e7qa-social and environmental issues

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Q1b - December 2011

Coastal Oil is one of the world’s largest petrochemical companies. It is

based in Deeland and is responsible alone for 10% of Deeland’s total stock

market value. It emplos 1!0"000 people in man countries and has anespeciall strong presence in #$and because of #$and’s ver large

consumption of oil and gas products and its large oil reserves.

Coastal Oil is organised" like most petrochemical companies" into three

verticall integrated business units the e&ploration and e&traction division'

the processing and re(ning division' and the distribution and retailing

division.

)ecause of the risks and the capital investment demands" Coastal Oil has

*oint venture +,- agreements in place for man of its e&traction operations

+i.e. its oil and gas rigs" especiall those in the deep/water seas. *oint

venture is a shared euit arrangement for a particular pro*ect where

control is shared between the ,- partners.

In each of its ,-s" Coastal Oil is the largest partner" although operations on

each rig are divided between the ,- member companies and the bene(ts are

distributed according to the share of the ,-.

s a highl visible compan" Coastal Oil has long prided itself on its safet

record and its ethical reputation. It believes both to be essential in

supporting shareholder value. Its corporate code of ethics" published some

ears ago" pledges its commitment to the 2highest standards’ of ethical

performance in the following areas

full compliance with regulation in all *urisdictions' safet and care of

emploees' transparenc and communication with stakeholders' social

contribution' and environmental responsibilit. In addition" Coastal Oil has

usuall provided a lot of voluntar disclosure in its annual report and on its

website. It sas that it has a wide range of stakeholders and so needs to

provide a great deal of information.



One of the conseuences of dividing up the di3erent responsibilities and

operations on an oil or gas rig is that Coastal Oil does not have direct

in4uence over some important operational controls. 5he contractual

arrangements on an given oil rig can be ver comple& and there have often

been disagreements between ,- partners on some individual legal

agreements and responsibilities for health and safet controls.

6iven that Coastal Oil has ,- interests in hundreds of deep/water oil and

gas rigs all over the world" some observers have said that this could be a

problem should an accident ever occur.

5his issue was tragicall highlighted when one of its deep/water rigs" the

#$and Coastal Deep 7ig" had an e&plosion earlier this ear. It was caused

b the failure of a valve at the 2well/head’ on the sea 4oor. 5he valve was the

responsibilit of 8ell 9ervices" a minor partner in the ,-.

#ight workers were killed on the rig from the high pressure released after

the valve failure" and oil gushed into the sea from the well/head" a situation

that should have been prevented had the valve been full operational.

It was soon established that 8ell 9ervices’ sta3 failed to inspect the valve

before placing it at the well/head at the time of installation" as was reuired

b the compan’s normal control sstems. In addition" the valve was

attached to a connecting part that did not meet the reuired technical

speci(cation for the water depth at which it was operating.

5he sea bed was 1"000 metres deep and the connecting part was intended

for use to a depth of up to :00 metres. 5here was a suggestion that the

need to keep costs down was a ke reason for the use of the connecting partwith the inferior speci(cation.

7eports in the media on the following da said that the accident had

happened on a rig 2belonging to Coastal Oil’ when in fact" Coastal Oil was

technicall onl a ma*or partner in the *oint venture. ;urthermore" there



was no mention that the accident had been caused b a part belonging to

8ell 9ervices.

*ournalist did discover" however" that both companies had operated a

more la& safet culture on the deep/water rigs than was the case at facilities

on land +the 2land/side’. <e said there was a culture of 2out of sight" out of

mind’ on some o3shore facilities and that this meant that several other

controls were inoperative in addition to the ones that led to the accident.

Information sstems reporting back to the 2land/side’ were in place but it

was the responsibilit of management on each individual rig to enforce all

internal controls and the 2land/side’ would onl be informed of a problem if

it was *udged to be 2an e&ceptional risk’ b the rig’s manager.

5he accident triggered a large internal argument between Coastal Oil and

8ell 9ervices about liabilit and this meant that there was no public

statement from Coastal Oil for seven das while the arguments continued.

=awers on both sides pointed out that liabilit was contractuall

ambiguous because the documentation on responsibilities was far too

comple& and unclear.

nd in an case" nobod e&pected anthing to go wrong. In the absence of

an o3icial statement from Coastal Oil for those seven das" the media had

no doubts who was to blame Coastal Oil was strongl criticised in #$and

with the criticism growing stronger as oil from the ruptured valve was

shown spilling directl into the sea o3 the #$and coast.

8ith no contingenc plan for a deep/water well/head rupture in place" the

ruptured valve took several months to repair" meaning that man thousandsof tonnes of crude oil polluted the sea o3 #$and. Images of seabirds

covered in crude oil were freuentl broadcast on television and thousands

of businesses on the coast reported that the polluted water would disrupt

their business over the vital tourist season.



>ublic statements from Coastal Oil that it was not responsible for the

ruptured valve were seemingl not believed b the #$and public. 9enior

legislators in #$and said that the accident happened on 2a rig belonging to

Coastal Oil’ so it must be Coastal Oil’s fault.

review b the Coastal Oil board highlighted several areas where risk

management sstems might be tightened to reduce the possibilit of a

similar accident happening again. ;inance director" 5ana 5un" suggested

that the compan should disclose this new information to shareholders as it

would be value/relevant to them.

In particular" she said that a far more detailed voluntar statement on

environmental risk would be material to the shareholders. 5he annual

report would" she believed" be a suitable vehicle for this disclosure.

)ecause of the high media pro(le of the event" politicians from #$and

involved themselves in the situation. 9enator ,ones’s constituenc on the

coast nearest the rig was badl a3ected b the oil spill and man of his

constituents su3ered economic loss as a result.

<e angril retorted in a newspaper interview that Coastal Oil’s C#O" 9usan

hmed" 2should have known this was going to happen’" such was the poor

state of some of the internal controls on the #$and Coastal Deep 7ig.

s the oil spill continued and the media interest in the events intensi(ed"

C#O ?rs hmed was summoned to appear before a special committee of

the #$and national legislature 2to e&plain herself to the citi@ens of #$and’.

5he Coastal Oil board agreed that this would be a good opportunit for ?rs

hmed to address a number of issues in detail and attempt to repair someof the compan’s damaged reputation.

5he board agreed that ?rs hmed should provide as full a statement as

possible on the internal control failures to the special committee.

Required:



#&plain" using e&amples" the di3erence between voluntar and mandator

disclosure" and assess 5ana 5un’s proposition that additional voluntar

disclosure on environmental risk management would be material to the

shareholders. +10 marks

Voluntary disclosure and environmental risk

Diference between

Compan reporting" usuall in annual reports" interim reports or on

websites" contains both mandator and voluntar disclosures. ?andator

disclosures are those statements that are compulsor under relevant

compan laws or stock market listing rules.In most *urisdictions" mandator items are the main (nancial statements

such as income statement" statement of (nancial position and statement of

cash 4ows. =isting rules in man *urisdictions" such as in the AB" also

mandate some corporate governance disclosures such as directors’

shareholdings and emoluments" and details of directors’ contracts.

-oluntar disclosures are not reuired b an mandate but are provided"

usuall in narrative rather than uantitative form. 5here is a belief that

some information of interest or relevance to shareholders or other

stakeholders cannot be conveed numericall and so additional information

is needed.

5he chairman’s statement" chief e&ecutive’s review" social and

environmental disclosure" intellectual capital reporting and risk reporting

are all e&amples of voluntar disclosure in most

*urisdictions.

5utorial note mandator and voluntar disclosures var slightl between

*urisdictions.

Material to sareolders



-oluntar disclosure is of interest to shareholders because it provides

information that cannot be easil conveed in statutor statements or in

numerical form. In the case of environmental risk reporting at Coastal Oil" it

is likel that shareholders will welcome the environmental risk measures

put in place after the accident as reported in the annual report.

;irst" in the case of Coastal Oil" the fact that there has been a recent and

e&pensive environmental accident means that environmental risk is clearl

material to shareholder value and is likel to remain so while the compan

continues to e&tract and process oil. 5his is a 2structural’ risk resulting from

the compan’s core activit.

5his makes environmental disclosure potentiall highl material and

capable of a3ecting the value of the compan. 5he e&tent of potential

e&posure +total impacts" and hence the potential losses" would be a ke

piece of information needed" and also the previous environmental accident

statistics.

9econd" it will allow the shareholders to understand the e&tent and nature

of the risk which clearl wasn’t full known before the accident. ) knowing

this" shareholders can assess whether the risk pro(le of the business

matches their own attitudes to or appetite for risk. In a portfolio of shares"

some investors will want to blend certain risks and returns" and knowing

about a compan’s risks is important in making these *udgements.

5hird" the additional environmental risk information will allow the

shareholders to *udge how the risk might a3ect compan value and hence

the potential volatilit and attractiveness of the share. 5he case sas thatthe disclosure would contain 2value relevant’ information meaning that the

risks described will be capable of a3ecting returns" costs or both.

5he materialit of environmental risk reporting is potentiall uite high

shareholders were unaware of the poor internal controls on the #$and



Coastal Oil 7ig and" had the been more aware" ma have discounted the

share price accordingl.

;ourth" risk reporting can e&plain the new risk controls put in place. fter a

con(dence/threatening event such as the valve rupture and oil spill on the

#$and Coastal Oil 7ig" the e&planation of these measures could be vital in

restoring investor con(dence.

In particular" the should reassure shareholders that the accident should

not re/occur" or that if it were to re/occur" further controls would be in place

to o3set the worst of the damage. It is likel that more detailed and

granulated environmental reporting would be valued b shareholders"

especiall those specialist institutional shareholders made cautious b the

#$and accident.

!"D# $%&'#R !"D# M$R("%) )*"D#

! marks for distinguishing between voluntar and mandator

disclosure

half mark for each e&ample of mandator and voluntar to a ma& of !marks

! marks for each bene(t to shareholders identi(ed and assessed to a

ma& of E marks

half a mark for identi(cation

+ma&imum 10 marks

!"D# #+$M"%#R& R#,R.

https://www.acowtancy.com/textbook/acca-p1/e-7-ir-and-sustainability-issues/social-and-environmental-issues-and-ethics/exam









>art +b was about mandator and voluntar disclosure and in particular" the

potential materialit of environmental risk disclosure at Coastal Oil. 5he

(rst task was to e&plain what the two terms meant +voluntar and

mandator and then to give some e&amples to demonstrate understanding.

?ost candidates were able to gain some marks here although uite a lot

were not able to sa an more than that mandator was reuired b law and

that voluntar was not. 5his missed the point about how listing rules also

place disclosure reuirements on companies" including" in man

*urisdictions" details of the compan’s corporate governance" e&ecutive

remuneration" etc.

