m freeaccastudymaterial.blogspot.com co ot sp l.b log ACCA ria Paper P1 ate Governance, Risk and Ethics ym Essential Text fre ea cc as tud freeaccastudymaterial.blogspot.com m freeaccastudymaterial.blogspot.com co ot sp l.b log British library cataloguinginpublication data A catalogue record for this book is available from the British Library. ym © Kaplan Financial Limited, 2014 ate ria Published by: Kaplan Publishing UK Unit 2 The Business Centre Molly Millars Lane Wokingham Berkshire RG41 2QZ as tud The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. Printed and bound in Great Britain. Acknowledgements cc We are grateful to the Association of Chartered Certified Accountants and the Chartered Institute of Management Accountants for permission to reproduce past examination questions. The answers have been prepared by Kaplan Publishing. fre ea All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Kaplan Publishing. ii KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com Contents Page Theory of governance Chapter Development of corporate governance Chapter The board of directors Chapter Directors' remuneration Chapter Relations with shareholders and disclosure Chapter Corporate governance approaches 101 Chapter Corporate social responsibility and corporate governance 115 Chapter Internal control systems 135 Chapter Audit and compliance Chapter 10 Risk and the risk management process 171 Chapter 11 Controlling risk 199 Chapter 12 Ethical theories 229 Chapter 13 Professional and corporate ethics 247 Chapter 14 Ethical decision making 283 Chapter 15 Social and environmental issues 295 Chapter 16 Questions & Answers 317 ot Chapter co m freeaccastudymaterial.blogspot.com sp 33 39 89 151 fre ea cc as tud ym ate ria l.b log 77 iii KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com fre ea cc as tud ym ate ria l.b log sp ot co m freeaccastudymaterial.blogspot.com iv KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com freeaccastudymaterial.blogspot.com chapter m Introduction fre ea cc as tud ym ate ria l.b log sp Paper Introduction ot co v freeaccastudymaterial.blogspot.com freeaccastudymaterial.blogspot.com How to Use the Materials ot co m Introduction sp These Kaplan Publishing learning materials have been carefully designed to make your learning experience as easy as possible and to give you the best chances of success in your examinations. l.b log The product range contains a number of features to help you in the study process. They include: (1) Detailed study guide and syllabus objectives (2) Description of the examination (3) Study skills and revision guidance (5) Question practice ria (4) Complete text or essential text ym ate The sections on the study guide, the syllabus objectives, the examination and study skills should all be read before you commence your studies They are designed to familiarise you with the nature and content of the examination and give you tips on how to best to approach your learning. • The learning objectives contained in each chapter, which have been carefully mapped to the examining body's own syllabus learning objectives or outcomes. You should use these to check you have a clear understanding of all the topics on which you might be assessed in the examination • The chapter diagram provides a visual reference for the content in the chapter, giving an overview of the topics and how they link together fre ea cc as tud The complete text or essential text comprises the main learning materials and gives guidance as to the importance of topics and where other related resources can be found. Each chapter includes: vi KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com Test your understanding sections provide an opportunity to assess your understanding of the key topics by applying what you have learned to short questions. Answers can be found at the back of each chapter • Summary diagrams complete each chapter to show the important links between topics and the overall content of the paper. These diagrams should be used to check that you have covered and understood the core topics before moving on • Question practice is provided at the back of each text co • ot The content for each topic area commences with a brief explanation or definition to put the topic into context before covering the topic in detail. You should follow your studying of the content with a review of the illustration/s. These are worked examples which will help you to understand better how to apply the content for the topic ria l.b log sp • m freeaccastudymaterial.blogspot.com ate Quality and accuracy are of the upmost importance to us so if you spot an error in any of our products, please send an email to mykaplanreporting@kaplan.com with full details, or follow the link to the feedback form in MyKaplan. ym Our Quality Coordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions. Icon Explanations as tud Definition – Key definitions that you will need to learn from the core content. Key Point – Identifies topics that are key to success and are often examined. cc Expandable Text – Expandable text provides you with additional information about a topic area and may help you gain a better understanding of the core content. Essential text users can access this additional content online (read it where you need further guidance or skip over when you are happy with the topic) fre ea Illustration – Worked examples help you understand the core content better. Test Your Understanding – Exercises for you to complete to ensure that you have understood the topics just learned. vii KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com freeaccastudymaterial.blogspot.com m Introduction ot co Tricky topic – When reviewing these areas care should be taken and all illustrations and test your understanding exercises should be