p1 - interim

Interim Assessment

KAPLAN PUBLISHING of 6

ACCA INTERIM ASSESSMENT

Professional Accountant

JUNE 2009

QUESTION PAPER

Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

Time allowed Reading time: 15 minutes Writing time: 3 hours This paper is divided into two sections Section A This ONE question is compulsory and MUST be

attempted Section B BOTH questions to be attempted

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ACCA P1 Professional Accountant

© Kaplan Financial Limited, 2008

All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.

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Interim Assessment

SECTION A

This ONE question is compulsory and MUST be attempted

QUESTION 1

The QAZ Company is based in a country where there is a code of corporate governance. Listed companies should follow the code, or explain why not in their annual report, while other companies can follow the code if they choose to do so. QAZ is not listed as many of the shareholders are members of the same family and application for listing has not been one of their aims.

However, QAZ is larger than many listed companies and the board is attempting to follow patterns of good corporate governance. The board consists of six executive and six non-executive directors (NEDs), with the roles of CEO and chairman being carried out by two different people. NEDs are appointed for a maximum of six years. There are audit, nomination and remuneration committees which comprise non-executive directors apart from the chairman, who sits on the remuneration committee. A senior independent director has been appointed (SID) who maintains close contact with the chairman to obtain a better understanding of the business. A recent innovation has been a weekly squash match to improve their business relationship. Control systems are implemented by department heads as required.

On the audit committee, all the NEDs have business experience; the directors' specialities are marketing, human relations and production. The nomination committee produces job descriptions for each director and provides suggestions for new directors as existing directors leave QAZ, and not before. However, one NED believes that this is inadequate and has had lengthy, and at times argumentative, discussions with two of the executive directors on this point. The issue has yet to be resolved.

All directors are required to hold shares in QAZ, although the timing for share sales and purchases is limited to a few months in the year and board approval is needed for large purchase. The CEO is also directly responsible for the implementation of board policy at an operational level, with performance appraisal being linked partly to this area.

Remuneration of the executive directors is a mixture of basic salary, bonus and performance related pay (PRP). Basic salary continues to be determined by reference to the average salaries paid in QAZ’s country of operation. The bonus payments are linked partly to guaranteed elements, taking into account the risky nature of QAZ’s business and the amount of net profit made. The performance element of remuneration is linked to change in QAZ’s share price; the total amount of PRP consists of 25% of remuneration to again recognise the risky nature of QAZ’s business. Directors are also provided with share options, normally exercisable after five years.



Required:

(a) Evaluate QAZ Company’s board and committees, recommending any changes you consider appropriate to meet generally accepted standards of good corporate governance. (15 marks)

(b) Discuss how the Chief Executive Officer (CEO) and the non-executive directors (NEDs) of QAZ should be appraised, explaining any limitations relevant to the QAZ company. (10 marks)

(c) Describe the role of NEDs. Explain how NEDs can enhance the standing of board sub-committees. (12 marks)

(d) Evaluate the different methods for determining the elements of executive directors’ remuneration, discussing whether those elements are correctly implemented in the QAZ Company. (13 marks)

(Total: 50 marks)


Interim Assessment

SECTION B

BOTH questions to be attempted

QUESTION 2

The EDC Company manufacturers motor vehicles in a number of different countries. Forecast demand for motor vehicles for the next five years is for a fall for three years followed by a strong increase. The directors of EDC are considering closure of one branch of the company which is located in a relatively poor region, mainly to save costs in the short term, although it may re-open the branch in three years. However, adverse publicity regarding this move and comments from some NEDs that EDC may not be acting ethically has made the board re-consider the closure option.

Required:

(a) Define corporate social responsibility (CSR) and assess the benefits of voluntary disclosure of CSR information to a company. (10 marks)

(b) Describe Carroll’s four-part model of CSR, and using this as a framework to your answer, advise the board of EDC on closure of the branch. (15 marks)

(Total: 25 marks)



QUESTION 3

FOC provides banking and investment services to the general public and other companies in its country. The company was formed a few years ago when a society which focused primarily on providing finance to assist members of the general public to purchase houses (a 'building society') changed to become a listed company.