Q1d ii - /une 2010

<esket Fuclear +<F is a nuclear power station in land" a large #uropean

countr. 5he <F plant is operated b <esket >ower Compan +<>C" which

in turn is wholl owned b the government of land. Initiall opened in the

late 1GH0s" the power station grew in subseuent decades b the addition of

several other facilities on the same site.

<F now has the abilit to generate H% of land’s entire electricit demandand is one of the largest nuclear stations in #urope. t each stage of its

development from the 1GH0s to the present da" development on the site

was welcomed b the relevant local government authorities" b the

businesses that have supported it" b the trade union that represents the

ma*orit of emploees +called ;orward 5ogether or ;5 for short and also b

the national land government.

nuclear reprocessing facilit was added in the 1GE0s. 5his is a valuable

source of overseas income as nuclear power producers in man other parts

of the world send material b sea to <F to be reprocessed. 5his includes

nuclear producers in several developing countries that rel on the cheaper

reprocessed fuel +compared to 2virgin’ fuel that <F produces.



<>C is loss/making and receives a substantial subsid each ear from the

government of land. <>C has proven itself uneconomic but is deemed

politicall and environmentall necessar as far as the government is

concerned. 5he government of land has reluctantl accepted that large

subsidies to <>C will be necessar for man ears but considers nuclear

power to be a vital component of its energ portfolio +along with other

energ sources such as oil" gas" coal" renewables and hdroelectric and

also as a ke part of its 2clean’ energ strateg.

Anlike energ from fossil fuels +such as coal" gas and oil" nuclear power

generates a negligible amount of polluting greenhouse gas. <F also

provides much needed emploment in an otherwise deprived part of the

countr. 5he <F power station underpins and dominates the econom of its

local area and local government authorities sa that the <F plant is vital to

the regional econom.

9ince it opened" however" the <F power station has been controversial.

8hilst being welcomed b those who bene(t from it in terms of *obs" trade"

reprocessing capacit and energ" a coalition has graduall built up against

it comprising those sceptical about the safet and environmental impact of

nuclear power.

9ome neighbouring countries believe themselves to be vulnerable to

radioactive contamination from the <F plant. In particular" two countries"

both of whom sa their concerns about <F arise because of their

geographical positions" are vocal opponents. 5he sa that their

geographical pro&imit forced them to be concerned as the are a3ected bthe location of the <F plant which was not of their choosing.

5he government of )eeland" whose capital cit is 0 km across the sea from

<F +which is situated on the coast" has consistentl opposed <F and has

freuentl asked the government of land to close <F down.



5he )eeland government claims that not onl does 2low/level’ emission from

the site alread contaminate the waters separating the two countries but it

also claims that an future ma*or nuclear 2incident’ would have serious

implications for the citi@ens of )eeland. 5here is some scienti(c support for

this view although opinion is divided over whether )eeland is being

irrational in its general opposition to <F.

5he government of Ceeland is also a vocal opponent of <F. Ceeland is

located to the north of )eeland and appro&imatel H00 km awa from

land. 9ome nuclear scientists have said that with such a large stretch of

water between the <F plant and Ceeland" even a much/feared incident

would be unlikel to seriousl impact on Ceeland.

9ome commentators have gone further and said that Ceeland’s concerns

are unfounded and 2borne of ignorance’. ;5" the trade union for <F

emploees" issued a statement saing that Ceeland had no reason to fear

<F and that its fears were 2entirel groundless’.

<F’s other vocal and persistent opponent is Fo Fuclear Fow +FFF" a

well/organised and well/funded campaigning group. Describing itself on its

website as 2passionate about the environment’" it describes <F’s social and

environmental footprint as 2ver negative’. FFF has often pointed to an

environmentall important colon of rare seals living near the <F plant.

It sas that the seals are dependent on a local natural ecosstem around the

plant and are unable to move" arguing that the animals are at signi(cant

risk from low/level contamination and would have 2no chance’ of survival if a

more serious radioactive leak ever occurred. FFF points to such a leak thatoccurred in the 1G0s" saing that such a leak proves that <F has a poor

safet record and that a leak could easil recur.

#ach time an ob*ection to the <F power station is raised" ;5" the trade

union" robustl defends the <F site in the media" and argues for further



investment" based on the need to protect the *obs at the site. ;urthermore"

the radiation leak in the 1G0s led to ;5 uniting with the <>C board to

argue against those stakeholders that wanted to use the leak as a reason to

close the <F site. 5he combination of union and <>C management was able

to counter the arguments of those asking for closure.

<F places a great deal of emphasis on its risk management and often

publicises the fact that it conducts continual risk assessments and is in full

compliance with all relevant regulator frameworks. 9imilarl" ;5 recentl

pointed out that <F has had an 2impeccable’ safet record since the

incident in the 1G0s and sas on its website that it is 2proud’ that its

members are involved in ensuring that the compan is continuall in full

compliance with all of the regulator reuirements placed upon it.

5he board of <>C" led b chairman >aul 6og" is under continual pressure

from the government of land to minimise the amount of government

subsid. #ach ear" the government places challenging targets on the <>C

board reuiring stringent cost controls at the <F power station.

In seeking to reduce maintenance costs on the e&pir of a prior

maintenance contract last ear" the board awarded the new contract to an

overseas compan that brought its own workers in from abroad rather than

emploing local people. 5he previous contract compan was outraged to

have lost the contract and the move also triggered an angr response from

the local workforce and from ;5" the representative trade union.

;5 said that it was deplorable that <>C had awarded the contract to an

overseas compan when a domestic compan in land could have beenawarded the work. 5he union convenor" Bate llu*ah" said that especiall in

the nuclear industr where safet was so important" domestic workers were

2more reliable’ than foreign workers who were brought in purel on the



basis of cost and in whose countries safet standards in similar industries

might not be so stringent.

<>C said that it had done nothing illegal as the foreign workers were

allowed to work in land under international legal treaties. ;urthermore" it

argued that pressure b ;5 to raise wages over recent ears had created"

with the government’s subsid targets" the cost pressure to re/tender the

maintenance contract.

On <F’s H0th anniversar last ear" FFF published what it called a 2risk

assessment’ for the <F power station. It said it had calculated the

probabilities +> and impacts +I of three prominent risks.

7isk of ma*or radioactive leak over the ne&t 10 ears > J 10%" I J !0

7isk of nuclear e&plosion over the ne&t H0 ears > J !0%" I J 100

7isk of ma*or terrorist attack over ne&t 10 ears > J 10%" I J E0

Impacts were on an arbitrar scale of 1K100 where 100 was de(ned b FFF

as 2total nuclear annihilation of the area and thousands of deaths’.

5he governments of )eeland and Ceeland sei@ed upon the report" saing

that it proved that <F is a genuine threat to their securit and should be

immediatel closed and decommissioned. <F’s risk manager" Beith 8an"

vigorousl disagreed with this assessment saing that the probabilities and

the impacts were 2ridiculous’" massivel overstated and intended to

unnecessaril alarm people. <F’s public relations o3ice was also angr

about it and said it would issue a rebuttal statement.

Required:

s a part of <>C’s public relations e3ort" it has been proposed that aresponse statement should be prepared for the compan’s website to help

address two ma*or challenges to their reputation.



Draft a statement to e&plain what a social and environmental 2footprint’ is

and construct the argument that <F’s overall social and environmental

footprint is positive. +L marks

&tatement

!esket ,ower comanys resonse to te reort roduced by %%%

!%s social and environmental 3ootrint

<>C is aware of some critics that have asserted that our overall footprint is

negative. In responding to this" we feel it necessar to remind readers that

the footprint of an organisation includes the sum total of its positive and

negative interactions with the environment.8hilst this sometimes involves negative impacts such as carbon emissions

and accidental pollution" it also takes into account the positive impacts such

as social bene(t" through such things as *ob creation" and positive

environmental impacts.

)oth 2sides’ need to be taken into account before an overall evaluation of

the social and environmental footprint can be established. 5o focus on onl

a small number of measures" as some of our critics have done" is to provide

an unfair and biased account of our genuine overall footprint.

&ocial ar4uments

It is our belief that <esket Fuclear makes a substantial positive

contribution on both social and environmental measures. In terms of social

contribution" <F makes a positive impact for several reasons.

8hilst accepting that <esket Fuclear has its critics" the compan would like

to remind the public both in land and )eeland that the plant is a ver

large emploer and vital to the economic well/being of the region" a fact

recognised b a wide range of local and national stakeholders.



Others have noted the importance of the *obs provided at <esket Fuclear to

the social and economic well/being of the region and <>C full agrees with

this analsis.

In addition to the *obs provided in land" <esket Fuclear also provides

reprocessed fuel that is cheaper than virgin fuel. 5his provides support for

nuclear power" and hence clean energ" in several developing countries that

are our valued customers. <esket Fuclear therefore indirectl supports

emploment and social development in those countries.

8ere our reprocessed fuel unavailable to them" rates of economic and social

development growth ma be slowed in those countries. 8e are therefore

determined to continue to suppl this vital input into those countries and to

continue to support them.

#nvironmental ar4uments

In addition" as a non/fossil fuel industr" nuclear is relativel non/polluting

and is an essential component of the government of land’s clean energ

strateg. <esket Fuclear is proud to be a part of that strateg and will

continue to be a dependable producer of nuclear power and reprocessing

services.

In so doing we will continue to carefull manage the risks of nuclear power

suppl whilst providing the *obs and clean energ for which <esket Fuclear

is corporatel responsible. likel alternative to nuclear is the burning of

more polluting fossil fuels which would presumabl be as unacceptable to

our critics as it is to us.

8hilst conceding that all nuclear operations reuire a high level of safetand regulator observance" we are pleased to be able to remind our

stakeholders" including the governments of )eeland and Ceeland" of our

ver high performance in this area.



s our colleagues in the ;orward 5ogether trade union recentl said" <esket

Fuclear has had an impeccable safet record since the 1G0s and is full

compliant with all relevant safet regulations. 8e full intend to maintain

this high level of performance.

!"D# $%&'#R !"D# M$R("%) )*"D#

! marks for evidence of understanding of MfootprintM in conte&t

1 mark for each relevant positive social and environmental impact

convincingl argued for"

to a ma& of N marks

+L marks

!"D# #+$M"%#R& R#,R.

>art +d+ii contained two tasks. ?an candidates were able to e&plain

2social and environmental footprint’ but fewer were able to do well on thesecond task which was a level : intellectual outcome to construct a case. In

this task" candidates were reuired to construct the argument in favour of

the proposition that <F’s social and environmental footprint is positive +i.e.

to argue that it made a favourable social and environmental contribution.