completed to ensure that the topic is understood. For more details about the syllabus and the format of your exam, please see your Complete Text or go online. sp Online subscribers Objectives of the syllabus Core areas of the syllabus l.b log Paper background Syllabus objectives and chapter references The examination ria Paperbased examination tips Study skills and revision guidance ate Preparing to study Effective studying ym Three ways of taking notes Revision as tud Further reading fre ea cc You can find further reading and technical articles under the student section of ACCA's website. viii KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com freeaccastudymaterial.blogspot.com m chapter ot co l.b log Chapter learning objectives sp Theory of governance Upon completion of this chapter you will be able to: • • define and explain the meaning of corporate governance • • analyse the purposes and objectives of corporate governance • explain and assess the major areas of organisational life affected by issues in corporate governance • compare, and distinguish between public, private and non governmental organisation (NGO) sectors with regard to the issues raised by, and scope of, governance • explain and evaluate the roles, interests and claims of the internal parties involved in corporate governance • explain and evaluate the roles, interests and claims of the external parties involved in corporate governance • • • define agency theory • analyse and critically evaluate the nature of agency accountability in agency relationships • explain and analyse the other theories used to explain aspects of the agency relationship ate ria explain, and analyse, the issues raised by the development of the joint stock company as the dominant form of business organisation and the separation of ownership and control over business activity define and explain the key concepts in agency theory explain and explore the nature of the principalagent relationship in the context of corporate governance fre ea cc as tud ym explain, and apply in the context of corporate governance, the key underpinning concepts freeaccastudymaterial.blogspot.com freeaccastudymaterial.blogspot.com ate ria l.b log sp ot co m Theory of governance cc as tud ym 1 Company ownership and control fre ea KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com Questions & Answers sp ot co The general acceptance of power distribution is another cultural difference. The stereotypical view of the US model is one of abhorrence towards government interference in life whilst the Chinese model is based on a generational acceptance of the need for power to be placed at the centre and used to guide/control individuals. It is never a consideration of right or wrong since, in the ethical decision making process, every decision is right, at least for the individual making the decision. m freeaccastudymaterial.blogspot.com l.b log A cultural factor that impacts on most countries is the extent to which national culture is willing to accept the western cultural model as appropriate. This becomes a dominant issue in the expansion of globalisation with its accompanying use of these cultural beliefs and symbols at its heart. ate ria This is very important in this case since the internet is itself a global phenomenon that generally embraces western cultural norms. The reluctance of the Chinese government to accept the uncontrolled use of this resource could be viewed as an attempt to stop the infiltration of western cultural beliefs into its population. Whether this is considered to be good or bad is a purely individual ethical view since it requires the individual to first perceive what they mean by good or bad and this is a deeply personal issue. as tud ym In a positive sense technology and the internet, delivered through the four major players identified in the question, could be viewed as a mechanism through which national borders and cultures are transcended and the global population is brought together to exchange ideas and influences. The journalists’ communication to New York could be seen as an example of this. Viewed in this way, the internet becomes a melting pot used to reduce national or ethnic cultural dependence and difference. The differences in culture become less pronounced and people begin to transform their ethical view into more of a collective, singular, global viewpoint. There is, of course, no agreement that this will take place or is wanted by different countries. The information restrictions within China can be viewed as an attempt to reduce this colourisation and preserve “better” cultural characteristics more attuned to the unique needs of its population fre ea cc If this is accepted as a change process that the global population is exposed to the question that arises is as to the characteristic of that global cultural norm. Whose ideas/beliefs become the predominant belief system that others adopt? Whose colours will define the one country that replaces the different countries of today? 