The majority of shareholders of FOC are members of the general public who borrowed money from FOC when it was a building society and were allocated shares when FOC obtained a listing because of their borrowing from FOC; there are only a few institutional investors. The members’ register shows 20% of the company’s shares are owned by 5 institutional investors with the remainder owned by about 2,000,000 members of the public.

There are no trade unions and employees of FOC are general satisfied with working conditions, though they were disappointed by a recent decision to transfer the call centre to a low wage economy for cost cutting purposes.

FOC attempts to attract customers for its banking services using publicity about its good customer service and ethical investment policy. This policy has been largely successful though the standard of service is perceived to have fallen following the call centre move.

Required:

(a) Explain the terms ‘agency theory’ and ‘stakeholder theory’ and describe the link between the two theories. (10 marks)

(b) Describe Mendelow’s stakeholder mapping matrix, and use this model to discuss the actions that FOC should take in respect to its stakeholders. (15 marks)

(Total: 25 marks)


Interim Assessment

KAPLAN PUBLISHING Page 1 of 17

ACCA

Paper P1

Professional Accountant June 2009

Interim Assessment – Answers

To gain maximum benefit, do not refer to these answers until you have completed the interim assessment questions and submitted them for marking.


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Interim Assessment


ANSWER 1

(a) Evaluation of board/committees of QAZ

Good corporate governance points

Overview of board

There is an appropriate mix of executive and non-executive directors (50% executive to 50% non-executive, with the chairman having a casting vote, meets most codes of corporate governance). This means that the non-executive directors can provide an appropriate check on the decisions being taken and the power of the executive directors. Similarly, the fact that non-executive directors (NEDs) are only appointed for up to six years provides for ongoing independence in their role.

Appropriate committees in place

The board has also established the 'normal' committees expected under corporate governance of audit, remuneration and nominations. The members of those committees are also in line with good corporate governance practice (NEDs apart from the chairman being on the remuneration committee), providing for appropriate control and independence in those areas.

Split chairman and CEO

The roles of the chairman and the CEO are split on the board, ensuring that one person does not have too much power on the board itself. Codes of governance do allow for these roles to be combined, but only in exceptional circumstances.

Poor corporate governance points

No risk appraisal or risk management committee

There does not appear to be any section of the governance structures that draws up a risk management policy. The lack of this policy means that risks facing QAZ will not be identified or appropriate responses determined. The risk is made worse by the apparent lack of any internal audit department. This implies that there is no formal review of the detailed internal control systems in QAZ. These systems could therefore be incomplete or ineffective. In jurisdictions with statutory reporting requirements, this would be considered a fundamental weakness.

Clearly a risk management committee and internal audit department need to be established as soon as possible.



Lack of financial experience on audit committee

While the audit committee has been established correctly, there does not appear to be any member with recent financial experience. This means that the committee cannot effectively review the financial statements or other financial reports presented to it as the committee members lack the experience to do this. Similarly, discussions with external auditors will be flawed as there is a lack of understanding regarding the process or terminology of audit. The audit committee cannot therefore be effective in this area.

The nomination committee should be tasked within finding another NED with relevant experience as soon as possible.

Senior independent director is a close friend of the chairman

While there is a senior independent director (SID), in accordance with corporate governance codes, that director appears to be a friend of the chairman of QAZ. This relationship may limit the independence of this director as he may not want to criticise the decisions of the chairman on the board. Similarly, the remuneration committee may be flawed in that the chairman and the SID both sit on this committee. The SID is unlikely to provide an independent view on salaries when the chairman is present.

The SID should be replaced as soon as possible with another NED. The current SID could maintain a general NED appointment although closeness to the chairman may provide too greater an independence threat.

Conflict resolution – inadequate

There has been some disagreement between one of the NEDs and other board members. As this situation has not been resolved, it is really up to the chairman to provide some dispute resolution procedure. To allow the conflict to remain unresolved is likely to affect the effective functioning of the board as the directors concerned will still have this problem at the back of their minds as they try to focus on other issues.