In order to be able to do this" candidates needed to know what such a

footprint was and what it involved" and then to stud the case for evidence

to support the argument. 5he case stud contained evidence on both the

social footprint +about local *obs" energ and development abroad and the

environmental footprint +clean energ and ver good safetleakage

record.










Despite m highlighting a poor 2professional marks’ performance in

previous e&aminer’s reports" man candidates failed to approach the answer

as reuired in order to gain all of these marks. In this case" the reuired

format for the answer was a response statement for a website. 5his means it

was FO5 a letter or a report.

Q1d i 5 ii - /une 2006

7owlands P ?edeleev +7P?" a ma*or listed #uropean civil engineering

compan" was successful in its bid to become principal +lead contractor to

build the 6iant Dam >ro*ect in an #ast sian countr. 5he board of 7P?

prided itself in observing the highest standards of corporate governance.

7P?’s client" the government of the #ast sian countr" had taken into

account several factors in appointing the principal contractor including

each bidder’s track record in large civil engineering pro*ects" the value of

the bid and a statement" reuired from each bidder" on how it would deal

with the 2sensitive issues’ and publicit that might arise as a result of the

pro*ect.5he 6iant Dam >ro*ect was seen as vital to the #ast sian countr’s

economic development as it would provide a large amount of hdroelectric

power. 5his was seen as a 2clean energ’ driver of future economic growth.

5he government was keen to point out that because hdroelectric power did

not involve the burning of fossil fuels" the power would be environmentall

clean and would contribute to the #ast sian countr’s abilit to meet its

internationall agreed carbon emission targets. 5his" in turn" would

contribute to the reduction of greenhouse gases in the environment.

Critics" such as the environmental pressure group 29top/the/dam’" however"

argued that the pro*ect was far too large and the cost to the local

environment would be unacceptable. 9top/the/dam was highl organised



and" according to press reports in #urope" was capable of disrupting

progress on the dam b measures such as creating 2human barriers’ to the

site and hiding people in tunnels who would have to be phsicall removed

before proceeding.

spokesman for 9top/the/dam said it would de(nitel be attempting to

resist the 6iant Dam >ro*ect when construction started.

5he pro*ect was intended to dam one of the region’s largest rivers" thus

creating a massive lake behind it. 5he lake would" the critics claimed" not

onl displace an estimated 100"000 people from their homes" but would also

4ood productive farmland and destro several rare plant and animal

habitats.

number of important archaeological sites would also be lost. 5he largest

communit to be relocated was the indigenous ;irst Fation people who had

lived on and farmed the land for an estimated thousand ears. spokesman

for the ;irst Fation communit said that the 2true price’ of hdroelectric

power was 2miser and cruelt’.

press report said that whilst the ;irst Fation would be unlikel to disrupt

the building of the dam" it was highl likel that the would protest and also

attempt to mobilise opinion in other parts of the world against the 6iant

Dam >ro*ect.

5he board of 7P? was full aware of the controvers when it submitted its

tender to build the dam. 5he (nance director" 9all 6rignard" had insisted

on putting an amount into the tender for the management of 2local risks’.

9all was also responsible for the (nancing of the pro*ect for 7P?. lthough the client was e&pected to release mone in several 2interim

paments’ as the various parts of the pro*ect were completed to strict time

deadlines" she anticipated a number of working capital challenges for 7P?"



especiall near the beginning where a number of earl stage costs would

need to be incurred.

5here would" she e&plained" also be (nancing issues in managing the cash

4ows to 7P?’s man subcontractors. lthough the ma*or banks (nanced

the client through a lending sndicate" 7P?’s usual bank said it was war

of lending directl to 7P? for the 6iant Dam >ro*ect because of the

potential negative publicit that might result.

nother bank said it would provide 7P? with its earl stage working

capital needs on the understanding that its involvement in (nancing 7P?

to undertake the 6iant Dam >ro*ect was not disclosed. press statement

from 9top/the/dam said that it would do all it could to discover 7P?’s

(nancial lenders and publicl e&pose them.

9all told the 7P? board that some debt (nancing would be essential until

the (rst interim paments from the client became available.

8hen it was announced that 7P? had won the contract to build the 6iant

Dam >ro*ect" some of its institutional shareholders contacted 7ichard

?arkovniko3" the chairman. 5he wanted reassurance that the compan

had full taken the environmental issues and other risks into account.

One fund manager asked if ?r ?arkovniko3 could e&plain the sustainabilit

implications of the pro*ect to assess whether 7P? shares were still suitable

for his environmentall sensitive clients.

?r ?arkovniko3 said" through the compan’s investor relations

department" that he intended to give a statement at the ne&t annual general

meeting +6? that he hoped would address these environmental concerns.<e would also" he said" make a statement on the importance of

con(dentialit in the (nancing of the earl stage working capital needs.

Required:



>repare the statement for ?r ?arkovniko3 to read out at the 6?. 5he

statement ou construct should contain

+i de(nition and brief e&planation of 2sustainable development’' +: marks

+ii n evaluation of the environmental and sustainabilit implications of the

6iant Dam >ro*ect' +E marks

Chairman’s statement at 6?

5hank ou for coming to the annual general meeting of 7owlands P

?endeleev. I would like to make a statement in response to the concerns

that a number of our investors have made in respect to our appointment as

the principal contractor for the prestigious and internationall important6iant Dam >ro*ect.

8e are ver pleased and honoured to have won the contract but as several

have observed" this does leave us in a position of having a number of issues

and risks to manage.

s a pro*ect with obvious environmental implications" the board and I wish

to reassure investors that we are aware of these implications and have

taken them into account in our overall assessment of risks associated with

the pro*ect.

7i8 $ de9nition o3 sustainable develoment

One investor asked if we could e&plain the sustainabilit issues and I begin

with addressing that issue. ccording to the well/established )rundtland

de(nition" sustainable development is development that meets the needs of

the present without compromising the abilit of future generations to meet

their own needs.

5his de(nition has implications for energ" land use" natural resources and

waste emissions. In a sustainable development" all of these should be

consumed or produced at the same rate the can be renewed or absorbed

so as to prevent leaving future generations with an unwanted legac of



toda’s economic activit. 8e believe that our involvement in the 6iant Dam

>ro*ect has implications for environmental sustainabilit and it is to these

matters that I now turn.

5utorial note other relevant de(nitions of sustainabilit will be euall

acceptable.

7ii8 #nvironmental and sustainability imlications o3 te )iant Dam

,roect

In our preparation for the bid to act as principal contractor for the 6iant

Dam >ro*ect" we established that there were two prominent negative

implications of the pro*ect but these are" in our view" more than o3set b

two ma*or environmental positives.

5he environmental arguments against the 6iant Dam >ro*ect both concern

the 4ooding of the valle behind the dam. 7egrettabl" it seems that there

will be some loss of important habitats. 5his" in turn" ma mean the removal

of balanced environmental conditions for certain animal and plant species.

In addition" the 4ooding of the valle will result in the loss of productive

farmland.

5his will mean reduced capacit for the host countr to grow food and thus

support citi@ens such as the members of ;irst Fation. ;rom our point of

view" as the board of 7P?" however" we would remind shareholders and

other observers that the decisions involving the si@e and positioning of the

6iant Dam were taken b the client" the government. It is 7P?’s *ob"

having won the contract as principal contractor" to now carr out the plans"regardless of our own views.

<appil" however" there are two ver powerful environmental arguments in

favour of the 6iant Dam >ro*ect. It will create a large source of clean energ

for economic development that will be sustainable" as it will create no



carbon emissions nor will it consume an non/renewable resources as it

does so +compared to" for e&ample" fossil fuels.

t a time when people are becoming ver concerned about greenhouse

gases produced from conventional power generation" the 6iant Dam >ro*ect

will contribute to the #ast sian countr’s internationall agreed carbon

reduction targets. 5his" in turn" will contribute to the reduction of

greenhouse gases in the environment.

It is clear that the construction of the 6iant Dam >ro*ect is an

environmental conundrum with strong arguments on both sides. 5he

deciding factor ma be the opinion that we each have of the desirabilit of

economic growth in the #ast sian countr +which the energ from the dam

is intended to support. It seems that 9top/the/dam values the preservation

of the original environment more than the economic growth that the energ

from the dam would support.

5he client does not agree with this assessment and we are happ to be

involved with a pro*ect that will create such a useful source of renewable

and non/polluting energ.

!"D# $%&'#R !"D# M$R("%) )*"D#

7i8 1 mark for each relevant point made

+total : marks

7ii8 1 mark for each environmental impact identi(ed up to a ma&

of N marks








+! positive and ! negative factors

1 mark for description of each up to a ma& of N marks

+total E marks

!"D# #+$M"%#R& R#,R.

>art +d was a multi/part uestion containing professional marks for the

drafting of a statement for ?r ?arkivniko3 to read out at the annual

general meeting. ll >1 papers will contain between N and L professional

marks and candidates are well/advised to note that these can make the

di3erence between a marginal fail and a pass. 5he time budget for N marks

in a three hour paper is about minutes and some of this time should have

been spent on planning how to draft answers in line with the reuirements

of the uestion. In December !00" professional marks were awarded for

the drafting of a letter and in this paper" the were for the drafting of a

formal statement.

If a senior compan director were to address shareholders in a formal

meeting" how would it soundQ It would begin with a formal introduction"

provide an overview of what he was going to cover and" as he spoke" the

sections would be connected with narrative designed to make the speech

sound convincing" logical and persuasive. It would" obviousl" not contain

bullet points +how would the be delivered in a speechQ.

5he actual content of ?r ?arkovniko3’s statement should have contained

three elements" as set out in the three reuirements of R1+d. 5he ma*orit

of candidates were able to de(ne and brie4 e&plain what 2sustainable

development’ is although +incorrectl some seemed to think that





2sustainabilit’ referred to the continuance of 7P? as a going concernS

>art +d +ii reuired an evaluation of the environmental and sustainabilit

implication of the pro*ect. In one sense" the whole point of using a big civil

engineering pro*ect as the basis for R1 in this paper was to probe the

environmental implication of such a pro*ect. In an evaluation" candidates

are reuired to present both sides of the argument K e&plaining the

environmental negatives and also the positives. Importantl" this uestion

was about environmental and sustainabilit implications and therefore was

not concerned with 2social’ matters such as the fate of ;irst Fation nor the

unfortunate fate of the important archaeological sites.

Q1a - December 2012

>P, is a long established listed compan based in #mmland" a highl

developed and relativel prosperous countr. ;or the past L0 ears" >P, has

been #mmland’s largest importer and processor of a product named T:!" a

compound used in a wide variet of building materials" protective fabrics

and automotive applications.