398 KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com freeaccastudymaterial.blogspot.com (b) Ethical position of internet companies sp ot The US committee discussion exposes deep divisions between the ethical standpoints of different stakeholders. It would appear that the government is highly critical of US companies trading with a regime that it deems to be unfriendly and undemocratic. The view of the internet companies is that they do not perceive any ethical flaws to exist in their position and wish to continue and possibly extend the trading relationship with China over time. co m chapter 16 l.b log It would appear that the major argument is the ethical belief that the company is run for the benefit of shareholders and that their needs are for financial returns. This is also a legal standpoint and as such the government could be considered culpable in creating and supporting it. A business is an artificial legal entity whose only purpose is the creation of wealth, as such it has no need or ability to consider moral issues since it is not a human being. ria The argument against is that this is a facile position since businesses consist of people and one cannot hide behind a corporate logo when there are perceived infringements to human liberty as defined by the US model on what liberty is. ym ate A second justification for trade is that the companies would be unfairly penalised if they were forced not to trade with the country. If they retire from the commercial arena, others who are not restricted will simply take their place. This will do nothing for the Chinese population (assuming they feel disadvantaged in life) yet will affect the ability of the companies to compete globally and through this sustain domestic employment and tax payments. as tud This is a powerful argument although those against would state that moral justification based on others actions is an amoral stance (having no moral standpoint and being led by whoever leads). This is unacceptable since one would hope that a company would not decide to murder a population just because others have done so in the past. fre ea cc A counter claim made in the case study relates to not being held responsible for the clients actions suggesting the company’s responsibility ends at the point of sale. There is justification in this since no company, no matter how big, can police its customers and anyway, to do so is an infringement of their right to freedom of action. Why should a customer listen or adhere to what a large US corporation wants if it doesn’t want to? 399 KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com Questions & Answers sp ot co This seems a dubious defence since in this instance the company’s know exactly how their technology will be used through the cooperation agreement. The plurality of their moral position is hard to understand since on the one hand they exist in a society that demands basic freedoms for its citizens (the company benefiting from that society in its own wealth creation), and yet it purposefully seeks to limit the same freedoms for others. The issue here may be the ambiguous nature of the position rather than the position itself. m freeaccastudymaterial.blogspot.com l.b log Finally, the reference to fighting the governments’ battles seems reasonable since governments are probably best placed to influence other governments. Question 18 – Ethical code ria (a) Ethical codes and ethical dilemmas Ethical codes may assist in resolving ethical dilemmas for the following reasons. ate Provision of a framework ym Ethical codes provide a framework within which ethical dilemmas can be resolved. The codes set the basic standards of ethics as well as the structures that can be applied. For example, most codes provide a general sequence of steps to be taken to resolve dilemmas. That sequence can then be applied to any specific dilemma. As a code, it is subject to interpretation. This means that two different people could form two entirely different but potentially correct views on the same element of the code. For example, terms such as ‘incorrect’ will mean that an action should not be attempted at all by some people, while others will interpret this as a warning that the action may be attempted, as long as good reasons are given for the attempt. fre ea cc as tud Interpretation of code 400 KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com freeaccastudymaterial.blogspot.com Lack of enforcement provisions (i) Ethical threats and safeguards l.b log (b) sp ot Many codes have limited or inadequate penalties and/or enforcement provisions. Breach of the code may result in fines, or simply a warning not to breach the code again. Again, a code is subject to interpretation making a ‘breach’ of the code difficult to identify anyway. co m chapter 16 An ethical threat is a situation where a person or corporation is tempted not to follow their code of ethics. An ethical safeguard provides guidance or a course of action which attempts to remove the ethical threat. ria (ii) Situation A ate The ethical threat is basically one of selfinterest. The director is using price sensitive information to ensure that a loss is prevented by selling shares now rather than after the announcement of poor results for the company. as tud ym An ethical safeguard is the professional code of conduct which requires directors to carry out their duties with integrity and therefore in the best interests of the shareholders. The director would recognise that selling the shares would start the share price falling already and this would not benefit the shareholders. As a code it may not be effective – the director could argue that selling shares prior to the results was designed to warn shareholders of the imminent fall in share price and was, therefore, in their best interests. cc An alternative course of action is to ban trading in shares a given number of weeks prior to the announcement of company results (as happens in the USA where directors are not allowed to sell shares during ‘blackout periods’). This would be effective as share sales can be identified and the directors could incur a penalty for breach of legislation. fre ea Provision of example methods of resolution Ethical codes also provide examples of ethical situations and how those example situations were expected to be resolved. Specific ethical dilemmas can be compared to those situations for guidance on how to resolve them. 401 KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com freeaccastudymaterial.blogspot.com m Questions & Answers co Establishes boundaries sp ot Ethical codes