A conflict resolution process must be put in place as soon as possible. It is probably not appropriate for the NED to resign given that his/her views ought to be heard, and continue to be heard, by the board.

Work of the nomination committee

The nomination committee appear to be doing an appropriate job in providing job specifications for the existing directors. The weakness in their work appears to be with succession planning. While the dates of retirement of NEDs are known, the actual appointment of new NEDs appears to be left to chance – there is no plan to start recruitment in advance of an NED leaving. This means that QAZ will, at some times, not have the appropriate number of NEDs and there is no chance of outgoing NEDs briefing new NEDs on the company.

The scope of work of the nomination committee should be broadened to include succession planning.

Interim Assessment


(b) CEO and NEDs – performance appraisal

In terms of corporate governance, performance appraisal applies to all members of the board, not just the executive directors. General comments concerning performance appraisal therefore apply to the CEO and NEDs as well as any other board member. There are some specific comments regarding evaluation that can apply to the CEO and NEDs and these are considered separately below.

CEO appraisal – general comments

Being an executive officer, the main elements of CEO appraisal will be the same as for the other executive directors. The CEO will therefore be appraised against targets set for the whole board as well as the CEO individually. The appraisal process will normally be selected by the chairman and may involve outside consultants to provide an independent check on the process. Information on outcomes will be shared with the board and the process in general terms outlined in the annual report.

CEO – specific comments

As the CEO is responsible for the running of the company, then it is likely that performance appraisal will be linked to the success of the QAZ Company. Attainment of specific targets such as return on operations or implementation of new product strategies could therefore form part of the CEOs appraisal process.

Within the QAZ Company, the requirement for the CEO to be responsible for operational systems appears to be inappropriate; given this is not a senior management responsibility. This could be removed and other more strategic indicators used to assess how well the CEO is performing.

NED performance appraisal

The main difference with NED performance appraisal and executive performance appraisal is that NED appraisal is not linked to remuneration. NEDs receive a fixed fee for their services not linked to any incentive payment. Appraisal in NED terms is therefore linked primarily to how well they have fulfilled their responsibilities in the company.

Performance appraisal overall is again via questionnaires and board discussion. However, NEDs also need to satisfy themselves that they remain independent of the company – or their position and performance may be compromised. In the QAZ Company there remains the issue of all directors being required to hold shares in QAZ which could compromise decision making, particularly of the NEDs.

To ensure that they have performed adequately during the year, NEDs also need to ensure that they are satisfied on areas such as:

• their ability to prepare for, attend and influence board meetings

• being able to devote sufficient time to understand the company, make site visits, etc

• being able to make a positive contribution to strategy development and risk management



• their ability to retain their own views and resist changes being suggested by others

• whether their performance and behaviour generate mutual trust and respect on the board.

So appraisal is not against specific targets, but rather an assessment of how well their responsibilities have been carried out. NEDs will need to be honest with themselves as to whether those responsibilities have been fulfilled, and then agree action plans where improvement and/or changes are required.

(c) Roles of non-executive directors

According to the Higgs Report published in 2003, NEDs have four distinct roles in an organisation:

• Strategic. NEDs should constructively challenge and help to develop proposals on strategy. NEDs can bring external knowledge and experience to the company, providing an external check on whether company strategy is appropriate and achievable.

• Performance. NEDs should review the performance of executive management in achieving agreed goals and targets as well as monitoring the reporting of performance. Again NEDs can provide an external check that board performance targets are appropriate and achievable, and then ensure that reporting systems correctly report the achievement, or otherwise, of those targets.

• Risk. NEDs should satisfy themselves regarding the integrity of the financial statements and that the systems of internal control and risk management are robust. NEDs will again be responsible for providing an independent check on these areas.

• People. NEDs should be involved in setting executive remuneration as well as appointing directors and providing for succession planning. Involving NEDs in this way removes the independence issue of executive directors setting their own remuneration and deciding who they would like on the board (compared to who they actually require on the board).

