OCTOBER 2024

ADVANCED CORPORATE GOVERNANCE

Date: 21 October 2024

Time: 12h45 – 16h00

Duration: 3 hours and 15 minutes

(including 15 minutes
reading time)

Marks: 100

General Instructions
1. In undertaking this examination, you declare that you have understood and abided by
the Student Code of Ethics.
2. There are six questions. Answer FOUR of the six questions. It is recommended that
you read through all the questions before starting the paper.
3. Answer all the questions in the answer book provided.
4. Fill in your student number on each page of the answer book. Do not use your own
name anywhere on the paper.
5. Number your answers exactly according to the numbering in the examination paper.
Start each main question (e.g. Question 1, Question 2) on a new page.
6. Avoid providing bullet point answers unless otherwise asked. Use sentences and
paragraphs for your answers.
7. You may not consult with anyone else while you are writing this examination.
8. Open-book resources are restricted to those listed in the open-book policy.
9. You may not use any electronic devices (e.g., cell phones, ear phones, smart watches
or similar devices).
10. Cheating in examinations will not be tolerated. Any student suspected of cheating will
face disciplinary action in terms of the student disciplinary policy.
QUESTION 1
Read the extract below and answer the following questions:

“What Corporate Boards can learn from Boeing’s Mistakes”

In February, Boeing shareholders filed a lawsuit against the company’s board of directors.
They argued that the board had neglected their oversight duty, failing to hold Boeing
accountable for safety before and after the crashes of two 737 MAX airplanes that killed 346
people in 2018 and 2019. “Safety was no longer a subject of board discussion, and there was
no mechanism within Boeing by which safety concerns respecting the 737 MAX were
elevated to the board or to any board committee,” they wrote in the 120-page filing.
Boeing’s strategy to minimise [sic] training costs in order to keep the overall cost of the plane
low was predicated on unrealistic expectations of 100% pilot effectiveness in correcting
MCAS system malfunctions in four seconds. The cost was several hundred lives, billions of
dollars in losses, reputational damage that Boeing is still trying to recover, and more. The
shareholders suing Boeing argue the board could have prevented it.”
Source: https://hbr.org/2021/06/what-corporate-boards-can-learn-from-boeings-mistakes/ June 2021

Required
1.1 Failures at Boeing have in part been attributed to poor corporate governance
practices. With reference to King IV™, how the underlying principles might have
prevented the outcomes. (8)
1.2 The board at Boeing seems not to have implemented appropriate risk
management strategies. Identify three categories of risk that can be considered
especially relevant in the context of the failures at Boeing and briefly explain
why you believe them to be significant. (6)
1.3 Assume that you have been appointed to advise the board at Boeing on how to
improve their risk management strategies. Compose a succinct memorandum
that explains how the company should approach risk management with
reference to the requirements of King IV. (11)
[25 marks]

QUESTION 2
Read the extract below and answer the following questions:

“Deloitte agrees to pay out up to R 1.3bn in compensation to claimants against

Steinhoff”
Steinhoff International Holdings says its former auditor Deloitte has agreed to pay up to R1.3
billion (€70 million) in compensation to claimants who are suing the Stellenbosch-
headquartered conglomerate. Steinhoff is facing over 90 separate legal claims in South
Africa, Germany and the Netherlands stemming from the precipitous drop in its share price in
December 2017.
Last year, the group proposed what it termed a "global settlement" to settle these claims once
and for all, albeit with no admission of liability or wrongdoing.
According to its latest term sheet, Steinhoff has proposed to pay out a total of roughly €900
million (about R16 billion) to settle all the claims it is facing. Settling would also give claimants
"certainty of outcome".

Advanced Corporate Governance October 2024 Page 2 of 7

 In a market update on Monday, Steinhoff said that it had reached an agreement with Deloitte
in the Netherlands and South Africa to "make additional compensation available to certain
Steinhoff claimants".
Deloitte was replaced by Mazars as Steinhoff's auditors in September of 2019.
Some of the particulars of the scheme still have to be worked out, and it is contingent upon
Steinhoff receiving favourable rulings in two upcoming court cases. In a statement on
Monday, Deloitte said the global settlement was in the "best interest of all stakeholders".
"The settlement by Deloitte is not in any way an admission of any liability for the losses
incurred by Steinhoff and its stakeholders as a result of the accounting irregularities at
Steinhoff," said the auditor.”
Source: https://www.news24.com/fin24/deloitte-agrees-to-pay-out-up-to-r13bn-in-compensation-to-
claimants-against-steinhoff-20210215 January 2021