provide boundaries which, ethically, it will be incorrect to cross. For example, many accountants prepare personal taxation returns for their clients. However, it is also known that, ethically, it is incorrect to suggest illegal methods of saving tax or to knowingly prepare incorrect tax returns. Maintenance of ethical conduct in this situation ensures that the accountant continues to be trusted by both his clients and by the taxation authorities. l.b log Ethical codes do not always assist in resolving ethical dilemmas for the following reasons. Codes only Situation B ria Ethical codes are literally what they say – they are ‘only’ a code. As a general code it may not fit the precise ethical dilemma and, therefore, the code will be limited in use. ym ate The ethical threat appears to be a lack of independence and selfinterest regarding the setting of remuneration for these directors. Not only do they have common directorships, but they are also good friends. They could easily vote for higher than normal remuneration packages for each other on the remuneration committees knowing that the other director will reciprocate on the other remuneration committee. In professional terms, the directors clearly have a conflict of interest. While their professional code of ethics may mention this precisely as an ethical threat, AB and CD should follow the spirit of the code and resign their nonexecutive directorships. This again would remove the threat. fre ea cc as tud In corporate governance terms, one ethical safeguard is to ban these crossdirectorships. The ban would be enforceable as the directors of companies must be stated in annual accounts, hence it would be easy to identify crossdirectorships. The ban would also be effective as the conflict of interest would be removed. 402 KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com freeaccastudymaterial.blogspot.com Situation C sp ot There is a clear ethical threat to the directors of Company Z. They appear to be being bribed so that they do not query the management style of the chairman. The threat is that the directors will simply accept the benefits given to them rather than try to run Company Z in the interests of the shareholders. It is clearly easy to accept that option. co m chapter 16 l.b log Ethical safeguards are difficult to identify and their application depends primarily on the desire of the directors to take ethical actions. In overall terms, the chairman does not appear to be directly breaching ethical or governance codes. The main safeguard is therefore for the directors not to accept appointment as director to Company Z or resign from the board if already a director. ate ria The director could attempt to get the matter discussed at board level, although it is unlikely the chairman would allow this. Taking any other action is in effect ‘whistle blowing’ on all the directors and has the negative impact that the director would also have to admit to receiving ‘benefits’ from the company. Question 19 – NM River Valley ym (a) An approach to ethical conflict resolution as tud As with any decision, a structured framework probably provides the best approach to making the decision. The IFAC provides such a framework for ethical conflict resolution and this could be used in this case. Relevant facts fre ea cc The first step is to gain as many relevant facts concerning the case as possible. In this scenario these will relate to identification of who the real beneficiaries of the project are. Even if it is the case that they are solely corporations this will have social implications since such companies bring employment and prosperity to the region. The number of people displaced through the project must also be determined more accurately as well as environmental costs of the project. These will enhance the financial investment appraisal that has already taken place. 403 KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com freeaccastudymaterial.blogspot.com m Questions & Answers co Ethical issues involved sp ot One of the ethical issues involved will be a utilitarian decision where the needs of the few are sacrificed for the needs of the many. The price of a quarter of a million people compared to benefit to 40 million must be considered. Compensation for their sacrifice is another ethical dilemma as is the extent to which the corporations should pay for that compensation rather than the local government which would amount to the people simply paying themselves for their sacrifice since they originally paid the taxes of the local government. l.b log Fundamental principles related to the matter in question ate ria The decision making process should draw together all relevant information and this includes the need to consider fundamental principles relating to the matter in question. These would include the need for the accountant to act professionally since he is representing the company in these matters. It also raises the question of whether the accountant is operating in the public good since the public do not seem to support the project. This latter issue highlights the importance of determining the volume of people involved and the actual public benefits of the project should it take place. Established internal procedures as tud ym There will be established internal procedures for the accountant to follow rather than the need to resort to Professor Hoi. These would include a whistleblower communication channel with direct access to the audit committee and nonexecutive directors should the serious misstatement of the business case prove to be well founded through examination of the above. All internal procedures must be exhausted prior to any direct action outside of the organisation. There are many alternative courses of action depending on the outcome to the investigation. These