Current Issues in Finance - Assignment Example

MN341Current Issues in Finance Part 1 (35% of total marks) (750 words.) Using a company of your choice answer the following question: Explain to someone who has no knowledge of corporate social reporting ‘what is a silent and shadow account? Part 2 (65% of total marks) (parts A, B and C- 1750 words). A. Risk disclosure (Word count guide: 550 words)* 1. Identify three sentences* that represent voluntary disclosures of risk information sentences. (3 marks) 2. Categorise the three sentences according to the Linsley and Shrives disclosure grid attached to this assignment and explain why you have chosen to categorise the sentences in this manner. (6 marks) 3. For each sentence critically discuss whether agency theory, signalling theory or legitimacy theory could explain why the directors have chosen to voluntarily disclose this piece of risk information. (12 marks) *Note that you should not identify generalised statements of risk management policy. 1. Three sentences Telecom Plus Plc Sentence I The Company received notification today that on 21 March 2007 Michael Pavia, non-executive director, acquired 10,000 ordinary shares of 5p each at a price of 195 pence per share. Mr Pavia has a beneficial interest in 10,000 shares, representing approximately 0.01 per cent of the issued share capital of the Company. Source: Notification of Major Interest in Shares - 28 March 2007 Sentence II “The difficulties of last winter are now firmly behind us, and the business is now in excellent shape. We are confident of delivering results for the full year which exceed our previous best pre-tax profits of £10.5m to 31 March 2005, and we look forward to the future with renewed confidence.” Source: Interim results for the six months ended 30 September 2006 Sentence III “Financial and business highlights” · Turnover up 32% to £68.5m (2005: £51.9m) · Profit before tax up 9% to £5.5m (2005: £5.1m) · Net cash balance up £18.7m during the period · Interim dividend of 2p per share (2005: Nil) · Services provided up 5% to 521,000 during the period · Launch of attractive new broadband packages · Positive contribution from energy, with npower agreement protecting Telecom plus from fluctuations in wholesale energy markets Source: Interim results for the six months ended 30 September 2006 2. Categorization of the three sentences according to the Linsley and Shrives disclosure grid Financial Risk Operations Risk Empowerment Risk Information Processing and Technology Risk Integrity Risk Strategic Risk Text Disclosures Sentence Characteristics 1 2 3 4 5 6 Monetary/good news/future A Yes Monetary/bad news/future B Yes Monetary/neutral/future C Yes Non-monetary/good news/future D Yes Yes Non-monetary/ bad news/future E Yes Yes Non-monetary/neutral/future F Yes Yes Monetary/good news/past G Monetary/bad news/past H Yes Yes Monetary/neutral/past I Non-monetary/good news/past J Yes Non-monetary/ bad news/past K Yes Non-monetary/neutral/past L Yes Yes 3. Discussion on each sentence Sentence I. This sentence is believed to disclose according to the agency theory (Fama, 1980). The agency theory mentions that there are conflicting objectives exist when the objectives of management agent deviate from the common of objectives of the company. Thus, the company discloses the information on holding of shares of their executives. Sentence II. This sentence is believed to intend to declare the operational risk the company faced last year. In addition, it also declared that the company has confidence on future operations. Sentence III. The sentence provides the financial information on the company operations. B. International corporate governance (Word count guide: 650 words) 1. Select any one of the following countries: - Indonesia, India, China, USA, UK, Hong Kong, Malaysia, Germany, France, or Japan. 2. Identify and outline three major governance characteristics of the selected country. (6 marks) 3. Provide a brief description of two major governance challenges faced by the country of your choice. (4 marks) 4. Propose possible reform initiatives that could be taken to remedy the identified challenges. Critically discuss the strengths, drawbacks and/or potential problems arising from implementing such measures. (14 marks) In UK, there are two types of governance mechanism-- internal and external. The internal mechanisms to be analyzed deal with board composition, ownership structure and incentives. The external monitoring mechanism involves the market for corporate control which comes into play when ownership changes. The Cadbury Committee was set up to investigate the problem of financial reporting and to assess the extent to which auditors were able to provide safeguards to the users of financial statements. The background to the setting up of the Committee was the sudden and spectacular failure of high-profile, and apparently successful, businesses such as Polly Peck, BCCI and the Maxwell empire. These examples illustrated a failure of accountability and effectiveness. The Cadbury Report (1992) set out a code of practice based upon the concepts of openness, integrity and accountability, with shareholder interests being central to the code. The report set out the responsibilities of the executive directors and non-executive directors, as well as outlining the links which should exist among shareholders, board members and auditors. It also identified a number of characteristics which were claimed to represent good governance practice. These included a separation of the roles of chairman and chief executive officer, having a significant presence of independent non-executive directors on the board, appointing high-calibre non-executive directors and the setting up of independent committees to decide top management remuneration packages. These governance structures were deemed to be necessary because the board is charged with ratifying and monitoring the most important decisions which an effect firm’s direction and performance (Weir, 1997). Three elements of board composition (1) the role of outside or