T:! is a material much valued for its heat resistance" strength andadaptabilit" but perhaps most of all because it is 4e&ible and also totall

(reproof. It is this last propert that led to the growth of T:! use and made

>P, a historicall successful compan and a ma*or e&porter.

T:! is mined in some of the poorest developing countries where large local

communities depend heavil on T:! mining for their incomes. 5he incomes

from the mining activities are used to support communit development"

including education" sanitation and health facilities in those developing

countries.

5he T:! is then processed in dedicated T:! facilities near to the mining

communities" supporting man more *obs. It is then e&ported to #mmland

for (nal manufacture into (nished products and distribution.



#ach stage of the suppl chain for T:! is dedicated onl to T:! and cannot

be adapted to other materials. In #mmland" >P, is the ma*or emploer in

several medium/si@ed towns. In town" for e&ample" >P, emplos NH% of

the workforce and in )etown" >P, emplos :"000 people and also supports a

number of local causes including a children’s nurser" an amateur football

club and a number of adult education classes.

In total" the compan emplos 1H"000 people in #mmland and another

:0"000 people in the various parts of the suppl chain +mining and

processing in developing countries. Anlike in #mmland" where health and

safet regulations are strong" there are no such regulations in most of the

developing countries in which >P, operates.

7ecentl" some independent academic research discovered that T:! was

ver harmful to human health" particularl in the processing stages" causing

a wide range of fatal respirator diseases" including some that remain

inactive in the bod for man decades.

Doctors had suspected for a while that T:! was the cause of a number of

conditions that >P, emploees and those working with the material had

died from" but it was onl when >rofessor <arr Broll discovered how T:!

actuall attacked the bod that the link was known for certain. 5he

discover caused a great deal of distress at >P," and also in the industries

which used T:!.

5he compan was faced with a ver di3icult situation. 6iven that L0% of

>P,’s business was concerned with T:!" >rofessor Broll’s (ndings could not

be ignored. lthough demand for T:! remained una3ected b Broll’s(ndings in the short to medium term" the compan had to consider a new

legal risk from a stream of potential litigation actions against the compan

from emploees who worked in environments containing high levels of T:!

(bre" and workers in industries which used T:! in their own processes.



In order to gain some understanding of the potential value of future

compensation losses" >P, took legal advice and produced two sets of

(gures" both describing the present value of cumulative future

compensation paments through litigation against the compan. 5hese

forecasts were based on (nancial modelling using another product of which

the compan was aware" which had also been found to be ha@ardous to

health.

in ; years in 1;

years

in 2;

years

in <; years

=7m8 =7m8 =7m8 =7m8

best case H :0 1H0 N00

worst case !0 E0 :H0 1000

5he (nance director +;D" <annah Uin" informed the >P, board that the

compan could not survive if the worst/case scenario was realised. 9he said

that the actual outcome depended upon the proportion of people a3ected"

the period that the illness la undetected in the bod" the control measures

which were put in place to reduce the e&posure of emploees and users to

T:!" and societ’s perception of T:! as a material.

9he estimated that losses at least the si@e of the best case scenario were

ver likel to occur and would cause a manageable but highl damaging

level of losses.

5he worst case scenario was far less likel but would make it impossible for

the compan to survive. lthough pro(table" >P, had been highl geared for



several ears and it was thought unlikel that its banks would lend it an

further funds.

<annah Uin e&plained that this would limit the compan’s options when

dealing with the risk. 9he also said that the compan had little b wa of

retained earnings.

Chief e&ecutive o3icer" =as@lo <o" commissioned a stud to see whether the

health risk to >P, workers could be managed with e&tra internal controls

relating to safet measures to eliminate or reduce e&posure to T:! dust.

5he con(dential report said that it would be ver di3icult to manage T:!

dust in the three stages of the suppl chain unless the facilities were

redesigned and rebuilt completel" and unless independent breathing

apparatus was issued to all !people coming into contact with T:! at an

stage.

;D <annah Uin calculated that a full re(t of all of the compan’s mines"

processing and manufacturing plants +which ?r <o called 2>lan ’ was

simpl not a3ordable given the current market price of T:! and the current

costs of production.

=as@lo <o then proposed the idea of a partial re(t of the town and

)etown plants because" being in #mmland" the were more visible to

investors and most other stakeholders.

?r <o reasoned that this partial re(t +which he called 2>lan )’ would

enable the compan to claim it was making progress on improving internal

controls relating to safet measures whilst managing current costs and

2waiting to see’ how the market for T:! fared in the longer term. Ander>lan )" no changes would be made to limit e&posure to T:! in the

compan’s operations in developing countries.

<annah Uin" a uali(ed accountant" was trusted b shareholders because of

her performance in the role of ;D over several ears. )ecause she would be



believed b shareholders" ?r <o o3ered to substantiall increase her share

options if she would report onl the 2best case’ scenario to shareholders and

report 2>lan )’ as evidence of the compan’s social responsibilit.

9he accepted ?r <o’s o3er and reported to shareholders as he had

suggested. 9he also said that the compan was aware of >rofessor Broll’s

research but argued that the (ndings were not conclusive and also not

considered a serious risk to >P,’s future success.

#ventuall" through speaking to an anonmous compan source" a (nancial

*ournalist discovered the whole stor and felt that the public" and >P,’s

shareholders in particular" would want to know about the events and the

decisions that had been taken in >P,. <e decided to write an article for his

maga@ine" Investors in Companies" on what he had discovered.

Required:

De(ne 2social footprint’ and describe" from the case" four potential social

implications of >rofessor Broll’s discover about the health risks of T:!. +10

marks

&ocial 3ootrint and otential social imlications>

&ocial 3ootrint

5he term 2footprint’ is used to refer to the impact or e3ect that an entit

+such as an organisation can have on a given set of concerns or stakeholder

interests. 2social footprint’ is the impact on people" societ and the

wellbeing of communities.

Impacts can be positive +such as the provision of *obs and communit

bene(ts or negative" such as when a plant closure increases unemploment



or when people become sick from emissions from a plant or the use of a

product. >rofessor Broll’s (ndings have both positive and negative impacts

upon societ and communities in the case of >P,.

,otential imlications

5he discover b >rofessor Broll will lead" whether b a tightening of

controls or b a reduction in >P,’s activities" to lower e&posures to T:! in

town and )etown" and hence there will" over time" be less T:!/related

disease. 5here will" in conseuence" be fewer people su3ering" and"

accordingl" less miser for the a3ected families and friends of su3erers.

lower mortalit from T:!/related disease will bene(t communities and

families as well as those individuals directl a3ected. <owever" as the are

continuing to manufacture the product" if >rofessor Broll’s (ndings prove

correct" larger numbers of people using the product will ultimatel be

a3ected worldwide.

=oss of *obs in the various stages of the >P, suppl chain. 5he forecast

losses" even in the best case scenario" would be likel to involve the loss of

*obs and emploment levels at >P, plants and its suppliers.

5he worst case scenario" in which the compan itself would be lost" would

involve the loss of the NH"000 >P, *obs plus man more among suppliers and

in the communities supported b the >P, plants +such as in local businesses

in town and )etown.

=oss of" or serious damage to" communities in which the operations are

located. 5his includes the economic and social bene(ts in the developing

countries and a ver high level of social loss in town and )etown +in#mmland" where both towns are highl dependent on a single emploer.

It is likel that town" e3ectivel a 2compan town’ with NH% of the *obs at

>P," will be ver badl a3ected and the good causes in )etown" such as the

nurser and adult education classes" will no longer be able to be supported.



5he loss of a ma*or emploer from a town can lead to a loss of communit

cohesion" net outward migration and a loss of" or deterioration in"

communit facilities.

5here will be a loss of economic value for shareholders" and a reduction in

the standards of living for those depending upon the compan’s value for

income or capital growth. 5his might result in a reduction in pension

bene(ts or endowment values" where >P, shares are a part of the value of

such funds. Individuals holding >P, shares ma lose a substantial

proportion of their personal wealth.

5utorial note llow other relevant impacts such as loss of ta&es to fund

states services" increases in state funding to support unemploedsick

workers" etc.

!"D# $%&'#R !"D# M$R("%) )*"D#

! marks for de(nition of social footprint

! marks for each implication identi(ed and discussed

+10 marks

!"D# #+$M"%#R& R#,R.

5he case in section +uestion 1 was about a compan called >P, that

made a product +T:! that was discovered to be to&ic and ha@ardous to

health. 8ith so much investment in the T:! suppl chain" >P, had to face

several strategic problems" not least of which was a likel long/term liabilit

from litigation claims from emploees and others that had been e&posed to

T:!. 5he reuirements e&amined a range of issues concerned with >P, and

its di3icult situation.










>art +a asked about >P,’s social footprint. ?ost candidates were able to

de(ne what it means +the (rst reuirement and the uestion then asked for

four particular social implications of >rofessor Broll’s (ndings. 5he case

described these and this showed the importance of carefull studing the

case to gather this information.

5he emphasis here was on e&ploring how people and communities can be

a3ected b business issues. In the case of T:!" these issues concerned

health" emploment and the loss of compan value.

Q1b - /une 201<

report was recentl published b an international accounting organisation

on the future of certain rare chemicals used in industrial processes. 5he

report said that some of these chemicals" crucial to man industrial

processes" were now so scarce that there was a threat to suppl chains for

items such as computer circuitr and the rechargeable batteries used in

electronic goods.

One of these scarce and rare chemicals" the highl to&ic trans/U1: +5U1:"has become increasingl rare and" therefore" ver e&pensive. It reuires

careful processing and" although used in small uantities in each product"

its high cost means that even small ine3iciencies in its treatment can

disproportionatel a3ect (nal product costs.

5he report’s conclusions included this statement 2>ut simpl" we are living

beond the planet’s means. )usinesses that use these materials will

e&perience new risks. It ma even become seen as sociall unacceptable to

use some of these materials. ;inall" if suppl stops" then manufacturing

stops.’

One compan which depends on a continuous and reliable suppl of 5U1: is

<oppo Compan. <oppo is a listed compan based in the highl developed



countr of #ssland. It has" for several ears" designed and developed its

products in #ssland and then outsourced manufacturing to another

compan" 7ed Co" which is based in the developing countr of 5eeland.

5his means that 7ed Co manufactures <oppo’s products for an agreed price

and to <oppo’s designs and technical speci(cations.

)ecause 7ed Co is based in 5eeland +a developing countr with lower land

and labour costs than #ssland" working with 7ed Co has o3ered <oppo

cost advantages over manufacturing its products in its home countr. s a

compan which outsources man of its functions" <oppo tries to ensure that

in each case of outsourcing" working conditions and environmental

responsibilit are the same at each outsourcing compan as the would be if

carried out in its highl/regulated home countr of #ssland.