may include the need to independently report findings to the forum or media. They might also involve resigning from the project on ethical grounds. They might include doing nothing and simply accepting the sacrifice of the few as being necessary for the wider good. It is important for the accountant to accept the need to at least consider these issues as part of a professional ethical approach to decision making. fre ea cc Alternative courses of action 404 KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com freeaccastudymaterial.blogspot.com (b) Extending corporate reporting into CSR ot The reasons why corporate reporting should extend into CSR can be viewed from a number of standpoints. In a purely commercial sense corporations are able to more fully meet the needs of shareholders and wider stakeholders and in meeting this need their reputations and returns may be enhanced. co m chapter 16 l.b log sp From a stakeholder perspective there are a number of deep issues relating to the structure and distribution of power. CSR could embrace full disclosure of the impact of organisational activity on society such as the negative impact on the local population and environment. This illumination leads to a wider appreciation of the costs and benefits of projects such as the dam and this in turn leads to a more frank, open and honest discussion of the real issues at events such as the World Water Forum. It would also improve the quality or appropriateness of presentations given such as that of Professor Hoi. ate ria The illumination leads to increased visibility of corporate operations. This is a goal worth pursuing in itself since it attempts to demystify or make transparent that which is obscured from stakeholders, most importantly shareholders. The need for transparency arises through the agency relationship between management and the owners of the corporation. A lack of transparency makes it difficult for shareholders to make correct decisions on ethical issues simply because they do not know the issues involved in such decisions. as tud ym Transparency in turn leads to accountability. Accountability is a reckoning for actions taken by corporations. The immense power given and wielded by corporations must be balanced through a responsibility to use that power in a way that society deems appropriate. The dam project is a very visible example of the power to change lives and the natural world in which all citizens must live. A lack of accountability means that power can be used to the detriment of these citizens without paying an appropriate price for those actions. fre ea cc Better information through CSR should lead to better decisions and more appropriate solutions to problems. The scientists, engineers, governments and corporations can then share their knowledge in order to create solutions that are most appropriate. Simply widening the scope of knowledge in the decision should increase the likelihood of a best solution being found. 405 KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com Questions & Answers sp ot co This collective decision making process, extending on a global basis through forums such as that identified in the question gradually reconstructs the power that exists in society away from single corporate decision making to a more inclusive world view. This reconstruction is both political and commercial, developing the organisation away from a purely pristine capitalist structure as defined by Gray, to one that has a greater social responsibility at its heart. m freeaccastudymaterial.blogspot.com (c) Attributes of the accountant l.b log This should be considered as a positive development and one that accountants should ethically consider appropriate. ria Accountants are perhaps uniquely capable of developing increased CSR in the public interest. The professional skills of the accountant in reporting, disclosure and audit, adapted as part of their work to any given industry or sector enables them to collect and disseminate information to stakeholders regarding CSR issues. ym ate Accounting also involves an essentially systemsbased approach to business where staged frameworks are applied in order to achieve required goals. These system skills assist in the development of environmental management systems through which reporting and monitoring is achieved. This view requires the accountant to use project based skills to implement systems where auditing techniques can be used. as tud Investment appraisal is mentioned in the question as a purely financial decision. Skills in this area enable the accountant to use a foundation skills base and extend it to include CSR related information. Finally, an attribute of the accountant as a profession is to operate in the public interest. This scenario identifies the public in the widest context to include the very poor and disadvantaged. To meet their purpose accountants should consider who the public are and act accordingly. fre ea cc As a profession including millions of professional, accounting is a body large enough to take on the task. Its formalisation through accounting bodies means that accountants have the infrastructure to take on the challenge on a global scale. 