NEDs can enhance the standing of board sub-committees as follows:

• NEDs help to limit the power of executive directors. As board sub-committees normally comprise solely, or a majority of NEDs, this ensures that executive power is limited in key areas such as remuneration and appointments.

• NEDs can provide specialist knowledge and experience to enhance the decision-making ability of the board and the sub-committees. Experience specifically relates to other companies with which NEDs have contact. For example, many NEDs are NEDs or even executives of other companies; they can therefore check whether remuneration, for example, is congruent with industry standards from first-hand experience.

Interim Assessment


• NEDs should be independent of the company – that is their actions are not influenced by other senior management in the company. Independence helps ensure that board and sub-committee decisions are acceptable to shareholders – they will be less concerned that executive directors are running the company for their own benefit.

• To maintain independence, NEDs are rotated and the committees therefore refreshed on a regular basis. This rotation helps to ensure that NEDs do remain independent, providing the benefit mentioned above. Rotation ensures that NEDs do not get too close to the executive directors and are not swayed by executive decision making from familiarity threats.

(d) Executive directors’ remuneration

The overall aim of a remuneration strategy should be to link reward to performance of the company. The remuneration strategy is therefore about creating a link to corporate strategy since the corporate strategy is the process through which performance is improved.

Components of directors’ remuneration package

Basic salary

As with most jobs directors are promised a specific annual salary. This is usually determined through benchmarking peer group salaries. Peer groups should be industry specific and should reference equivalent sized ventures.

The amount of the basic salary provides an indication of the performance expected from the director, with salaries in the top quartile of payments indicating higher levels of expected performance.

Directors in the QAZ Company are being paid at the industry average. The only consideration appears to be that 'industry' in this case applies to the whole economy rather than to QAZ’s specific business. Some adjustment may be necessary if it is found that salaries in QAZ’s industry differ significantly from the economy norm.

Bonus payments

The purpose of a bonus is to adjust pay on the basis of performance. To award a bonus regardless of any particular effort is to make the term meaningless as there is no set level of performance necessary to actually obtain that bonus.

A bonus paid to the director at the end of the accounting year may be based on any number of accounting measures including gross profit, net profit, earnings per share and total shareholder value. Most corporate governance systems recommend that the bonus is linked to shareholder value in some way to show that the shareholders' and directors' interests are the same.



QAZ’s bonus system can be criticised on two counts – firstly, there is a guaranteed element which indicates this is not really a bonus. Secondly, the bonus is linked to net profit which directors could manipulate to improve their payments. Linking to an increase in shareholder value would help to remove this possibility.

Performance related pay (PRP)

Performance related elements of remuneration are defined as those elements of remuneration dependent on the achievement of some form of performance measurement criteria. Good corporate governance principles state that the performance related element should form a significant part of the total remuneration package. The PRP elements of remuneration should be attainable in order to provide motivation since unattainable targets are generally demotivating.

In the QAZ Company, only 25% of remuneration is linked to PRP. This is probably insufficient as this is not a significant element of total remuneration and may therefore not be sufficiently motivating. Also, linking PRP to share price is generally thought to be inappropriate as directors cannot control market conditions; so a general decline in market conditions is not caused by directors and they should not be penalised for this. Similarly, they are not responsible for favourable market conditions and should not be rewarded for these. QAZ needs to consider linking PRP to other indicators such as shareholder returns.

Other benefits including shares and share options

Share options are contracts that allow the executive to buy shares at a fixed price or exercise price. Directors make a profit if the share price of the company increases – the option is exercised to purchase at a lower price and reselling the shares provides the profit. Share options are good because they attempt to link company performance to director performance in the longer term (although market factors distort this as mentioned above).

The inclusion of share options in QAZ’s remuneration package is therefore acceptable.