<oppo itself is one of the most valuable companies on the #ssland stock

e&change and has strategicall positioned itself as a compan that is seen as

a trustworth and responsible producer" that is also responsible in its social

and environmental behaviour. In its press statements and annual reports" it

has freuentl highlighted the high value it places on integrit and

transparenc as fundamental values in its corporate governance. It has

recentl considered producing an annual environmental report" as it

believes its shareholders would value the information it contains.

7ed Co is an e&perienced producer of electronic circuits and has a long

histor of working with 5U1:. It has relationships with the main 5U1:

suppliers going back man ears" and these relationships ensure that it can

normall obtain supplies even during periods when world suppl is short.)ecause the suppl ualit of 5U1: varies widel" 7ed Co has developed

(nel/tuned methods of ensuring that the 5U1: received is of suitable

ualit.



5he performance of the (nished product is ver sensitive to the ualit of

the 5U1: and so this pre/production testing is considered vital. In addition"

5U1:’s to&icit and high cost mean that other sstems are put in place at

7ed Co to ensure that it is safel stored until needed for manufacture.

#arlier this ear" however" two issues arose at 7ed Co which caused <oppo

to reconsider its outsourcing relationship. 5he (rst one was the publication

of an international media report showing evidence that" despite <oppo’s

claims about having the same working conditions at all of its outsourcing

clients" labour conditions were unacceptabl poor at 7ed Co.

)ecause labour regulations were less stringent in 5eeland" 7ed Co had been

forcing emploees to work e&cessivel long hours without breaks" and other

measures that would not have been permitted in #ssland. It was reported

that workers were being bullied" and threatened with dismissal if the

complained about their working conditions.

5he second problem was a leakage of unprocessed 5U1: from the 7ed Co

factor. Fot onl was this seen as wasteful and careless" it also poisoned a

local river" killing man (sh and contaminating local farmland. 5he

communit living nearb said that it would be unable to use the

contaminated land for man ears and that this would a3ect local food

suppl.

8hen a *ournalist" )ob <ob" discovered information about these two issues"

the media interpreted the stor as a problem for <oppo" partl because of

its reputation as a responsible compan. <oppo’s own research had shown

that man of its customers valued its environmental reputation and thatsome of its ke emploees were attracted to <oppo for the same reason.

9ome important customers began to associate <oppo directl with the

problems at 7ed Co" even though it was 7ed Co which had actuall been

responsible for the emploee issues and also the 5U1: leak. <oppo’s share



price fell when some investors considered the problems to be important

enough to undermine future con(dence in <oppo’s management and brand

value.

In an e3ort to protect its reputation in future" <oppo began to review its

outsource arrangement with 7ed Co. 5he board considered the options for

taking manufacturing under its own direct control b building a new factor

in another low/cost countr" which would be owned and operated b <oppo.

It uickl realised that stopping the outsourcing relationship with 7ed Co

would mean the loss of about 1"000 *obs there and could also raise the

likelihood of legal action b 7ed Co against <oppo for loss of contract. s

<oppo’s manufacturing contract is so valuable to 7ed Co" some people

thought it likel that 7ed Co would sue <oppo for loss of future earnings"

despite the terms of the contract being legall ambiguous.

5his lack of clarit in the contract arose because of di3erences in #ssland

and 5eeland law and as a conseuence of poor legal advice that <oppo

received when drawing up the contract. It was believed that an legal

action would be widel reported because of <oppo’s international pro(le

and that this ma result in some unfavourable publicit.

8hen considering its options for a directl/owned factor" <oppo’s plan was

to build a modern and e3icient plant with 2state of the art’ environmental

controls. Uuland was chosen as a suitable countr and <oppo narrowed the

choice down to two possible sites in Uuland for its new factor Ootown and

atown.

5he maors of both towns wrote to <oppo’s chief e&ecutive saing that thewould welcome an potential investment from <oppo. In addition" the

maor of Ootown asked for a 2personal gift’ +relativel immaterial although

not a trivial amount to <oppo but a large amount of mone locall to



facilitate a trouble/free passage of the necessar planning permission for a

new <oppo factor in the town.

8hen deciding between Ootown and atown in Uuland" the general view

was that" all other things being eual" Ootown was a better location. )ut

there was some discussion about whether the 2personal gift’ reuested b

the maor of Ootown was ethical. 5he board thought that the decision was

an important one and so took some time to re4ect before reaching a

decision on whether to continue with 7ed Co or to build a new factor in

either Ootown or atown.

<aving become aware that investing in Ootown and paing the mone to its

maor was being considered b <oppo" a member of the chief e&ecutive’s

o3ice sta3 informed the *ournalist" )ob <ob" and a stor appeared in an

#ssland national newspaper saing" 2<oppo considers paing a bribe to get

preferred site in Uuland.’ )ob <ob made remarks challenging <oppo’s

claims about integrit and transparenc" and suggested that recent events

had shown that it had demonstrated neither.

>ublic discussion then took place on the internet saing that <oppo"

previousl considered a highl ethical compan" had been corrupt and

incompetent" both in allowing 7ed Co to breach emploment and

environmental best practice" and then to consider paing a bribe to the

maor of Ootown.

It was decided that" in seeking to restore its reputation" the compan

needed to publish a detailed press statement responding to the issues

raised in the media. )ecause <oppo’s reputation for integrit andtransparenc were considered to be strategicall important and had been

uestioned" it was decided that the statement should also contain

reassurances about these important themes.

Required:



Describe an environmental report" including its purpose and contents" and

discuss the potential advantages of an environmental report for <oppo and

its shareholders. +10 marks

Descrition o3 environmental reort

In most *urisdictions" the production of environmental information is

voluntar in that it is not reuired b an accounting standard or legalstatute.

In some cases" environmental information is included in the regular annual

report and in other cases" 2stand alone’ environmental andor sustainabilit

reports are published" usuall annuall. lthough these are often published

as hard cop documents" the are also often made available on compan

websites.

In each case" however" the purpose of an environmental report is to report

on some of the details of the compan’s environmental impact or 2footprint’.

)ecause some of this information is technical in nature" sstems need to be

put in place to generate and internall assure the data" similar to those

sstems necessar for generating accurate (nancial data.

5he contents of an environmental report tpicall include information on

the compan’s direct environmental impact +through its own manufacturing

and distribution and also its indirect impacts +through its forward and

backward suppl chains.

It involves recording" measuring" analsing and reporting on the

environmental impact" usuall in respect of two aspects consumption +of

energ and other resources and production. 5his latter impact +production



involves the measurement and reporting of the environmental impact of

products and also an other emissions" such as b/products and an

pollutants.

$dvanta4es 3or !oo and its sareolders

5he (rst advantage of environmental reporting would be to provide

information to investors on the sources and was of mitigating

environmental risk" and of those risks correlated with environmental risk.

5he events at 7ed Co have the potential to damage <oppo’s reputation and

potentiall turn some customers awa from buing <oppo products because

of the implication that <oppo has poor environmental controls in its suppl

chain.

9econd" an environmental report would enable <oppo to demonstrate its

responsiveness to ma*or issues such as the leakage of 5U1: at 7ed Co.

=ikewise" it would be a suitable place to inform shareholders on the 2state of

the art’ environmental performance of its new factor in Uuland.

9ome customers are known to bu from <oppo partl because of its

environmental reputation" and some emploees" similarl" are attracted for

the same reason. 5hese factors make this responsiveness potentiall ver

important.

5hird" the regular production of an environmental report would necessitate

the establishment of measurement sstems able to generate the information

for the report. 5his would mean that the compan would have greater

knowledge of" and control over" its resource consumption" environmental

e3icienc and emissions.5his knowledge could then" in turn" save costs and improve internal controls

in the compan. In the case of a new/build facilit in Uuland" sstems for

gathering this data can be 2designed/in’ to ensure that information is

meaningful" accurate and timel. 5hese measures ma help convince



investors that <oppo is a sound long/term and sustainable source of

shareholder value.

;ourth" reporting strengthens the accountabilit to the shareholders and

encourages better environmental performance as a result. Once a compan

reports on a polic" a measure or a target +for e&ample" it provides

something against which it can be later held to account.

;or shareholders" the publication of environmental information means that

the compan can be reuired to respond to ueries on underperformance

against agreed standards. 5his could serve" over time" to make the board

more answerable to shareholders and reduce the agenc gap.

!"D# $%&'#R !"D# M$R("%) )*"D#

up to N marks for description

! marks for each advantage

+ma&imum 10 marks

!"D# #+$M"%#R& R#,R.

>art +b was about environmental reporting. 5he wording of the

reuirement showed that it is important to determine how man tasks there

are in the reuirement. 5he (rst was to describe the purpose and contents

of an environmental report" and the second was to discuss the advantages

of an environmental report for the compan and its shareholders. 5he best

answers divided up these two tasks and approached them separatel.

Candidates who had read the technical article on this would have been

better prepared for this reuirement than others.










5here were some ver good answers to the (rst part +on purpose and

content but the highest marks were awarded for those also able to

meaningfull approach the second part" on the advantages to <oppo and its

shareholders. 5his involved e&amining the speci(c environmental

challenges faced b <oppo and then showing how producing and

environmental report could help with these. 6eneral answers on the generic

advantages of environmental reporting were less well/rewarded.

Q1a i - December 201<

8hen the 1"000 km <iaka pipeline in 8land was built ten ears ago" the

route took it" overground" the full length of <iakaisland" one of 8land’s

largest o3shore islands.

Owned and operated b <iaka #nerg Compan +<#C" its construction was

signi(cantl over budget and su3ered length delas" but the pipeline has

since become a vital source of economic growth on <iakaisland and beond.

Its purpose is to connect the oil platforms o3 the north coast of the island

with the deepwater port of <iakatown in the south. land pipeline to the south is needed because sea ice in the north prevents

shipping access during the winter months. 5he oil carried b the pipeline is

loaded onto several ships each da at <iakatown port.

?ost of the oil from <iakaisland is sent to the neighbouring countr of

#&land" with oil from <iakaisland representing G0% of #&land’s total oil

consumption. )ecause the contract with <#C is so important to the

government of #&land" the terms of suppl are sub*ect to legal enforcement

with regard to prices charged" deliver terms and the ualit of the oil

delivered. )ecause most of its output goes to e&port" <#C is a ma*or source

of foreign currenc for 8land.



<iakaisland is a globall important natural habitat with a dramatic and

rugged terrain. It is monitored b several international scienti(c agencies"

some of which were ver critical of the decision to build the pipeline in the

(rst place.

