Xuland is a developing country. Certain bodies which monitor different governments consider Xuland to have problems with corruption. Xuland authorities are tolerant of breaches in corporate governance compliance among its listed companies. It is common for police officers to request, and receive, corrupt payments from members of society. There is also corruption among public servants, in educational establishments and in many companies.
In the senior levels of business, there is a network of interconnections between business directors and senior members of the government. The prime minister is known to be a reclusive figure and a law prevents the media or public gatherings from voicing any criticism of him or the government. The newspaper media is largely owned and controlled by the government, which means that published criticism of the government is very rarely seen by people in Xuland. Where it is in evidence, the state often takes drastic action to remove such people or to dissuade them from making public criticisms.
Bob Tong is the chief executive of the country’s largest business (Xuland Oil). Xuland Oil had been owned by the government until five years ago. It is now listed on the Xuland stock exchange and has secondary listings in other, more developed countries, where the shares have become attractive to investors. This is because Xuland Oil is a monopoly supplier of energy in Xuland and therefore enjoys a home market without competition. Accordingly, it is believed to make strong profits in Xuland. It also exports energy (oil and gas) outside Xuland to neighbouring countries by pipeline, and to other countries by liquefying the gas and shipping it in very large container ships.
Chief executive Bob Tong is believed to receive a substantial fixed salary. However, he also receives ‘rewards’ from private sector companies for awarding them large support contracts such as for the supply of oil rigs, ships and other important non-current assets. He considers this a way of making money for his retirement. The culture in Xuland means that he is very rarely criticised in public for his behaviour. There is a listing rule about the separation of the roles of CEO and chairman but it is rarely enforced and Mr Tong is also the executive chairman of Xuland Oil. He considers it important that he occupies both roles to prevent his activities from being too closely scrutinised.
Alice Tuesday, a business journalist from outside Xuland, reported that the figure noted in Xuland Oil’s remuneration report was clearly not the true figure of what Mr Tong actually received from his leadership of the company. This was because it failed to report the bribes he received from supply contracts.
A major international policy-making body is considering asking all oil and gas companies to produce a stand-alone environmental report each year, reporting in detail on the company’s environmental footprint. This is because of a number of recent, high profile cases, in which the poor environmental performance of oil and gas companies has been questioned. A prominent intergovernmental body believes that oil and gas companies will be helping their own reputations by joining the scheme to produce high quality environmental reports each year.
The initiative proposes that each environmental report should contain a meaningful discussion of how each company is attempting to mitigate the worst effects of its environmental impacts. It has been suggested that this report should include figures on all aspects of a company’s environmental impacts and also the changes from year-to-year so that stakeholders can monitor how each oil and gas company is performing over the longer term. Some companies, including Xuland Oil, are resisting this initiative, because the board believes that people in Xuland do not care much about the environment. The company’s internal audit function has offered to advise on establishing internal controls, in order to assure the company that the information fed into the environmental report has integrity and is accurate. Xuland Oil has been criticised in international media for acting as an arm of Xuland foreign policy.
This has meant, for example, that countries which are not favoured by the Xuland government are charged higher prices for oil imports. Some of the shareholders have been angry about this, as they see their investment as a way of making reliable long-term returns and most shareholders care nothing about Xuland foreign policy. They believe that Xuland Oil should get on with producing returns and ignore the pressure by the Xuland government to be a part of Xuland foreign policy. The pressure for Mr Tong and the company board to enact foreign policy is thought to be linked to the intimate relations among the elites in Xuland society. Many government ministers and senior business figures went to the same universities and remain close friends outside their working lives.
The journalist, Alice Tuesday, has been investigating the problems at Xuland Oil for some years and has widely reported the corruption in Xuland society. She pointed out that many of the jobs in the Xuland public sector tended to be concentrated among one of the several ethnic groups in Xuland and this, she believed, was anti-meritocratic and did not serve the country’s best interests. It was she who exposed Mr Tong for taking bribes on supply contracts. She has also recently accused the prime minister of taking money from public accounts for his own use. She said that 2 Xuland Oil needs to decide if it is a business organisation or a part of the Xuland state, and to notify its shareholders accordingly. Mr Tong is a close personal friend of the prime minister and other senior government ministers. He is also a strong supporter of the government and its policies.
Alice Tuesday’s view is that Xuland is structurally corrupt and needs a thorough review of its culture. As a developing country, Alice Tuesday says that it will not become a developed country until it tackles its problem with corruption, including corruption in the police and in the public services. She recently wrote that, ‘if Xuland tolerates corruption, it is choosing poverty over development, and this a terrible shame for the decent, hard-working families in Xuland, who deserve a better future. Xuland has been appallingly-led for many years, and the ruling class has badly let down the people of Xuland.’
Required:
(a) Explain why, the shareholders would benefit if the roles of chief executive and chairman were split and an effective non-executive chairman was appointed. (3 marks)
Shareholders would benefit if the roles of chief executive and chairman were split and an effective non-executive chairman was appointed because it will ensure,
The chairman clearly and solely represents the interest of the shareholders unlike the role of manager(s) whose interest are on private gains. This will help provide independent assessment and oversight of management, since the chairman role is to guide the board in its preparation and deliberation. There will not be independence if the CEO is guiding the process.
Clear accountability from the Chief Executive Officer (CEO) and the management team. The split of roles of the CEO and that of chairman will ensure proper checks and balances which will help in proper accountability of resources of the shareholder since the CEO report to the chairman of the Board.
Reduction in the act of self-interest of CEO and the management team rather than purely in the interest of shareholders.
(b) The bribes which Mr Tong accepted means that the remuneration report does not contain a complete picture of his annual income. Required:
(i) Discuss the importance of completeness in a remuneration report and explain how the inaccuracy of information on the remuneration of executive directors creates a potential agency problem. (3 marks)
(ii) Explain why most shareholders would support a link between rewards and performance, and why this link is important to shareholders. (2 marks)
(c) Xuland Oil’s overseas investors have encouraged the company to adopt the compulsory environmental reporting in order to ensure that all environmental risks are considered. Required: Explain the importance of effective internal controls and internal audit in underpinning the proposed compulsory environmental reporting requirement. (4 marks)
(d) Alice Tuesday intends to write an article for international media to discuss several important issues with the governance of Xuland Oil. Draft this article, to include the following content. Required:
(i) Explain the meaning of ‘corruption’ and discuss the barriers to improving the corrupt practices in Xuland. (4 marks)
(ii) Propose measures which might be put in place to defeat corruption in Xuland.
