVERNANCE CASE: ABC International Limited

     Executive Summary

     The report gives an insight into ABC International Limited in the wake of an adequately constituted audit committee based on the annual report recommendation. Subsequently, it covers the various duties, rights, and competencies of the appropriate candidate who suits the audit committee member. For example, their responsibilities range from participation in influencing strategic direction to audit and remuneration functions. While discharging these duties, they enjoy specific rights that enhance their independence. Notably, such a person should be highly competent in their leadership and possess business acumen that they apply to comprehend the prevailing environment and make appropriate decisions. By extension, sharp skills are underscored as inevitable to the audit committee members’ efficiency and productivity.

     Further, the report highlights this director’s functioning in the context of being a member of the specific committee, audit. Indeed, it is essential to view such a person because they work as a team with shared goals and objectives, vital to the organization’s growth. For instance, as a team, they review the financial statement and recommend appropriate internal control actions. Also, they have a broad scope of roles within the audit function, including the approval of external auditors in compliance with the regulations and policies. ABC International Limited has a typical board structure consisting of executive and non-executive directors, under the leadership of a president, who chairs the board. The report ends at the coverage of the need for accountability and transparency, which are inevitable pillars of corporate governance. Through them, there is the hope of avoiding any conflict of interest among directors.

      

      

      

     Table of contents

      

     Executive Summary. 2

     Introduction/Case Background. 4

     Duties, Rights, and Competencies. 4

     1. Duties. 4
     2. Rights. 6

     iii.   Competences. 6

     Committee Work. 6

     Board Structure and Style. 8

     1. President 8
     2. Executive Directors. 9

     iii.   Non-executive Directors. 10

     Transparency and Accountability. 10

     Conclusion. 12

     Bibliography. 14

      

      

      

      

      

      

      

      

     Introduction/Case Background

     The primary objective of every business is to earn profits. Organizations apply different strategies to gain a competitive advantage that helps them control a large market share. The case of ABC International Ltd, a Hong Kong-based telecommunications equipment and electrical components manufacturer, presents a typical company that undergoes a magnificent business growth, following its joint venture with an Australian firm. In the organization’s strategies, it ensures it is sure to attract office and homeowners and retailers, military, and government. ABC International Limited is conscious of the dynamics of the trending technological advancements that might significantly affect its operations through potential competitors in the market. It takes annual and financial reports seriously despite variations between actual and expected sales turnover and profits. With a huge employee base of 1,280 workers, its ownership is by the public, Transelec (Australia), and Goldbarb (Bermuda). In the recently published share prices, the company experienced a growth of 11%. While the company has a functioning board of directors, it wishes to appoint a third independent non-executive director to join the two members in the audit committee, in compliance with corporate governance, as per the previous annual report recommendations.

     Duties, Rights, and Competencies

     1. Duties

     Each director has specific vital duties that they should undertake within their membership at the overall board. Sometimes, the responsibilities are enhanced depending on the additional engagement with a particular company, for example, if one doubles as a specific company member. According to Geach and CA (2018, p.7), a non-executive director provides a strategic direction for the company since they have a better and more precise understanding of the underlying business environment, unlike the executive directors. Frequently, these appointees are full-time employees of other institutions, which adds to their knowledge and provides constructive criticism to the plans and objectives by the executive team or the chief executive officers.

     Moreover, a non-executive director must perform audit function, in which it will work closely with Deloitte Touché, ABC International Ltd.’s appointed external auditors. While the overall board has to ensure a proper presentation of the financial actions, the appointment as a non-executive director comes with the responsibility of providing leadership in ascertaining internal control systems. For instance, in the case study, this duty is strengthened through their membership in the audit committee, where they need to act independently. Additionally, the non-executive director must monitor performance (Alqatan, Chbib & Hussainey 2019, p.20). At ABC International Ltd, this function would involve the director keeping track of the executive management’s progress to establish their alignment with its objectives and strategy.

     The director will determine executive members’ appropriate remuneration levels. Being a large company with a joint venture with a global presence, the independent non-executive director will ensure the other board members’ compensation is based on a nonbiased process. Finally, the independent director has a critical duty in benefiting the company with external opinions and contacts through effective communication. For example, it will be exciting to strike a partnership between ABC International Ltd and Dim Sum Ltd for a potential business connection. Therefore, a non-executive director promotes networks and relationships with other useful organizations and people. Overall, they must avoid a potential conflict of interest at all times.