It is one of ver few locations in which some wildlife species threatened

elsewhere are still in abundance. 5here are health populations" for

e&ample" of bears" elk and otters.

One well/respected international wildlife organisation +called 9ave Our

8ilderness or 29O8’ produced a report saing that the <iaka pipeline was

not environmentall sustainable and that" over time" it would deteriorate

and create an unacceptable environmental risk to <iakaisland. It said that

both the compan +<#C and the government of 8land needed to adopt

longer/term time perspectives and consider the potential environmental

conseuences of the pipeline.

5he government of #&land" elected ever four ears" disputed this" saing

that 9O8’s de(nition of sustainabilit was too narrow and that it should

also consider the economic sustainabilit of #&land. 5he position of the

board of <#C is that its operations should be 2as sustainable as is

economicall possible’.

8land is a developing countr with few labour regulations and ver little

legislation on emploee pa and conditions. 5his has enabled <#C to use a

large proportion of poorl/paid immigrant labour to build and maintain the

pipeline" thereb reducing its construction and operating costs.

)ecause of the multinational nature of much of the semi/skilled workforce"there are often language di3iculties" especiall when conveing messages to

sta3 working on the pipeline and on the oil platforms. <#C has a

reuirement that all sta3 should speak the language of 8land" but this has

proven to be impossible to enforce.



s the main emploer on <iakaisland" <#C emplos H"000 people including

some on o3shore oil platforms" others in the main southern town of

<iakatown" and others still at a number of remote locations the length of

the island at strategic points situated along the pipeline. )ecause of the

remoteness of much of the work on <iakaisland" conditions are harsh for

man of these workers.

<#C emploees often work in free@ing temperatures and live in

encampments with intermittent logistical support. ?otivation and morale

are often low among these maintenance emploees.

5here have been poor industrial relations because of this lack of support.

8orkers resent the compan’s management in <iakatown for their harsh

conditions.

5hese poor relationships have also made it di3icult for management to tr

to enforce the 8land language reuirement upon the immigrant labour.

5he remote locations and poor conditions have also meant that the compan

has found it di3icult to recruit the skilled technical people it needs to

inspect and maintain the pipeline.

5here is a shortage of uali(ed engineers and technical sta3 in 8land"

with man preferring to work in the cities rather than in the more di3icult

conditions on <iakaisland.

<#C is one of 8land’s biggest businesses and is listed on the 8land stock

e&change. )ecause of the nature of the energ market" shareholders have

come to e&pect a good annual return on investment in terms of dividends.

One market analst recentl commented that a focus on short/term returnshas not been good for the compan’s long/term strateg and that

shareholders should be prepared to e&pect lower dividend ields as a result.



In order to address the man challenges which the compan faced" <#C

appointed a new chief e&ecutive and risk manager last ear. 6avin <oo was

appointed chief e&ecutive and 6err ,upp *oined as risk manager.

)orn and educated in a highl developed countr" ?r <oo had a strong

track record in the energ industr and took over at <#C on what was

considered a good reward package for his home countr. On <iakaisland"

however" the level of reward was ver large b local standards" making him

the highest paid person not *ust in the compan" but in the entire regional

econom of <iakaisland.

8hen the reward (gure was later published in the annual report" the local

press and some trade unions were angr" believing that his reward was

2outrageous’ and that he lived in lu&ur whilst unskilled immigrant workers

2fro@e’ in the maintenance parties working along the length of the pipeline.

9ome critics pointed to the fact that it was signi(cantl cheaper to live on

<iakaisland than in the ma*or cities on the 8land mainland and that this

was not re4ected in ?r <oo’s rewards at all.

?eanwhile" risk manager 6err ,upp set about e&amining the compan’s

man risks. One of his (rst tasks was to assess some of the risks which ma

a3ect the operation of the pipeline" and he took technical advice on these to

arrive at probabilities of the risks arising over the ne&t ten ears.

It was recognised that there was some sub*ectivit involved in these

measurements.

7isk 1. 7isk of terrorist attack on an part of the pipeline causing severe

spillage and complete suppl disruption 10%.7isk !. 7isk of geological movement andor earthuake capable of severing

the pipeline in more than one place causing severe long/term suppl

disruption H%.



7isk :. 7isk of technical failure of a *oint in the pipeline causing a

temporar suppl disruption of a few hours but no leakage of oil 10%.

7isk N. 7isk of animal or natural damage to pipeline +e.g. b bears" elk or

adverse weather causing super(cial damage to pipeline but no disruption

to suppl L0%.

Anfortunatel" 7isk N was realised shortl after 6err ,upp produced his

calculations. t the point where it crossed the 6o*o river in northern

<aikaisland" the pipeline had a long and unsupported section.

During a winter storm" a connection was slightl displaced resulting in a

minor oil leak. lthough not serious in itself and uickl repaired" the 26o*o

incident’ did raise concerns and showed that the pipeline was vulnerable.

9eeking to protect both the pipeline and the environment on <iakaisland"

the 8land government’s industr minister wrote to C#O 6avin <oo asking

him to respond to rumours about poor internal controls in <#C and to

introduce measures to reduce the chances of a repetition of the 6o*o

incident.

In response to the industr minister’s letter" the <#C board reviewed

internal controls and two resolutions were agreed. 5he (rst was that the

compan should establish a formal internal audit function and second" that

a full review of an barriers to sound internal controls in the compan

should be carried out.

lthough a formal internal audit function was not reuired b statute law or

an stock e&change listing rule in 8land" the board agreed that it would be

good practice" especiall if the securit and maintenance of the long <iakapipeline could be included in the scope +terms of reference of the internal

audit function to be established. It was decided that in responding to the

minister" ?r <oo should conve both the board’s resolve on internal audit



and also an honest review of the problems for achieving sound internal

controls in the uniue situation the compan was in on <iakaisland.

Required:

5he term 2sustainabilit’ can be understood in di3erent was.

#&plain the concept of 2sustainable’ as used b 29ave our 8ilderness’ +9O8

and contrast this with the concept of economic sustainabilit as discussed

b the government of #&land. +N marks

?oncets o3 sustainability

In the conte&t of the case" 9O8 meant sustainabilit in the environmental

sense of the word. 5his means that resources should not be taken from theenvironment or emissions should not be made into the environment" at a

rate greater than can be corrected" replenished or o3set.

In the case of the <iaka pipeline" this means that its impact on the

environment should not e&ceed the abilit to replace used resources or

clean up spills or emissions as the occur.

5he government of #&land used the term to mean the sustainabilit of its

econom and the economic sustainabilit of <#C itself which is such an

in4uence on the national econom. 5he fact that #&land gets G0% of its oil

from one single source +<#C means that it is disproportionatel dependent

on the <iaka pipeline.

In all developed and developing economies" oil underpins economic growth

and hence the wellbeing of citi@ens. 5his applies to *obs" health" education

and other essential aspects of #&land’s infrastructure.

8ithout a regular and reliable source of oil from <#C" and assuming that

#&land is unable to (nd other sources of oil at reasonable cost" the #&land

econom would be badl damaged with a number of unfortunate social

conseuences.



!"D# $%&'#R !"D# M$R("%) )*"D#

! marks for each e&planation of the two tpes of sustainabilit

+N marks

!"D# #+$M"%#R& R#,R.

5he case in uestion 1 was about some issues surrounding a long oil

pipeline on <iakaisland. s with other >1 cases in section of the e&am"

this is based on a real/life situation of a long pipeline and some of the

problems that have been associated with it. 5he reuirements in this

uestion" as usual in uestion 1" covered a range of areas on the >1 stud

guide.

>art +a asked about various aspects of sustainabilit. In part +a+i" most

candidates were able to de(ne sustainabilit" often using the )rundtland

de(nition or similar. 5his was contrasted with the idea of economic

sustainabilit which" whilst important to the government of #&land" which

can often be at the cost of environmental sustainabilit. ?ost candidates

were able to obtain good marks for this part.

Q1a ii - December 201<

8hen the 1"000 km <iaka pipeline in 8land was built ten ears ago" the

route took it" overground" the full length of <iakaisland" one of 8land’s

largest o3shore islands.

Owned and operated b <iaka #nerg Compan +<#C" its construction was

signi(cantl over budget and su3ered length delas" but the pipeline has

since become a vital source of economic growth on <iakaisland and beond.










Its purpose is to connect the oil platforms o3 the north coast of the island

with the deepwater port of <iakatown in the south.

land pipeline to the south is needed because sea ice in the north prevents

shipping access during the winter months. 5he oil carried b the pipeline is

loaded onto several ships each da at <iakatown port.

?ost of the oil from <iakaisland is sent to the neighbouring countr of

#&land" with oil from <iakaisland representing G0% of #&land’s total oil

consumption. )ecause the contract with <#C is so important to the

government of #&land" the terms of suppl are sub*ect to legal enforcement

with regard to prices charged" deliver terms and the ualit of the oil

delivered. )ecause most of its output goes to e&port" <#C is a ma*or source

of foreign currenc for 8land.

<iakaisland is a globall important natural habitat with a dramatic and

rugged terrain. It is monitored b several international scienti(c agencies"

some of which were ver critical of the decision to build the pipeline in the

(rst place.

It is one of ver few locations in which some wildlife species threatened

elsewhere are still in abundance. 5here are health populations" for

e&ample" of bears" elk and otters.

One well/respected international wildlife organisation +called 9ave Our

8ilderness or 29O8’ produced a report saing that the <iaka pipeline was

not environmentall sustainable and that" over time" it would deteriorate

and create an unacceptable environmental risk to <iakaisland. It said that

both the compan +<#C and the government of 8land needed to adoptlonger/term time perspectives and consider the potential environmental

conseuences of the pipeline.

5he government of #&land" elected ever four ears" disputed this" saing

that 9O8’s de(nition of sustainabilit was too narrow and that it should



also consider the economic sustainabilit of #&land. 5he position of the

board of <#C is that its operations should be 2as sustainable as is

economicall possible’.

8land is a developing countr with few labour regulations and ver little

legislation on emploee pa and conditions. 5his has enabled <#C to use a

large proportion of poorl/paid immigrant labour to build and maintain the

pipeline" thereb reducing its construction and operating costs.

)ecause of the multinational nature of much of the semi/skilled workforce"

there are often language di3iculties" especiall when conveing messages to

sta3 working on the pipeline and on the oil platforms. <#C has a

reuirement that all sta3 should speak the language of 8land" but this has

proven to be impossible to enforce.

s the main emploer on <iakaisland" <#C emplos H"000 people including

some on o3shore oil platforms" others in the main southern town of

<iakatown" and others still at a number of remote locations the length of

the island at strategic points situated along the pipeline. )ecause of the

remoteness of much of the work on <iakaisland" conditions are harsh for

man of these workers.

