REVIEW QUESTIONS :

1) Why do corporations need a board of directors ?

Not all small businesses have the skills they need to operate effectively,
especially if theyve experienced rapid growth. A board of directors can help
by adding to and complementing skills and industry expertise that you might
not have in-house. A board can also help ensure you have the right processes in
place to manage growth, focus your strategy, prepare to raise capital, and plan
for an IPO.
Effective and networked boards can also help bring in new talentboth at the
board and management leveland help with succession planning (an important
aspect of running a family business).
More than anything, a board of directors is there to help you. A board can give
you the opportunity to step back from the tangled hairball of day-to-day tactical
business operations and focus strategically and objectively on your business at
large.
2) What is the value of adding outside directors to your board ?
Outside directors bring outside experience and perspective to the board.
They keep a watchful eye on the inside directors and on the way the
organization is run, and provide guidance as to risk management and good
corporate governance practices. Outside directors are often useful in
handling disputes between inside directors, or between shareholders and the
board.
3) Which is more important to effective corporate governance : an audit
committee or a compensation committee ? Why ?
The audit committee is more straightforward and as a new board member it
is better to learn about the business first and get into compensation politics
later .
Its a better way to learn the business and you can establish relationships before
getting deep into politics.

The audit committee is the fastest way to get an appreciation of the business.
Many subjects covered quickly at the board level are discussed in depth in the
audit meeting.
The objectives of the management and the audit committee are the same:
provide accurate financial statements with transparent disclosure. There may
be differences of opinion from time to time but everyone moves in the same
direction with tight deadlines that force decisions.
The audit committee has the advice of the outside auditors who not only
opine on the companys financials but provide context by discussing the
practices of their other clients.
In presenting the financials to the audit committee the finance team has to
justify its conclusions, providing the committee members with great insight
into the thought process of management.
Finally, audit committee meetings are large and attended by a broad
representation of the finance staff which allows the committee to hear from
people who are the possible successors to senior financial management.
By contrast the compensation committee is very different in subject matter and
style.

The committee and management sit on opposite sides of the table on

compensation. Management wants to be paid well for its hard work and there
are often vast differences between the committee and management on the
numbers involved. While everyone tries to be professional, emotions can run
high.
Compensation consultants advise the committee and provide data but do not
need to sign off on compensation the way auditors sign off on financial
statements. Since companies all want to be at the 50th percentile in pay, the
analysis can drive compensation higher as companies in the lower quartiles
try to catch up.
Compensation is a sensitive subject so meetings are small and involve only
senior management in human resources, the CEO and sometimes the CFO.
The committee must rely on managements evaluation of others in setting
compensation.
No one is ever completely satisfied with the result. No matter how good the
intentions, committees are always looking for better ways to align

performance with shareholder return and management wants to protect itself

on the downside for results due to unforeseen events outside of its control.
4) Many experienced senior business executives serve on multiple corporate
boards . Is this a good thing ? Explain your answer .

Progress question :
Question 7 : Explain the difference between the King I and King II report :
The King I report :
-

Incorporated a code of corporate practices and conduct that looked beyond the
corporation itself , taking into account its impact on the larger community.
Took more integrated approach to the topic of corporate governance , recognizing the
involvement of all the corporations stakeholders - the shareholders , customers ,
employees , vendor partners and the community in which the corporation operates in
the efficient and appropriate operation of the organization .

The King II report :

-

Formally recognized the need to move the stakeholder model forward and consider a
triple bottom line as opposed to the traditional single bottom line of profitability .
Took an approach known as comply or explain which means that companies should
assess the guidelines and apply them in a manner that is appropriate ; if they choose not
to comply they should publicly explain why not .

Question 8 : Explain the difference between comply or explain and comply or else :
Comply or explain :
-

The comply or explain method is a set of guidelines that require companies to abide by
a set of operating standards or explain why they choose not to.

Comply or Else :
-

The comply or else method is a set of guidelines that require companies to abide by a
set of operating standards or face stiff financial penalties.

Progress question 11 and 12

Question 11: Explain the difference between short-term and long-term view in the
governance of a corporation.

Answer: The CEO can pursue policies that are focused on maintaining a high
share price in a short-term (to maximize the price he gets when he cashes in all
the share options that his friends on the board gave him on the last contract)
without any concern for the long-term stability of the organization-after all, there
will probably be another CEO by then.
Question 12: Is it unethical to populate your board of directors with friends and
business acquaintances? Why or why not?
Answer: It is unethical because when you populate your board of directors with
friends and business acquaintances, you are covered by your own benefit.
Moreover, the talent employees may not come from business acquaintances, they
are formed by recruiting, training and challenging. Acquaintances can make the
board of director vulnerable and inexplicit. Its not fair for every single member
who is involved in your company.

Progress question
Question 5
Which two scandals greatly increased the attention paid to the 1992 Cadbury report?

Bank of Credit and Commerce International (BCCI)

The company was accused of fraud and money laundering. At the meantime, it had owed more than 10
billion pound to its creditors. BCCI lost money for inefficient lending operations and currency dealings.
Moreover, after investigation, BCCI was believed to have been involved with terrorists money and many
criminal customers like drug dealer, weapon producers, etc.

The activities of publishing magnate Sir Robert Maxwell

After his death in 1991, his publish company had financial difficulties before announced bankrupt in the
following years. With high debt and borrow 767 million from worker pension funds, he was broke.
Maxwell had promised the same asset as collateral property that you promise to give if you cannot pay
the loan. In other word, Maxwells wealth was more financial illusion that reality.

Question 6
Explain the right balance that Cadbury encourages companies to pursue.
As mentioned in the text, right balance is between meeting the standards of corporate governance
now expected of them and retaining the essential spirit of enterprise.

In other words, they could maintain the necessary degree of oversight needed without stifling the
creativity and entrepreneurial spirit needed to perform effectively in a competitive market.