2 At a board meeting of JGP Chemicals Limited,the directors were discussing some recent negative publicity arising from the accidental emission of a chemical pollutant into the local river.As well as it resulting in a large fi ne from the courts,the leak had created a great deal of controversy in the local community that relied on the polluted river for its normal use（including drinking）.A prominent community leader spoke for those affected when she said that a leak of this type must never happen again or JGP would suffer the loss of support from the community.She also reminded JGP that it attracts 65% of its labour from the local community.

　　As a response to the problems that arose after the leak,the JGP board decided to consult an expert on whether the publication of a full annual environmental report might help to mitigate future environmental risks.The expert,Professor Appo（a prominent academic）,said that the company would need to establish an annual environmental audit before they could issue a report. He said that the environmental audit should include,in addition to a review and evaluation of JGP‘s safety controls,a full audit of the environmental impact of JGP’s supply chain.He said that these components would be very important in addressing the concerns of a growing group of investors who are worried about such things.Professor Appo said that all chemical companies had a structural environmental risk and JGP was no exception to this. As major consumers of natural chemical resources and producers of potentially hazardous outputs,Professor Appo said that chemical companies should be aware of the wide range of ways in which they can affect the environment.CEO Keith Miasma agreed with Professor Appo and added that because JGP was in chemicals,any environmental issue had the potential to affect JGP's overall reputation among a wide range of stakeholders.

　　When the board was discussing the issue of sustainability in connection with the environmental audit,the finance director said that sustainability reporting would not be necessary as the company was already sustainable because it had no 'going concern' issues.He said that JGP had been in business for over 50 years,should be able to continue for many years to come and was therefore sustainable.As far as he was concerned,this was all that was meant by sustainability.

　　In the discussion that followed,the board noted that in order to signal its seriousness to the local community and to investors,the environmental audit should be as thorough as possible and that as much information should be made available to the public 'in the interests of transparency'.It was agreed that contents of the audit（the agreed metrics）

　　should be robust and with little room left for interpretation – they wanted to be able to demonstrate that they had complied with their agreed metrics for the environmental audit.

　　Required:

　　（a）Explain 'sustainability' in the context of environmental auditing and criticise the fi nance director‘s understanding of sustainability. （6 marks）

　　（b）Explain the three stages in an environmental audit and explore,using information from the case,the issues that JGP will have in developing these stages. （9 marks）

　　（c）Defi ne 'environmental risk'.Distinguish between strategic and operational risks and explain why the environmental risks at JGP are strategic. （10 marks）

　　（25 marks）

　　3 KK is a large listed company.When a non-executive directorship of KK Limited became available,John Soria was nominated to fi ll the vacancy.John is the brother-in-law of KK's chief executive Ken Kava.John is also the CEO of Soria Supplies Ltd,KK’s largest single supplier and is,therefore,very familiar with KK and its industry.He has sold goods to KK for over 20 years and is on friendly terms with all of the senior offi cers in the company.In fact last year, Soria Supplies appointed KK‘s fi nance director,Susan Schwab,to a non-executive directorship on its board.The executive directors of KK all know and like John and so plan to ask the nominations committee to appoint him before the next AGM.

　　KK has recently undergone a period of rapid growth and has recently entered several new overseas markets, some of which,according to the fi nance director,are riskier than the domestic market. Ken Kava,being the dominant person on the KK board,has increased the risk exposure of the company according to some investors.They say that because most of the executive directors are less experienced,they rarely question his overseas expansion strategy. This expansion has also created a growth in employee numbers and an increase in the number of executive directors, mainly to manage the increasingly complex operations of the company.It was thought by some that the company lacked experience and knowledge of international markets as it expanded and that this increased the risk of the strategy‘s failure.Some shareholders believed that the aggressive strategy,led by Ken Kava,has been careless as it has exposed KK Limited to some losses on overseas direct investments made before all necessary information on the investment was obtained.