<#C emploees often work in free@ing temperatures and live in

encampments with intermittent logistical support. ?otivation and morale

are often low among these maintenance emploees.

5here have been poor industrial relations because of this lack of support.

8orkers resent the compan’s management in <iakatown for their harsh

conditions.5hese poor relationships have also made it di3icult for management to tr

to enforce the 8land language reuirement upon the immigrant labour.

5he remote locations and poor conditions have also meant that the compan



has found it di3icult to recruit the skilled technical people it needs to

inspect and maintain the pipeline.

5here is a shortage of uali(ed engineers and technical sta3 in 8land"

with man preferring to work in the cities rather than in the more di3icult

conditions on <iakaisland.

<#C is one of 8land’s biggest businesses and is listed on the 8land stock

e&change. )ecause of the nature of the energ market" shareholders have

come to e&pect a good annual return on investment in terms of dividends.

One market analst recentl commented that a focus on short/term returns

has not been good for the compan’s long/term strateg and that

shareholders should be prepared to e&pect lower dividend ields as a result.

In order to address the man challenges which the compan faced" <#C

appointed a new chief e&ecutive and risk manager last ear. 6avin <oo was

appointed chief e&ecutive and 6err ,upp *oined as risk manager.

)orn and educated in a highl developed countr" ?r <oo had a strong

track record in the energ industr and took over at <#C on what was

considered a good reward package for his home countr. On <iakaisland"

however" the level of reward was ver large b local standards" making him

the highest paid person not *ust in the compan" but in the entire regional

econom of <iakaisland.

8hen the reward (gure was later published in the annual report" the local

press and some trade unions were angr" believing that his reward was

2outrageous’ and that he lived in lu&ur whilst unskilled immigrant workers

2fro@e’ in the maintenance parties working along the length of the pipeline.9ome critics pointed to the fact that it was signi(cantl cheaper to live on

<iakaisland than in the ma*or cities on the 8land mainland and that this

was not re4ected in ?r <oo’s rewards at all.



?eanwhile" risk manager 6err ,upp set about e&amining the compan’s

man risks. One of his (rst tasks was to assess some of the risks which ma

a3ect the operation of the pipeline" and he took technical advice on these to

arrive at probabilities of the risks arising over the ne&t ten ears.

It was recognised that there was some sub*ectivit involved in these

measurements.

7isk 1. 7isk of terrorist attack on an part of the pipeline causing severe

spillage and complete suppl disruption 10%.

7isk !. 7isk of geological movement andor earthuake capable of severing

the pipeline in more than one place causing severe long/term suppl

disruption H%.

7isk :. 7isk of technical failure of a *oint in the pipeline causing a

temporar suppl disruption of a few hours but no leakage of oil 10%.

7isk N. 7isk of animal or natural damage to pipeline +e.g. b bears" elk or

adverse weather causing super(cial damage to pipeline but no disruption

to suppl L0%.

Anfortunatel" 7isk N was realised shortl after 6err ,upp produced his

calculations. t the point where it crossed the 6o*o river in northern

<aikaisland" the pipeline had a long and unsupported section.

During a winter storm" a connection was slightl displaced resulting in a

minor oil leak. lthough not serious in itself and uickl repaired" the 26o*o

incident’ did raise concerns and showed that the pipeline was vulnerable.

9eeking to protect both the pipeline and the environment on <iakaisland"

the 8land government’s industr minister wrote to C#O 6avin <oo askinghim to respond to rumours about poor internal controls in <#C and to

introduce measures to reduce the chances of a repetition of the 6o*o

incident.



In response to the industr minister’s letter" the <#C board reviewed

internal controls and two resolutions were agreed. 5he (rst was that the

compan should establish a formal internal audit function and second" that

a full review of an barriers to sound internal controls in the compan

should be carried out.

lthough a formal internal audit function was not reuired b statute law or

an stock e&change listing rule in 8land" the board agreed that it would be

good practice" especiall if the securit and maintenance of the long <iaka

pipeline could be included in the scope +terms of reference of the internal

audit function to be established. It was decided that in responding to the

minister" ?r <oo should conve both the board’s resolve on internal audit

and also an honest review of the problems for achieving sound internal

controls in the uniue situation the compan was in on <iakaisland.

Required:

5he term 2sustainabilit’ can be understood in di3erent was.

Asing information from the case" discuss the tensions which e&ist between

these two concepts.

+E marks

.ensions between te concets

5he balance between environmental conservation and economic

development is a longstanding one" and one which applies to all parts of the

world in which business activit takes place. lot of business activit takes

place at a net cost to the environment and so the sustainabilit of one

+environment or econom ma be achieved onl at a net cost to the other.

9ome believe that a lot of business activit can be made more

environmentall sustainable but the economic costs of this" possibl b

accepting a lower rate of economic growth with its associated e3ects" are

often unpopular.



5he economies of both <iakaisland and also #&land are ver dependent on

the <iaka pipeline. 5he thousands of *obs on <iakaisland depend on it" the

econom of #&land is underpinned b the oil and the business transaction

with #&land is also an important source of foreign currenc for the

government of 8land. 5hese bene(ts all depend upon the economic

arguments having ascendenc over the claims of 9O8.

7easons wh man are unconvinced b the case for environmental

sustainabilit include the issues of measurement and time perspective.

#ssentiall" economic value can be measured whilst environmental value is

more di3icult.

#conomic conseuences can be seen over the short term whilst

environmental conseuences ma not be visible for man ears. 9ome socio/

political structures are thought to militate against longer/term perspectives

such as the need to provide short/term shareholder returns +as <#C’s

shareholders have traditionall demanded and the length of electoral

ccles.

In the case scenario" 9O8 would probabl claim to have a longer/term

perspective whilst the government of #&land and <#C will have shorter/

term perspectives #&land because its government needs to be re/elected

ever four ears and <#C because it is a public compan whose shares are

traded on the 8land stock e&change. 5he e&pectations for strong annual

returns have" in the opinion of the market analst" been unhelpful in

allowing the compan to work with longer/term perspectives.

5he e&traction of oil is ultimatel unsustainable because it reuires thee&ploitation of a non/renewable energ source. In other words" once it is

gone" it is gone. 5he view of <#C’s board that it should be 2as sustainable as

is economicall possible’ is unlikel to satisf 9O8 and ma be seen

e3ectivel as no commitment to environmental sustainabilit at all.



9ome countries have taken steps to reduce the net impact of business

activit including investing in renewable energ +e.g. wind and water

power and both 8land and #&land could reduce their dependence upon oil

b diversifing their energ sources to help to increase environmental

sustainabilit. lack of dependence on a single energ source +e.g. oil can

also make the countr more economicall robust" thereb helping its long/

term economic sustainabilit.

.utorial note llow a range of e&pressions of these tensions.

!"D# $%&'#R !"D# M$R("%) )*"D#

! marks for each relevant discussion point

+E marks

!"D# #+$M"%#R& R#,R.

>art +a+ii was more challenging for man candidates. 5he task was to

discuss the tensions that e&ist between environmental and economic

sustainabilit. 5hese are issues that are at the heart of the sustainabilit

debate in business and so are important themes in understanding how

businesses can become environmentall sustainable.

Q2a - December 2010

t a board meeting of ,6> Chemicals =imited" the directors were discussing

some recent negative publicit arising from the accidental emission of a

chemical pollutant into the local river. s well as it resulting in a large (ne

from the courts" the leak had created a great deal of controvers in the local

communit that relied on the polluted river for its normal use +including

drinking.










prominent communit leader spoke for those a3ected when she said that

a leak of this tpe must never happen again or ,6> would su3er the loss of

support from the communit. 9he also reminded ,6> that it attracts LH% of

its labour from the local communit.

s a response to the problems that arose after the leak" the ,6> board

decided to consult an e&pert on whether the publication of a full annual

environmental report might help to mitigate future environmental risks. 5he

e&pert" >rofessor ppo +a prominent academic" said that the compan

would need to establish an annual environmental audit before the could

issue a report.

<e said that the environmental audit should include" in addition to a review

and evaluation of ,6>’s safet controls" a full audit of the environmental

impact of ,6>’s suppl chain. <e said that these components would be ver

important in addressing the concerns of a growing group of investors who

are worried about such things. >rofessor ppo said that all chemical

companies had a structural environmental risk and ,6> was no e&ception to

this.

s ma*or consumers of natural chemical resources and producers of

potentiall ha@ardous outputs" >rofessor ppo said that chemical companies

should be aware of the wide range of was in which the can a3ect the

environment. C#O Beith ?iasma agreed with >rofessor ppo and added

that because ,6> was in chemicals" an environmental issue had the

potential to a3ect ,6>’s overall reputation among a wide range of

stakeholders.8hen the board was discussing the issue of sustainabilit in connection

with the environmental audit" the (nance director said that sustainabilit

reporting would not be necessar as the compan was alread sustainable

because it had no 2going concern’ issues. <e said that ,6> had been in



business for over H0 ears" should be able to continue for man ears to

come and was therefore sustainable. s far as he was concerned" this was

all that was meant b sustainabilit.

In the discussion that followed" the board noted that in order to signal its

seriousness to the local communit and to investors" the environmental

audit should be as thorough as possible and that as much information

should be made available to the public 2in the interests of transparenc’. It

was agreed that contents of the audit +the agreed metrics should be robust

and with little room left for interpretation K the wanted to be able to

demonstrate that the had complied with their agreed metrics for the

environmental audit.

Required:

#&plain 2sustainabilit’ in the conte&t of environmental auditing and criticise

the (nance director’s understanding of sustainabilit. +L marks

#@lain sustainability and criticise te 9nance directors

understandin4 o3 sustainability

9ustainabilit is the abilit of the business to continue to e&ist and conduct

operations with no e3ects on the environment that cannot be o3set or made

good in some other wa. 5he best working de(nition is that given b the 6ro

<arlem )rundtland" the former Forwegian prime minister in the )rundtland

7eport +1GE as activit that" 2meets the needs of the present without

compromising the abilit of future generations to meet their own needs.

’Importantl" it refers to both the inputs and outputs of an organisational

process. Inputs +resources must onl be consumed at a rate at which the

can be reproduced" o3set or in some other wa not irreplaceabl depleted.

Outputs +such as waste and products must not pollute the environment at a

rate greater than can be cleared or o3set.



7eccling is one wa to reduce the net impact of product impact on the

environment. 5he business activities must take into consideration the

carbon emissions" other pollution to water" air and local environment" and

should use strategies to neutralise these impacts b engaging in

environmental practices that will replenish the used resources and

eliminate harmful e3ects of pollution.

number of reporting frameworks have been developed to help in

accounting for sustainabilit including the notion of triple/bottom/line

accounting and the 6lobal 7eporting Initiative +67I. )oth of these attempt

to measure the social and environmental impacts of a business in addition

to its normal accounting.