non-executive directors; (2) the combining of the posts of chief executive officer (CEO) and chairman; and (3) the quality of the non-executive directors. First, executive directors are appointed because of their experience, specialized skills, expertise and knowledge. However, even with the available internal checks and balances there is no obvious way of monitoring the activities of a board which consists entirely of executive directors. Consequently an additional governance structure, namely nonexecutive directors, is charged with fulfilling this key monitoring role (Fama, 1980; Fama and Jensen, 1983, and Cadbury, 1992). A non-executive director’s primary functions are to encourage senior management to improve corporate performance, to officer specialized assistance when required and to monitor managerial actions. UK boards are dominated by inside directors who, on average, make up two thirds of board membership. Second, if the internal monitoring mechanisms are to operate effectively, it is important that no individual possesses too much power (Cadbury, 1992). The Committee concluded that combining the roles of chairman and CEO creates a strong power base which could reduce the ability of a board to exercise executive control. The Committee therefore recommended that in large firms, the key roles of CEO and chairman should be separated. This would allow the management of decisions, that is the day-to-day running of the business, to fall within the remit of the CEO. The chairman’s responsibilities include the development of strategy as well as appraising the performance of the other directors. Therefore separating the roles provides a means of dividing key responsibilities among different office holders and so prevents one person gaining too much power within the decision-making body. Third, the calibre and standing of non-executive directors may also be measured by the number of additional directorships they hold. This is determined by the market for outside directorships. (Fama, 1980). If the nonexecutive directors are perceived to be effective monitors of management such that corporate performance improves, their value on the external labour market will increase. Consequently they will be offered additional directorships on the boards of other firms. Thus the number of additional directorships held by non-executives may be taken as a proxy for their ability to protect shareholder interests. A high number implies that the non-executive director is perceived to be an effective board member. However, if the number is low, this suggests that the incumbent non-executive directors are either inexperienced or that the market does not regard them as being capable of protecting shareholder interests. C. Share movement (Word count guide: 550 words) 1. Provide a one-year graph of the selected company’s share price fluctuation covering the most recent year. (3 marks) 2. Identify one major movement in the share price and critically discuss what events may have driven this movement and comment on the level of market efficiency (17 marks) Telecom Plus Plc The share prices were dramatically went up after December 2006. The three events which took place and are believed to push the price up were: 1. Total Voting Rights - 29 December 2006 2. Director's shareholding - 14 December 2006 3. Board Appointment - 13 December 2006 (1) Total Voting Rights and Share Capital The company made an announcement on 29 December 2006 for its total voting rights and share capital. It said that for the purposes of the transitional provisions of the Financial Services Authority's Disclosure and Transparency Rules, the total number of ordinary shares of 5p of Telecom plus plc in issue as at the date of this notice is 68,838,928 with each share carrying the right to one vote. There are no shares held in treasury. The total number of voting rights in Telecom plus plc is therefore 68,838,928. The above figure may be used by shareholders as the denominator for the calculations by which they will determine if they are required to notify their interest in, or a change to their interest in, Telecom plus plc, under the Disclosure and Transparency Rules. (2) Director’s Shareholding On December 14, 2006, the Company received notification today that Stephen Davis, who as announced in our Interim Results will be resigning from the board on 31 December 2006, sold 11,000 shares at 183½p per share on 13 December 2006. Following this transaction, Mr Davis holds 54,730 ordinary shares of 5p each representing 0.08 per cent. of the issued share capital. (3) Directors’ Declarations On December 13, 2006, the following the boardroom changes announced today in the interim results for the six months ended 30 September 2006, pursuant to Listing Rule 9.6.13 paragraph (1), details of all directorships held by Mr Pavia in any other publicly quoted company at any time in the previous five years are set out below: British Nuclear Fuels plc * WHAM Energy Plc * SEEBOARD Group PLC ** Concateno PLC ** * indicates directorship is current; ** indicates former directorship Telecom plus PLC confirms that there is no further information to be disclosed under paragraphs 9.6.13 (2) to (6) of the Listing Rules in respect of the appointments of Michael Pavia as a non-executive director and Richard Hateley as an executive director. References Weir, C. (1997). Corporate governance, performance and take-overs: an empirical analysis of UK mergers. Applied Economics, 1997, 29, 1465- 1475 Fama, E. (1980) Agency problems and the theory of the firm, Journal of Political Economy, 88, 288-307. Fama, E. and Jensen, M. C. (1983) Separation of ownership and control, Journal of Economics and L aw, 26, 301-25. Cadbury Committee Report (1992) Report of the Cadbury Committee on the Financial Aspects of Corporate Governance, Gee, London. Gray R.H., D.L. Owen & C. Adams (1996) Accounting and accountability: Changes and challenges in corporate social and environmental reporting (London: Prentice Hall) . See also SEAJ for reports on new initiatives and campaigns from time to time. Read More