Interim Assessment


MARKING GUIDE

(a) 1 mark for each positive aspect of the board or committee approach up to a maximum of 5 marks

1 mark for each negative aspect of the board or committee approach up to a maximum of 5 marks

2 marks for each recommendation up to a maximum of 6 marks

Maximum total 15 marks

(b) 1 mark for each element of a process of appraisal up to a maximum of 6 marks

1 mark for each limitation up to a maximum of 4 marks

Total 10 marks

(c) 2 marks for each descriptive role, 4 in total, 8 marks

1 mark for each issue relating to enhancement maximum 4 marks

Total 12 marks

(d) 1 mark for each method

1 mark for each positive aspect

1 mark for each negative aspect

Maximum 4 methods

1 mark for each implementation issue, up to 4 marks




ANSWER 2

(a) Definition of CSR

The pressure group Business for Social Responsibility defines corporate and social responsibility (CSR) as 'it generally refers to business decision making linked to ethical values, compliance with legal requirements and respect for people, communities and the environment'.

In many companies, therefore, CSR is viewed as having policies in place that support the CSR objectives of the organisation. The company has a statement that it will, for example, trade ethically, and has policies in place to ensure that this actually happens.

Benefits of voluntary disclosure of CSR information

The extent of CSR reporting varies from jurisdiction to jurisdiction; however, in most countries, CSR reporting tends to be voluntary. However, the benefits of reporting, whether statutory, code or voluntary, include:

Accountability

Disclosure is the dominant philosophy of the modern system and the essential aspect of corporate accountability. Disclosing CSR information helps to show the company’s stance on CSR and its ability to meet its CSR objectives.

Information asymmetry

Disclosure removes some aspects of information asymmetry. The decision makers in a company have more information than other stakeholders, who may well have an interest in the CSR obligations of the company. Disclosure starts to provide these other stakeholders with that information.

Attracts investment

Institutional investors are attracted by increased disclosure and transparency. Greater disclosure reduces risk and with it the cost of capital to the company. In some situations, taking an ethical stance and disclosing work on this stance will attract more investors. For example, in the UK, the Co-op group of shops attempts to source food supplies from farms where workers are paid a fair wage under 'Fair Trade' agreements. This attracts investors who share the fair trade principles and customers who wish to be ethical consumers.

Compliance

In jurisdictions where there are CSR reporting obligations, non-compliance may threaten listing and could result in fines through civil action in the courts. In the UK, the Companies Act 2006 will start to introduce some basic CSR reporting in the next few years, but without as yet strict rules for non-compliance.

Interim Assessment


Reputation risk

Lack of disclosure may adversely affect the company’s reputation, especially where it is perceived to be involved in unethical activities.

Stakeholders

Taking an ethical stance may attract other stakeholders such as employees who wish to work for ethical organisations. Shared ethical values between the company and its employees may help to attract more customers or provide better customer service (e.g. the Body Shop where the company and employees share views on not producing cosmetics using testing on animals).

(b) Branch closure and Carroll’s theory

Carroll developed a four-part theory of CSR which is applicable to companies. There are four responsibilities which are represented by layers of a pyramid. Carroll argued that true social responsibility requires meeting all four levels consecutively.

Economic responsibility

The EDC Company has an economic responsibility in terms of providing shareholders with a reasonable return on their investment, to provide employees with safe and fairly paid jobs and also to provide consumers with good quality products at a reasonable price. In other words this is the main reason for the existence of the company, and the economic responsibility is expected by society as a whole. In some jurisdictions, economic responsibility is extended to apply to communities, not simply workers.

There is a clear conflict between the decision to close the factory or not and EDC's responsibilities. Saving money in the short term does meet the aims of the shareholders in terms of continuing to provide a reasonable return on their investment. However, branch closure will mean employees losing jobs in a poor jurisdiction. If the directors subscribe to the wider view on economic responsibility, then this action may not be taken. Similarly, closure may result in adverse publicity and a fall in demand for EDC's products which would not be in the interests of shareholders. Retaining the branch, even at a loss, for the next three years appears advisable.

Legal responsibility

Legal responsibility means that companies abide by the laws of their jurisdiction. Laws are seen as the codification of society’s moral views – they are things that must be done or followed, so it is required that companies follow those laws.