5he (nance director has completel misunderstood the meaning of the term

sustainable. <e has assumed that it refers to the sustainabilit of the

business as a going concern and not of the business’s place in the

environment.

Clearl" if a business has lasted H0 ears then the business model adopted is

able to be sustained over time and a health balance sheet enabling future

business to take place ensures this. )ut this has no bearing at all on

whether the business’s environmental footprint is sustainable which is what

is meant b sustainabilit in the conte&t of environmental reporting.

!"D# $%&'#R !"D# M$R("%) )*"D#

N marks for e&planation of sustainabilit

! marks for criticism of the fdMs understanding

allow cross marking between the two tasks








+L marks

!"D# #+$M"%#R& R#,R.

5his uestion was mainl concerned with sustainabilit and environmental

themes although part +c introduced some content on risk. ?an candidates

did well on part +a which was pleasing to see. #&plaining what

2sustainabilit’ meant was straightforward for well/prepared >1 candidates

although some could not see the wa in which the (nance director had

misunderstood the term. <e thought it meant going concern and so euated

sustainabilit with the business being (nanciall sustained rather than the

environmental sustainabilit of the compan.

QAc - December 2011

8hen )iggo ?anufacturing +a public listed compan needed to build an

e&tension to its factor" it obtained planning permission to build it on an

ad*acent (eld. 5he local government authorit was keen to attract the new

*obs that would go with the e&pansion and so granted the permission

despite the ob*ections of a number of residents" who were concerned that

the new factor e&tension would mean the loss of a children’s pla area.

8hen the board of )iggo met after the building approval had been given"

the chief e&ecutive read out a letter from lbert Doo" leader of the local

government authorit" saing that although permission to build had been

given" the compan should consider making a si@eable contribution towards

creating a new children’s pla area in a nearb location.

?r Doo said that )iggo 2should recognise its social responsibilit’. <e said

that the compan should consider itself a citi@en of societ and should"

accordingl" 2recognise its responsibilities as well as its legal rights’.





One of )iggo’s directors" 7obert 5ens" said he thought the reuest was

entirel reasonable given the displacement of the pla area. <e also said

that the could use the donation strategicall to help cultivate the

compan’s reputation locall to help in future recruitment. It might also" he

said" help to reduce resistance to an future e&pansion the compan might

need to make.

?argaret <eggs" in contrast" argued that the compan should not make the

donation as it was likel that compan pro(ts would be low in the current

ear. 9he said that the acuisition of the land and the gaining of planning

permission were done through the normal legal channels and so the

compan had no further contractual or ethical duties to the local

government" nor to the local communit.

9he said that )iggo provided local emploment and produced e&cellent

products and so it was unreasonable for the reuest for a donation to have

been made. 25his board is accountable to the shareholders of )iggo and not

to the local communit or the local government authorit’" she said.

Required:

De(ne 2social responsibilit’ as used b lbert Doo. Contrast how short and

long/term shareholder interest perspectives ma a3ect )iggo’s attitude to

the reuested contribution for the children’s pla area. +G marks

&R and sort5lon4 term

&ocial resonsibility

5his phrase refers to the belief that companies such as )iggo must act in

the general public interest as well as in the speci(c interest of their

shareholders. 5his can appl to the compan’s strateg and the wa in

which the compan is governed" but ?r Doo is referring to the speci(c

social footprint that the compan has locall.



It can also appl to the environmental footprint that a compan has" i.e. the

e3ect of compan activities on resource consumption or the e3ect that

emissions from operations have. It is possible to interpret this phrase

narrowl" as ?argaret <eggs has done" or more widel" as lbert Doo has.

&ort and lon4-term ersectives

5his uestion recognises that the attitude that a compan ma take towards

a particular stakeholder claim can var when a time perspective is

introduced.

short/term perspective is likel to consider a time period of das" months

or perhaps up to a given (nancial ear in terms of an action a3ecting short/

term performance. longer/term perspective" tpicall looking to ears

rather than months ahead" is likel to consider the legitimac of a claim in

terms of its e3ect on long/term shareholder value.

In the short term" )iggo ma see the claim from ?r Doo" on behalf of the

communit" as a cost because a 2si@eable’ contribution would have an e3ect

on the pro(t for the ear and hence the return to the shareholders.

5he case mentions that pro(ts are likel to be low in the current ear and

so all costs should be carefull scrutini@ed for value for mone and reduced

or eliminated if possible. s )iggo is a public listed compan" a short/term

reduced pro(t can erode shareholder value because of reduced dividends

and a potential reduction in share price.

In the longer term" )iggo can be seen to be cultivating two potentiall ke

stakeholders +?r Doo and the local communit and hence ma create

longer term value in terms of the advantages identi(ed b 7obert 5ens+such as local emploees and lower resistance to future factor

enlargements.

5he case mentions the resistance from the local communit and" given that

the compan will have to 2live with’ the communit for man ears to come"



it ma be in )iggo’s long/term strategic interest to do what it reasonabl

can to reduce an friction with this ke stakeholder. 5here ma" therefore"

be a strategic case for making the contribution as reuested.

!"D# $%&'#R !"D# M$R("%) )*"D#

1 mark per relevant point on social responsibilit to a ma& of :

marks

! marks for recognition of short and long/term perspectives

! marks for discussion on short/term e3ects

! marks for discussion of long/term e3ects

+G marks

!"D# #+$M"%#R& R#,R.

>art +c was sometimes treated as a bit of an afterthought with some

answers being ver short" despite it being worth G marks. 5here were three

tasks to de(ne social responsibilit as used b lbert Doo in the case" and

then to e&amine )iggo’s decision about the pla area from short and long

term perspectives. ?ost who attempted it were able to gain some of the

marks for de(ning social responsibilit. 5he tasks about short and long term

shareholder interests were often not done well. 5o achieve high marks"

candidates had to engage with the case and to show how the decision would

have di3erent issues in the short term and" with the management of certain

ke stakeholders in the longer term.

QAd - December 2010










During the global economic recession that began in mid !00E" man

companies found it di3icult 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 4ow de(cits could not be

funded.

Altra/Aber =imited +AA" a large manufacturer based in an economicall

depressed region" had traditionall operated a voluntar supplier pament

polic in which it was announced that all trade paables would be paid at or

before !0 das and there would be no late pament.

5his was operated despite the normal pament terms being :0 das. 5he

compan gave the reason for this as 2a desire to publicl demonstrate our

social responsibilit and support our valued suppliers" most of whom" like

AA" also provide emploment in this region’. In the !0 ears the polic had

been in place" the AA website proudl boasted that it had never been

broken.

)rian ?ills" the chief e&ecutive often mentioned this as the basis of the

compan’s social responsibilit. 27ather than tring to dela our paments

to suppliers"’ he often said" 2we support them and their cash 4ow. It’s the

right thing to do.’

?ost of the other directors" however" especiall the (nance director" think

that the voluntar supplier pament polic is a mistake. 9ome sa that it is a

means of )rian ?ills e&ercising his own ethical beliefs in a wa that is not

supported b others at AA =imited.

8hen AA itself came under severe cash 4ow pressure in the summer of !00G as a result of its bank’s failure to e&tend credit" the (nance director

told )rian ?ills that AA’s liuidit problems would be greatl relieved if

the took an average of :0 rather than the !0 das to pa suppliers.



In addition" the manufacturing director said that he could o3er another

reason wh the short/term liuidit at AA was a problem. <e said that the

credit control department was poor" taking appro&imatel H0 das to receive

pament from each customer.

<e also said that his own inventor 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 LH% of turnover and this proportion was

continuousl rising" driving down gross and pro(t margins. Due to poor

inventor controls" e&cessivel high levels of inventor were held in store at

all stages of production.

5he long/serving sales manager wanted to keep high levels of (nished

goods so that customers could bu from e&isting inventor 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/e&ecutive directors +F#Ds of AA =imited" )ob Fdumo" said

that he could not work out wh AA was in such a situation as no other

compan in which he was a F#D was having liuidit problems. )ob Fdumo

held a number of other F#D positions but these were mainl in service/

based companies.

Required:

Criticise the voluntar supplier pament polic as a means of demonstrating

AA’s social responsibilit +H marks

?riticise te voluntary sulier ayment olicy

9upplier pament disclosures have become increasingl popular in recent

ears in some countries as a signal of intent to suppliers that larger buers



will not e&ploit the economic advantage that the sometimes have over

smaller suppliers. It is usual for these statements to announce that all

paments will be made in line with the supplier’s terms and so AA’s

intention to voluntaril pa within !0 das is more generous that would

usuall be e&pected.

In terms of criticism as a means of demonstrating social responsibilit" the

case sas that the purpose of the polic is to 2publicl demonstrate our

social responsibilit’. ke limitation of the polic is" however" that the

polic onl focuses on one stakeholder +suppliers and apparentl ignores

other groups. 6iven the information in the case" the social responsibilit

polic is apparentl aimed at one single stakeholder which is an ine3ective

overall strateg.

9econdl" however" it is unlikel that this polic is the best use of resources

if the desire is to 2publicl demonstrate’ social responsibilit. ?easures

aimed more at customers or more charitable causes would be likel to

attract more publicit if that is the intention.

5he polic is ver costl to AA in terms of cash 4 ow. 9o much so that the

(nance director has uestioned whether it can actuall be a3orded"

especiall at times of a lack of short/term credit" particularl during the

global economic recession. It is" of course" a matter of ethical debate as to

how committed AA should be to its social responsibilit in terms of

resources.

;inall" the polic doesn’t en*o the support of the other directors and is

thus hard to maintain as an ongoing commitment. 5his means it is vulnerable and susceptible to change if the C#O is the onl person who

reall believes in it. s a part of the compan’s overall strategic positioning"

the components of social responsibilit must en*o widespread support"



especiall among the senior of(cers in the compan" and arguabl most

importantl" it must en*o the support of the (nance director.

!"D# $%&'#R !"D# M$R("%) )*"D#

! marks for each criticism made to a ma& of H marks

+ma&imum H marks

!"D# #+$M"%#R& R#,R.

;or (ve marks" part +d asked candidates to criticise the voluntar supplier

pament polic as a means of demonstrating C97. 5his means candidates

had to point out wh it wasn’t a ver good means of demonstrating C97.

5he case contained a number of issues associated with the polic which the

better/prepared candidates picked up on. >oor answers receiving few or no

marks were those that simpl de(ned C97 or used a te&tbook framework

+such as Carrol’s framework in an attempt to answer the uestion.








e7qa-social and environmental issues

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