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June2008 Q3

Mary Hobbes recently joined Rosh and Company as the finance director. She realized the board lacked diversity and had poor governance practices. The board rarely discussed strategy and the chairman's younger brother would automatically succeed him despite lacking relevant experience. Implementing a nominations committee could help address these issues by bringing more independence and oversight to succession planning and appointments. "Retirement by rotation" means long-serving directors must stand for re-election, which increases accountability to shareholders.

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Mubashar Hussain
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103 views4 pages

June2008 Q3

Mary Hobbes recently joined Rosh and Company as the finance director. She realized the board lacked diversity and had poor governance practices. The board rarely discussed strategy and the chairman's younger brother would automatically succeed him despite lacking relevant experience. Implementing a nominations committee could help address these issues by bringing more independence and oversight to succession planning and appointments. "Retirement by rotation" means long-serving directors must stand for re-election, which increases accountability to shareholders.

Uploaded by

Mubashar Hussain
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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June2008 Q3

Mary Hobbes joined the board of Rosh and Company, a large retailer, as finance director
earlier this year. Whilst she was glad to have finally been given the chance to become
finance director after several years as a financial accountant, she also quickly realised that
the new appointment would offer her a lot of challenges. In the first board meeting, she
realised that not only was she the only woman but she was also the youngest by many
years.

Rosh was established almost 100 years ago. Members of the Rosh family have occupied
senior board positions since the outset and even after the companys flotation 20 years ago
a member of the Rosh family has either been executive chairman or chief executive. The
current longstanding chairman, Timothy Rosh, has already prepared his slightly younger
brother, Geoffrey (also a longstanding member of the board) to succeed him in two years
time when he plans to retire. The Rosh family, who still own 40% of the shares, consider it
their right to occupy the most senior positions in the company so have never been very
active in external recruitment. They only appointed Mary because they felt they needed a
qualified accountant on the board to deal with changes in international financial reporting
standards.

Several former executive members have been recruited as non-executives immediately


after they retired from full-time service. A recent death, however, has reduced the number
of non-executive directors to two. These sit alongside an executive board of seven that,
apart from Mary, have all been in post for over ten years.

Mary noted that board meetings very rarely contain any significant discussion of strategy
and never involve any debate or disagreement. When she asked why this was, she was told
that the directors had all known each other for so long that they knew how each other
thought. All of the other directors came from similar backgrounds, she was told, and had
worked for the company for so long that they all knew what was best for the company in
any given situation.

Mary observed that notes on strategy were not presented at board meetings and she asked
Timothy Rosh whether the existing board was fully equipped to formulate strategy in the
changing world of retailing. She did not receive a reply.

Required:
(a) Explain agency in the context of corporate governance and criticise the
governance arrangements of Rosh and Company. (12 marks)

(b) Explain the roles of a nominations committee and assess the potential
usefulness of a nominations committee to the board of Rosh and Company. (8
marks)

(c) Define retirement by rotation and explain its importance in the context of
Rosh and Company.

(5 marks)
(25 marks)
June2008 Q3
(a) agency + criticism of the CG

Agency:
Directors are the prime agent of shareholders and help shareholders operate the
company but because shareholders dont trust directors and so agency problem
arises.

60% shares are owned by external shareholders so board has agency responsibility
to
those shareholders.

Criticism:

Succession planning
Chairmans younger brother will succeed him in 2 years time and this is based on
family membership rather than experience and skills he has but if the company
wants
to go listed then this may not be acceptable to shareholders.

Number of non-executive directors(NEDs)


The board doesn't have an appropriate balance of executive directors(EDs) and
NEDs
because there are 7 EDs and 2 NEDs. There should be 50% and 50% split between
EDs
and NEDs.

Previous EDs
NEDs are recruited from previous EDs and this would decrease the independence of
those NEDs.

Strategy
Theres no discussion of the strategy in the board and company should have a
detailed
discussion about the strategy to ensure company success according to corporate
governance code.

Background
The background of the NEDs are almost the same and this can result in a lack of
new
thoughts to the company and per corporate governance it should ensure the
diversity
of members to the board.
(b) roles +usefulness of nomination committee

Roles:

Balance of board
Nomination committee would review the board by inspecting balance and
experience
of the board members to ensure its effectiveness.

Succession planning
Nomination committee would do succession planning to determine who will be
included
in the next management team.

Appointment
Nomination committee would oversee the appointment of the new members to the
board and make recommendation about the appointment.

Non-executive directors
The committee should examine the role of non-executive directors and consider
whether they are spending enough time on their duties.

Usefulness:

Balance
Nomination committee would ensure the balance in the board is appropriate split
between EDs and NEDs and hence improve effectiveness of the board.

Succession planning
Nomination committee would ensure the succession planning of new members to
the
board not necessarily be the family members.

Appointment
Nomination committee would ensure the appointment of the NEDs are not
necessarily
from the previous EDs and hence increase their independence.

Compliance
Nomination committee would ensure company complies with the corporate
governance
code relating to appointment and effectiveness of the board.
(c) retirement by rotation

Definition:
Retirement by rotation means that every year a certain number of directors retire
from
the board, and have to offer themselves for re-election if they wish to continue to
serve.

Directors include directors who have been appointed during the year and then
directors
who have served the longest on the board

Importance:

It gives shareholders a right to deny any incompetent directors being reelected.


It reduces the cost of contract termination for underperforming directors
It forces directors to improve their performance because they are being reelected
each year.

(c) retirement by rotation

Definition:
Retirement by rotation means that every year a certain number of directors retire
from
the board, and have to offer themselves for re-election if they wish to continue to
serve.

Directors include directors who have been appointed during the year and then
directors
who have served the longest on the board

Importance:

It gives shareholders a right to deny any incompetent directors being reelected.


It reduces the cost of contract termination for underperforming directors
It forces directors to improve their performance because they are being reelected
each year.

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