　　As a large listed company,the governance of KK is important to its shareholders.Fin Brun is one of KK‘s largest shareholders and holds a large portfolio of shares including 8% of the shares in KK.At the last AGM he complained to KK’s chief executive,Ken Kava,that he needed more information on directors‘ performance.Fin said that he didn’t know how to vote on board reappointments because he had no information on how they had performed in their jobs. Mr Kava said that the board intended to include a corporate governance section in future annual reports to address this and to provide other information that shareholders had asked for.He added,however,that he would not be able to publish information on the performance of individual executive directors as this was too complicated and actually not the concern of shareholders.It was,he said,the performance of the board as a whole that was important and he（Mr Kava）would manage the performance targets of individual directors.

　　Required:

　　（a）Explain the term ‘confl ict of interest’ in the context of non-executive directors and discuss the potential confl icts of interest relating to KK and Soria Supplies if John Soria were to become a non-executive director of KK Limited. （8 marks）

　　（b）Assess the advantages of appointing experienced and effective non-executive directors to the KK board during the period in which the company was growing rapidly. （7 marks）

　　（c）Explain the typical contents of a ‘best practice’ corporate governance report within an annual report and how its contents could help meet the information needs of Fin Brun. （10 marks）

　　（25 marks）

　　4 During the global economic recession that began in mid 2008,many companies found it diffi cult to gain enough credit in the form of short-term loans from their banks and other lenders.In some cases,this caused working capital problems as short-term cash fl ow defi cits could not be funded.

　　Ultra-Uber Limited（UU）,a large manufacturer based in an economically depressed region,had traditionally operated a voluntary supplier payment policy in which it was announced that all trade payables would be paid at or before 20 days and there would be no late payment.This was operated despite the normal payment terms being 30 days.The company gave the reason for this as 'a desire to publicly demonstrate our social responsibility and support our valued suppliers,most of whom,like UU,also provide employment in this region'.In the 20 years the policy had been in place,the UU website proudly boasted that it had never been broken.Brian Mills,the chief executive often mentioned this as the basis of the company's social responsibility.'Rather than trying to delay our payments to suppliers,‘ he often said,'we support them and their cash flow.It‘s the right thing to do.’ Most of the other directors,however, especially the fi nance director,think that the voluntary supplier payment policy is a mistake.Some say that it is a means of Brian Mills exercising his own ethical beliefs in a way that is not supported by others at UU Limited.

　　When UU itself came under severe cash flow pressure in the summer of 2009 as a result of its bank‘s failure to extend credit,the fi nance director told Brian Mills that UU’s liquidity problems would be greatly relieved if they took an average of 30 rather than the 20 days to pay suppliers.

　　In addition,the manufacturing director said that he could offer another reason why the short-term liquidity at UU was a problem.He said that the credit control department was poor,taking approximately 50 days to receive payment from each customer.He also said that his own inventory control could be improved and he said he would look into that. It was pointed out to the manufacturing director that cost of goods sold was 65% of turnover and this proportion was continuously rising,driving down gross and profi t margins.Due to poor inventory controls,excessively high levels of inventory were held in store at all stages of production.The long-serving sales manager wanted to keep high levels of fi nished goods so that customers could buy from existing inventory and the manufacturing director wanted to keep high levels of raw materials and work-in-progress to give him minimum response times when a new order came in.

　　One of the non-executive directors（NEDs）of UU Limited,Bob Ndumo,said that he could not work out why UU was in such a situation as no other company in which he was a NED was having liquidity problems.Bob Ndumo held a number of other NED positions but these were mainly in service-based companies.

　　Required:

　　（a）Defi ne ‘liquidity risk’ and explain why it might be a signifi cant risk to UU Limited.（5 marks）

　　（b）Defi ne ‘risk embeddedness’ and explain the methods by which risk awareness and management can be embedded in organisations. （7 marks）

　　（c）Examine the obstacles to embedding liquidity risk management at UU Limited. （8 marks）

　　（d）Criticise the voluntary supplier payment policy as a means of demonstrating UU‘s social responsibility.（5 marks）

　　（25 marks）