In terms of EDC, if the branch is closed, then the company will be required to follow any laws regarding payment of redundancy pay, payment of remaining taxes to the government, etc. There are not normally any laws which state that a company must continue in existence, so as long as laws are followed, EDC can close the branch.



Ethical responsibility

Ethical responsibilities mean a company should do what is right and not simply follow what they have to do from any legal responsibility. These responsibilities are generally expected by society – so the company does not have to follow them, but may find adverse affects if those expectations are not met. For example, the Shell oil company had a legal right to dispose of an old oil drilling platform at sea. However, pressure groups and the expectation of the public not to take this action meant that alternative disposal options were taken.

For EDC, there is a legal right to close the branch. However, the public may have expectations of companies being ethically obliged to assist poorer jurisdictions. This would mean that EDC should keep the branch open as it meets those expectations. Closure against public expectation may again harm EDC if its customers move to alternative suppliers.

Philanthropic responsibility

Philanthropic responsibility, or the love of the fellow human in the original Greek, refers to the responsibility of organisations to improve the quality of life of employees, local communities and ultimately society in general. This responsibility includes the provision of facilities for employees (e.g. sports halls) through to sponsoring of the arts (e.g. the Tate Gallery in London – originally sponsored by Tate and Lyle, the sugar manufacturer). The philanthropic responsibility is not required by society, but is normally desired so that corporations are showing some interest in the world apart from profit making.

For EDC, there is no clear philanthropic responsibility in terms of providing employee benefits, etc. It can be argued that keeping the branch open will cost EDC money, and in this sense EDC has to be philanthropic to continue to pay their employees in this location. There would also be a direct benefit to the community in that jobs would not be lost.

Summary

In terms of Carroll, by closing the branch, EDC can fulfill its legal responsibilities. However, the directors may find that the wider context of economic responsibility is not fulfilled, and that ethically and philanthropically the branch should remain open in the short term. The board is therefore correct in re-considering its action.

Interim Assessment


MARKING GUIDE

(a) 1 mark per point for definition up to a maximum of 3 marks

1 mark for identifying a benefit and 1 mark for assessment (size of benefit, significance to a company etc) up to maximum of 8 benefits


(b) For each of the four parts to the model:

- 1 mark for description of part

- 1 mark for application to EDC

- Up to 2 marks for each advisory issue raised and discussed

Up to 2 additional marks for overall summary




ANSWER 3

(a) Agency theory and stakeholder theory

Agency theory

Agency theory is a group of concepts describing the nature of the agency relationship deriving from the separation between ownership and control.

The basic agency relationship occurs when one party, the principal, employs another party, the agent, to perform a task on their behalf. In the context of companies and corporate governance, the principal is the shareholders, the agent is the directors and the task is running the company. The principal either cannot or does not want to run the company and therefore delegates this task to the agent. The agent is employed by the principal to carry out a task on their behalf.

Having established the principal/agent relationship, agency costs are incurred in the set up, operation and monitoring of schemes to ensure the alignment of principal and agent interests. Examples of such costs include profit-related bonuses and productivity schemes to align the interests of directors with shareholders and audits to ensure that financial information produced by directors is accurate.

Stakeholder theory

The basis for stakeholder theory is that companies are so large and their impact on society so pervasive that they should discharge accountability to many more sectors of society than solely their shareholders. Taking into account the interests of stakeholders may be important for a company depending on the power that each stakeholder group has. Stakeholder interest could therefore override shareholder interests in some situations e.g. a pressure group suggesting that activities are unethical and providing extensive publicity to show this. Action may have to be taken by the company in response to this group which could decrease shareholder return e.g. provision of a more environmentally friendly method of disposal of waste products.

The word 'stake' suggests an exchange relationship with the company, which is generally correct. The stakeholder will have an interest in the company, and in most situations the company will need to take those interests into account. Typical stakeholder groups include:

• shareholders and employees

• customers and suppliers

• creditors and communities

• governments and the general public/world society

• environment, animal species and future generations.

A stakeholder provides the company with an input (e.g. road infrastructure) and expects their own interests to be satisfied via inducements (to enhance not degrade the quality of life as a corporate citizen).