     1. Rights

     While all directors have certain rights, there are specific ones that only apply to the non-executive members, owing to their objective contribution to the running of a company. First, they have the right to exercise independence in their judgments, without much consultation with their executive counterparts (Hopt 2016, p.16). The issues may revolve around employment, diversity, sustainability, transformation, resources, strategy, and performance evaluation. Also, they have an exemption from the daily running of a company’s affairs to which they are non-executive directors. That notwithstanding, they reserve the right to hold regular meetings in the executive directors’ absence to examine executive management’s actions and performance. Besides, the persons are allowed to accept full-time employment with other institutions to participate in the day-to-day running of their affairs. As an appreciation, a non-executive director is entitled to compensation from the company for the critical services in relevant committees.

     1. Competences

     A suitable person for a non-executive director’s position should have dependable leadership skills to demonstrate to the board and the more comprehensive organization. In the context of ABC International Limited, the director should lead to suggestions, business ideas, and proposals that will improve the company’s competitive edge. Chan, McCalman, and Young (2018, p.15) suggest that the ideal candidate should have a business acumen, which relates to their ability to make quick decisions and judgments based on their comprehension of the business situation. Here, the relevant traits include being logical, flexible, and conscious of the consequences of their decisions.

     Committee Work

     Most companies’ Memoranda of Incorporation have a provision allowing the board of directors to institute different committees to delegate various duties. Indeed, it is a prominent issue in corporate governance, which has a clear scope of authority and reporting procedures as part of its compliance. Some of the committees deal with social and ethics, risk, audit, nomination, and remuneration. In the case study, ABC International Limited is seeking to find a third person to join two others in the audit committee. Therefore, the third person will have specific work to do within the audit committee, where he is a member, which relates to financial controls’ integrity and reporting. By extension, the committee covers financial risk identification and management (Alqatamin 2018, p.49).

     The independent non-executive director will participate in the audit committee’s drafting of the appropriate policies relating to accounting, recording, financial controls, and financial reporting to the board for their adoption. In a public company like ABC International, there will be a regular review of financial statements on an annual or quarterly basis, to highlight any accounting judgments and estimates that the management undertook. Consequently, they consider the possibility of new regulations or accounting principles as they deem appropriate. Occasionally, the committee may recommend on senior management personnel’s suitability like the chief finance officer based on their performance. For example, these non-executive directors’ role is to suggest an investigation following a suspected fraudulent case involving crucial officers within the organization and approve or disapprove of such a study’s recommendations. Sometimes such circumstances relate to the use of information technology (IT).

     The committee will be responsible for nominating the external auditor and determining the appropriate fee to pay the external auditor. While doing so, the directors ensure strict compliance with the internal policies and procedures and the applicable legislation. The conduct of Deloitte and Touché will be insignificantly dependent on the functionality of the audit committee, including their approval and replacement. This role is performed with the utmost lack of bias to ensure that the auditor is independent in their opinion on the financial statements. In its submission to the board, the committee ascertains that auditors were self-reliant in their work and that no coercion or conflict of interest could compromise the report’s authenticity.

     Notwithstanding the many tasks relating to both internal and external audit through oversight and approval, the committee is part of the risk identification and management. This team of directors provides direction on the organization’s functions and processes concerned with understanding and addressing the risks that could hinder the company from achieving its short-term and strategic objectives. The work involves linking available opportunities with the audit committee’s recommendations to ensure their implementation, including embracing a risk-based management approach. In these regards, Suryanto, Thalassinos, and Thalassinos (2017, p.45) acknowledge that the audit committee should ensure an integrated reporting, expressing a summary of their roles and the attendance in the various meetings held.

     Board Structure and Style

     The board of directors of ABC International Limited exhibits a basic corporate structure with distinct functions and goals. The case indicates that the company has three main categories of the board of directors: the chairman, the executive directors, and the independent non-executive directors. Altogether, the current board consists of eight members, with a present intention to find a ninth member who will join the non-executive group.

     1. President

     The position is currently occupied by Alan K. M. Yau, ABC International Limited’s technical leader, responsible for its practical and smooth running. According to Santos et al. (2018, p.1), the president is equivalent to the board’s chairperson. Their typical duty is to ensure communication flow among the high-level executives, including group chief executive officer (CEO). Also, the board chairman provides maintenance of corporate integrity and develops the corporation’s business strategy. During meetings with the shareholders and the general public, the incumbent represents both the board and the management, reading announcements on their behalf (Shafana, 2016, p.79). For example, Alan K. M. Yau speaks during annual general meetings on issues related to the company’s policies, earning prospects, and recommending a member of the audit committee to respond to the annual report on corporate governance. The board of directors decides who occupies the position through an election.