406 KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com freeaccastudymaterial.blogspot.com Question 20 – Dirk Hausmann sp ot The AAA model is sanctioned by the IFAC and provides a rigorous structure to evaluate the wide ranging issues involved in making an ethical decision or coming to a conclusion in terms of what is right in the narrow or wider context for the individual or the organisation as a whole. It suggests a logical, sevenstep process for decision making which takes ethical issues into account co m chapter 16 Step 1: Establish the facts of the case l.b log The first step is to gather the facts relating to the situation. This means that when the decisionmaking process starts there is no ambiguity about what is under consideration. Step 2: Ethical issues of the case. ria Much of the discussion in this situation revolves around rumour and opinion and so it is important for Dirk to gain actual written testimony or a clear picture of how events unfolded and who were the key players in the events of the previous day. ym ate The second step is to consider the ethical issues involved. The establishment of these ethical principles will offer a guide as to what to do in a given situation. The principles may be understood through the company’s code of ethics or with reference to the IFAC model. The model states that integrity professionalism and confidentiality are among a limited range of key ethical principles that must not be sacrificed in the ethical decision deliberation. as tud Dirk is faced with the decision as to whether to keep the information of this false rumour to himself. Step 3: Norms, principles and values related to the case This involves placing the decision in its social, ethical, and, in some cases, professional behaviour context. cc A corporate code should include procedures for individuals to follow such as the appropriate hierarchical structure through which concerns can be raised with those on the board of directors or below. fre ea The standard whistleblower clause should not be ignored in this instance as it may offer a way of passing the onerous requirement to actually make a decision to a higher level. A core principle of integrity would suggest that the rumour should not have been spread and Dirk should be honest about his findings. 407 KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com freeaccastudymaterial.blogspot.com m Questions & Answers co Step 4: Identify alternative courses of action sp ot In this step each alternative course of action open to Dirk is identified. This involves stating each one, without consideration of the norms, principles, and values identified in Step 3, in order to ensure that each outcome is considered, however appropriate or inappropriate that outcome might be. Dirks’ alternatives include: (2) notify the board of directors l.b log (1) keep silent about the rumours that have been spread (3) seek another internal route to escalate the problem Step 5: Best course of action ria Then the norms, principles, and values identified in Step 3 are overlaid on to the options identified in Step 4. When this is done, it should be possible to see which options accord with the norms and which do not. ate Dirk should evaluate the variety of possible actions he could take. Raising the matter with someone internally, possible a senior manager, would be in line with the principles of integrity, as would notifying the board of directors. ym Step 6: Consequences of each possible course of action as tud This step requires clear consideration of the consequences of each course of action. The purpose of the model is to make the implications of each outcome unambiguous so that the final decision is made in full knowledge and recognition of each one. Alternative (1): keeping silent would ensure that the shareholders remained pleased with the favourable trading results. However, Dirk may feel uncomfortable with this approach • Alternative (2): Notifying the board of directors may have adverse repercussions on Dirk’s trading team colleagues and even his whole department. The board would then have to decide if they communicated this matter outside the company cc • Alternative (3): If Dirk chooses to talk to another manager with the organisation he may feel that he has passed on the burden of the decision with regards to this matter, hence easing his own concerns. However, it may be the case that this approach is not successful and no further action is taken fre ea • 408 KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com freeaccastudymaterial.blogspot.com Step 7: Decision ot Finally, in the last step a decision can be taken based on weighing up the consequences with the values and ethical beliefs. co m chapter 16 l.b log sp Alternatives (2) or (3) appear to be the ethical options. If no solution can be found then advice should be sought from governing bodies and even lawyers. In the end a decision simply must be reached or the Dirk should distance himself from the situation by resigning. Question 21 – C company (a) Triple bottom line ria Triple bottom line (TBL) accounting means expanding the normal financial reporting framework of a company to include environmental and social performance. The concept is also explained using the triple ‘P’ headings of ‘People, Planet and Profit’. ate People ym The people element of the TBL expands the concept of stakeholder interests from simply shareholders (as in financial reporting) to other groups including employees and the community where the company carries out its business. Actions of the company are therefore considered in light of the different groups, not simply from the point of view of shareholders. as tud The C Company appears to be meeting this objective of the TBL for its own staff. The provision of flexible working hours, staff restaurant and sports facilities all indicate a caring attitude towards staff. However, the ability of C Company to take into account other stakeholder interests is unclear. Specific areas where C is not meeting the TBL include: Delaying payment for raw materials will adversely affect the cash flow of C’s suppliers. Some discussion or negotiation of terms may have been helpful rather than simply amending terms without consultation fre ea cc – 409 KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com Questions & Answers Moving the administration headquarters ‘outoftown’ does not necessarily