Interim Assessment


Link between agency theory and stakeholder theory

Agency theory is a narrow form of stakeholder theory – in agency theory the only 'stakeholder' is effectively the shareholder, whereas in stakeholder theory there are many other stakeholders including customers, the government, etc.

Stakeholder theory may be the necessary outcome of agency theory given that there is a business case in considering the needs of stakeholders through improved customer perception, employee motivation, supplier stability, shareholder conscience investment

Both stakeholder and agency involve a contract, the purpose of which is to align divergent interests between the directors and the shareholder/stakeholder.

(b) Stakeholder power and interest

Mendelow’s stakeholder mapping matrix can be used to explain the action to take for different stakeholder groups. The matrix can be expressed as follows:

Level of interest

Low High

Pow

er

Low

Minimum Effort Keep Informed

High

Keep Satisfied Key Players

The matrix was designed to track interested parties and evaluate their viewpoint in the context of some change in business strategy.

Power relates to the amount of influence (or power) that the stakeholder group can have over the organisation. However, the fact that a group has power does not necessarily mean that their power will be used.

The level of interest indicates whether the stakeholder is actively interested in the performance of the organisation. The amount of influence the group has depends on their level of power.



Low interest – low power

These stakeholders include small shareholders, the unskilled element of the labour force and the general public. They have low interest in the organisation primarily due to lack of power to change strategy.

FOC has a significant number of shareholders in this category who were allocated shares when FOC obtained a listing. As the members obtained the shares by default, rather than actively deciding to invest in FOC they appear to have little interest in the company. They also have little power – there are 2,000,000 shareholders in this category. While not necessarily ignoring the group, there is little FOC needs to do apart from keep them 'happy', that is pay a regular dividend.

High interest – low power

These stakeholders would like to affect the strategy of the organisation but do not have the power to do this. Stakeholders include salaried staff, customers and suppliers, particularly where the organisation provides a significant percentage of sales or purchases for those organisations. Environmental pressure groups would also be placed in this category as they will seek to influence company strategy, normally by attempting to persuade high power groups to take action.

For FOC, the main stakeholder group from the scenario appears to be the customers. Customers expect a good level of service – they have a high interest in their money being managed appropriately by FOC. While the level of customer service has been good, FOC may need to address the issue of the call centre appearing to provide poorer service. While customers individually have little or no power over FOC, a significant number of customers leaving FOC could exert significant power.

Low interest – high power

These stakeholders normally have a low interest in the organisation, but they do have the ability to affect strategy should they choose to do so. Stakeholders in this group include the national government and in some situations institutional shareholders. The latter may well be happy to let the organisation operate as it wants to, but will exercise their power if they see their stake being threatened.

FOC does have a few institutional shareholders. Given the limited number, it should not be difficult for the chairman, or other director in FOC, to contact them and assess their objectives. The board of FOC should take those objectives into account when planning FOC’s strategy, because stakeholders could exert their power on FOC if their objectives are not being met – by selling their shares. However, as institutional shareholders hold a minority of the shares, the board must still remember to cater for the interests of the majority of shareholders also.

High interest – high power

These stakeholders have a high interest in the organisation and have the ability to affect strategy. Stakeholders include the directors, major shareholders and trade unions.

Interim Assessment


The main stakeholder in this group is the directors. As there are no major shareholders or trade unions, the directors appear to have fewer outside influences to consider than other companies. Their apparent high level of power will need to be checked by having appropriate corporate governance structures in place. These structures will help to reassure shareholders that FOC is being run for their benefit.

MARKING GUIDE

(a) Explanation of each theory:

1 mark per point, up to a maximum of 4 marks on each theory – 8 marks total

1 mark for each link, up to 4 marks


(b) Description of matrix, power & influence terms – 1 mark per point, maximum 4 marks

For each stakeholder group (power / influence):

- 1 mark for identifying example for FOC

- up to 2 marks for discussion of actions

Maximum of 4 per group, for 4 groups.


p1 - interim

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