Question 1
a) According to the National article, the “inextricable link” highlighted was the link that existed between the independence of the board and good corporate governance.
b) According to the National article, financial, legal and future mergers are the areas that really need independence even on a small executive board. The reason why it is very essential to have independence even on a small scale is because it would be quite expensive to bring in a person as a full employee in those areas.
c) In accordance with the 2010 UK Corporate Governance Code, except for smaller companies, at least half of the board, excluding the chairman should comprise nonexecutive directors determined by the board to be independent. A smaller company should have at least two independent non-executive directors.
Reasons supporting the same person being the CEO
i. The company is able to communicate externally with one voice as only person is responsible for the task and there is no likelihood of conflict of interest.
ii. The company will know the person to hold accountable for any situation or misfortune as only one person is in charge of the managerial duties which ensure the smooth running of the company.
iii. There are no instances of power struggles (which can be very disastrous in a company) caused by disagreements between the chairman and the CEO.
iv. Decision making can be done very fast as opposed to series of consultation done in places with different people occupying the positions of CEO and chairman which always derails the process of decision making.
Reasons supporting separate CEO and Chairman
i. There is a possibility of giving one person too much power which might undermine the functionality and efficiency of the other directors
ii. There is a possibility of misuse of power leading to poor governance as one person can make decisions which only fit him/her and ignoring the welfare of others.
iii. It is not easy to get a single person who posses all the wisdom necessary to do what is best for the company.
iv. A clear separation of the two, makes the board more independent
v. It leads to efficiency as the management becomes more dedicated as opposed to situations when the two positions are put together that a single person does a bulk of work. This often leads to inefficiency as a person cannot be a master of all jobs.
Explain which of the two models you believe to be the best and state the reasons why you believe it to be the best model.
I believe that the best model is the one that involves separating the two positions and giving them to different people because, by giving one person too much power, decision making may be too biased and always one sided. Additionally, in cases where the director to take up the two positions is not well equipped and knowledgeable, the Company and the board may lack proper guidance and leadership. It is also not possible to have a single person who is a master of all jobs thus leading to poor productivity.
Question 2
a) The four key elements of the Kuoni financial methodology covered by the value based management approach are:
Target setting: This reflects the goals and the objectives which spell out explicitly the expectations of investors. Investors always expect to get a return on their capital input which should be proportional to their investment risk. Additionally, KEP objectives are defined for the whole group and also for its tactical Business Units whose success will provide shareholders with dividends and other profits higher than the WACC.
Value communication: Through the reports presented by KEP and ROIC, communication links are created between Kuoni Group and the outside market, investors and analysts. This will basically reflect the commitment of Kuoni Group on sustainable value provision to the outside market.
Performance measurement: This is achieved through the quarterly KEP and ROIC reports presented by Kuoni Group and its strategic Business Groups. The figures obtained are compared with the previous ones obtained. Changes in values of KEP (delta KEP) and ROIC reflect with time demonstrate economic progress achieved by Kuoni Group and its Strategic Business Groups. Turnover growth, cost and capital efficiencies may also be used to demonstrate whether economic value has been added to the Company or not.
Management compensation: This refers to strategies and policies through which bonuses, dividends and other profits are shared among the shareholders. From the 2007 financial year, KEP has been the key financial principle and measure used to determine bonus payments to shareholders and Group Board Management, junior managers and the Strategic Group organizational managers. (4 marks)
b) The four essential pieces of information needed in calculating the Weighted Average Cost of Capital (WACC) are:
The economic profit of a business: For Kuoni Company, the economic profit is referred to as Kuoni Economic Profit (KEP). It is calculated by subtracting the Net Operating Profit after Tax (NOPAT) from the capital invested.