     1. Executive Directors

     These board members include directors involved in the running of ABC International Limited’s affairs and activities. For instance, while the upper management prepares high-level budgets, these directors ensure they are approved appropriately. Currently, there are five directors in this category, including the vice president. The team executes and keeps track of the business strategy alongside supporting significant projects and initiatives. As a group, they are inside directors who assist in presenting the extended board’s internal perspective to their counterparts. In the company, these officers participate in managing the organization under different functions that determine their positions. For example, the directors include:

     1. Peter Y. M. Chow – Vice president
     2. Charles K. K. Lau – Operations Director
     3. Johnny Y. K. Ho – Finance Director
     4. Andy H. S. Woo – Development Director
     5. Rebecca H. S. Sun – Personnel Director
     1. Non-executive Directors

     This category of investors has almost similar responsibilities as the executive directors through corporate policy and strategic direction. However, they do not form part of the management team like the inside directors. Their role is merely to provide an unbiased perspective and version of the issues that come before the broader board of directors. Such members form various committees that help in the realization of companies’ goals and objectives. Following the need for independent non-executive directors as expressed in a previous statement from the ABC international Limited’s annual reports, two directors were appointed to form an audit team, with the company seeking to find a third member to fill the remaining slot. The two current directors include:

     1. Abraham P. K. Lau
     2. Frederick W. L. Ho

     Note that Rebecca S. S. Cheung handles the organization’s legal matters, is the company secretary.

     Transparency and Accountability

     Accountability and transparency are vital pillars in corporate governance because their absence can be disastrous to an organization’s survival due to potential conflict of interest that may arise from the agency relationship. The two phenomena are essential in strengthening the relationship between the directors with other stakeholders, including customers, government, financial institutions, regulators, shareholders, and other related authorities. Therefore, a director ensures there are transparency and accountability by undertaking specific activities one-off or regularly.

     According to bin Abdul Razak (2020, p.54), there should be a disclosure of all related party transactions. For instance, there may be a case where persons related to a director may receive a discounted service from the organization. Most jurisdictions demand disclosures to ensure such associations meet the required law obligations to enhance transparency because of the significant control that directors enjoy in an organization. Some of the prominent related party transactions are donations, providing or receiving financial aid, or receiving a good or service. Alternatively, related party transactions may be in a director’s interest to purchase or sell property or goods, including shares of a publicly-traded company, like ABC International Limited. Therefore, directors ensure the development of appropriate policies on these transactions, focusing on their disclosure and management.

     Also, directors exercise transparency and accountability through the financial reports they accept to own as they provide them to funders, members, and the public (Mabati, Onserio, and Mutai 2020, p.54). Most organizations rely on standard financial reporting, which they depend on to make crucial decisions. The use of a conventional standard ensures their ease of comprehension of all the relevant stakeholders. The element of accountability is guaranteed if the contents of lead other parties into making a decision. Often, the financial reports are audited by external auditors to authenticate them and moment on their reliability.

     Additionally, directors must adhere to the general meeting and annual reporting. In the AGM (annual general meeting), various stakeholders, such as owners, get a general overview of the organization’s finances and activities of the previous year. Elections may happen to retain or change the current board of directors, based on the existing organizational policies and procedures. The AGM presentations are critical in revealing the commitment of the directors to the realization of the company values, vision, and strategic goals. That is, stakeholders get to gauge their successes using the year’s demonstrated achievement. Therefore, it will be necessary for persons nominated as a non-executive director at ABC International Limited to exercise their duties and roles while ensuring they duly uphold transparency in their dealings, while remaining accountable for the actions they take.

     Conclusion

     Businesses strive to maintain routine operations. During the usual functions, top leadership establishes measures that protect it against the risk of failing. Notwithstanding the typical activities that managers undertake, there is a significant agency relationship resulting from shareholders’ appointment of a board of directors, which they entrust to help achieve strategic goals and objectives. However, these roles may be demanding to fulfill, predominantly when part of the board comprises executive members because of their direct involvement in its management. Indeed, it is in ABC International Limited’s best interest to establish an audit committee, which may work best if it consists of independent non-executive directors because of the perceived fairness.

     As a non-executive director sitting at the audit committee, specific roles relate to audit and institutional policies, which one should play. In this light, they enjoy certain rights and privileges, which intend to enhance their ability to discharge the duties independently. The nonexistence of such requests is known to make them vulnerable to pressure from their executive counterparts. For example, the audit role is extensive, and most organizations rely on it as an oversight function. Therefore, an unfair opinion in audit has the potential of adversely affecting the operation of a company. According to the case study, there is an ideal opportunity for the board’s anticipated member based on the existence of other members whose contributions will come in handy.

     Under the chairperson’s leadership, there is an adequate representation of the vital roles within the organization. That is, the various functions considered include personnel, development, operations, and development. Overall, this report acknowledges the inevitable need for transparency and accountability because of the possible conflict of interests since a director exercises control over the company’s operations. For example, they are achievable through financial reports, annual reports, AGMs, and directors’ disclosure of related party transactions.