help the community. For example, there will be increased pollution as C’s employees drive out to the administration building (note that there is no public transport). Also, while flexible working time is allowed, this may mean travel time has increased. This may place pressure on workers regarding collection of children on ‘school runs’ and mean more cars on the road increasing the risk of accidents. Provision of company buses out to the new headquarters would help decrease pollution but would not necessarily assist with the working hours issue – Finally, the proposal for the redevelopment of the old administration headquarters into a waste disposal centre is unlikely to benefit the community. There will be additional heavy lorries travelling through residential areas while the burning of rubbish provides the risk of fumes and smoke blowing over residential properties. Finding an alternative use, even if this was less profitable, would benefit the community overall l.b log sp ot co – m freeaccastudymaterial.blogspot.com ria Planet ate The planet element of TBL refers to the environmental practices of the company to determine whether they are sustainable or not. The TBL company attempts to reduce the ‘ecological footprint’ by managing resource consumption and energy usage. The company therefore attempts to limit environmental damage. Lack of an energy audit. A review of energy consumption could identify areas for energy saving, even if this was only the use of low wattage light bulbs – The relocation of the administration office to a outoftown district may enhance working conditions for staff, but it also means that public transport cannot be used to reach the offices. This increases fuel use as employees must use their own transport – Finally, the insistence of the chairman in holding all divisional review meetings in person rather than using newer technology such as videoconferencing means increased use of air travel and therefore carbon dioxide emissions fre ea cc as tud – ym It is not clear that the C company is meeting this section of the TBL. Specific areas of concern include the following. 410 KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com freeaccastudymaterial.blogspot.com Profit sp ot Profit is the ‘normal’ bottom line measured in most businesses. As noted above, a nonTBL company will seek to maximise this measure to improve shareholder return. A TBL company on the other hand will balance the profit objective with the other two elements of the TBL. co m chapter 16 l.b log At present, the C Company appears to be placing a lot of importance on the profit motive. Two specific decisions to increase profits are: delaying payment to creditors to provide additional cash within C and therefore decrease the need for bank overdrafts, which in turn decreases interest payments – the proposal for the redevelopment of the old administration headquarters into a waste disposal site, which appears to be focused entirely on the amount of profit that can be made ria – ate As noted above, involving creditors in the discussions and finding alternative uses for the old administration site (even at a lower profit) would show C’s commitment to the TBL. (b) Sustainability ym Sustainable development can be defined as development that meets the needs of the present without compromising the ability of future generations to meet their own needs (World Commission on Environment and Development 1987). as tud Sustainability is an attempt to provide the best outcomes for the human and natural environments both now and into the indefinite future with reference to the continuity of economic, social, institutional and environmental aspects of human society, as well as the nonhuman environment. The economic perspective recognises that the earth’s resources are finite and so economic development must be limited. Sustainability means that the organisation must plan for long term growth and be neutral in its use of resources. There is no evidence that the C Company has considered this perspective apart from the fact it is profit motivated and wants, therefore, to survive as a company. fre ea cc The three perspectives of sustainability are economic, social and environmental. 411 KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com Questions & Answers ot co The social perspective recognises that organisations have an impact on their communities and may also change the social mix of a community. By moving the administrative headquarters out of town, the C Company has had an impact on the community – in effect C is denying jobs in its headquarters to those members of the community who do not have access to private transport. m freeaccastudymaterial.blogspot.com fre ea cc as tud ym ate ria l.b log sp The environmental perspective recognises that organisations have an impact on the environment and that lack of environmental concern means an overall decrease in earth’s resource base. The lack of videoconferencing for example, means that C’s executives use air travel unnecessarily, decreasing the amount of fossil fuels and increasing carbon dioxide emissions. 412 KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com ... fre ea cc as tud ym ate ria l.b log sp ot co m freeaccastudymaterial.blogspot.com iv KAPLAN PUBLISHING freeaccastudymaterial.blogspot.com freeaccastudymaterial.blogspot.com chapter m Introduction... The complete text or essential text comprises the main learning materials and gives guidance as to the importance of topics and where other related resources can be found. Each chapter includes: vi KAPLAN. .. cc Expandable Text – Expandable text provides you with additional information about a topic area and may help you gain a better understanding of the core content. Essential text users can access this additional content online (read it