Required
2.1 As an entity listed on the Johannesburg Stock Exchange (JSE), Steinhoff and
its external auditor Deloitte are required to comply with statutory requirements
and to implement the recommendations of King IV. Discuss the legal liability of
the auditor (in this case Deloitte) and of its client company (in this case
Steinhoff) in terms of in the Companies Act 71 of 2008 (Companies Act). The
discussion should specifically reference the aims that the regulatory framework
seeks to achieve and explain how the legal obligations and corresponding
liability relate to these aims. You do not have to include the JSE Listings
Requirements (LR) in your discussion. (12)
2.2 With reference to the extract (and any other appropriate examples), critically
assess the role of the external auditor as a mechanism to achieve good
corporate governance with specific reference to the importance of
independence and the challenges that auditor independence presents. (13)
[25 marks]
QUESTION 3
Read the extract below and answer the following questions:

“Celebrity status is always bad for corporate governance”

Banking and corporate management used to be a boring, backroom affair, but since the
1980s, it has increasingly become careers taken by people desiring fame and wealth.
Arguably, this unrestricted greed, with few checks and balances, was the driving force behind
the 2008 financial crash.
Most recently, [Elon] Musk exemplifies this archetype. In under two months, from 28 October
to 20 December, he went from fresh-faced Twitter CEO to the promise of resignation.
In this period, Twitter faced countless lawsuits, had lost half of their biggest advertisers, and
at one point faced potential bankruptcy. Musk’s other ventures felt the impact too, with Tesla
shareholders complaining that Musk had “abandoned” them after a $700 billion drop in stock
market value. His personal wealth followed, and Musk suffered the greatest loss ever
recorded: $182 billion (enough to end world hunger many times over, by the way). Ouch.
Governance mistakes were made from the offset. Firstly, he immediately fired the entire
board and made himself the sole member. Then, around half of the payroll are let go,
including many whose job it is to fight misinformation and hateful content. Add to this some

Advanced Corporate Governance October 2024 Page 3 of 7

 poorly thought through policies, such as the ‘pay for play’, blue tick, 'official' status,
contravened labour regulations, and ending remote working entirely, and you have a perfect
storm of poor governance. At the centre of all of this is poor governance, which was caused
by Musk’s autocratic, impatient, inconsistent and unqualified management.
Throughout this period, he rushed through poor decisions, centralised control totally, removed
anyone who was critical and chased the spotlight – the cult of the 'celebrity CEO’.
It isn’t just Twitter, but it also isn’t just Musk.
Elizabeth Holmes, the enchanting 19-year-old who founded Theranos, a biotech startup that
would soon raise $700 million, had a boardroom of big name executives, including Henry
Kissinger and other White House secretaries. Despite this, Holmes and Theranos were soon
caught up in a high-profile fraud investigation: her wealth plummeted to zero and she now
faces criminal charges.
The Enron collapse is probably one of the most well-known cases of corporate fraud in US
history, and many of the same themes apply. Executives, using flashy figures and misleading
accounting techniques, lied to board members, shareholders and regulators to inflate profits
and hide debt.
In each case, the same factors apply: ego, greed and the desire for wealth and fame allowed
CEOs, CFOs, etc, to pacify boards, remove checks and balances, and shape company policy
in line with their lofty ambitions. Musk is the best example of a failing CEO longing for the
spotlight, but he is not an isolated case.”
Source: https://www.hrmagazine.co.uk/content/comment/celebrity-status-is-always-bad-for-
corporate-governance/ January 2023

Required
3.1 The extract highlights several instances where the so-called ‘cult of the CEO’
undermined good corporate governance. Evaluate the role of the CEO and
explain the relationship between the CEO and the board of directors with
reference to general principles of good governance and any relevant
recommendations of King IV. The evaluation must specifically consider why the
nature of the role and the relationship between the board and the CEO could
give rise to the circumstances alluded to in the extract. (15)
3.2 Assume that you have been asked to advise a new CEO that has just taken
over from Elon Musk at X (formerly Twitter). Compose guidelines based on
accepted best practice for the new CEO with specific emphasis on best practice
that contrast with the particular examples of poor governance highlighted in the
extract. (10)
[25 marks]
QUESTION 4
Read the extract below and answer the following questions:

“State companies bleeding South Africa dry – giving nothing back”

The South African government has put R282.5 billion into various state-owned companies
(SOCs) as “capital investments” since 2019, but has seen just R1 million back in dividends.
This was revealed by the Minister of Public Enterprises, Pravin Gordhan when asked in
parliament by MP Farhat Essack how much six SOCs have received from the state, and in
return, paid out since May 2019.

Advanced Corporate Governance October 2024 Page 4 of 7

 The minister started off by saying that all of South Africa’s SOC were adversely impacted by
the effects of state capture, and emphasised that since the sixth administration took over, “no
bailouts were provided to SOCs but rather capital invested to put them on a path of
sustainability.”
Four entities (South African Airways, Eskom, Transnet and Denel) were listed by Gordhan as
having received funds from state coffers since May 2019, amounting to R282.5 billion. None
of these entities paid out any dividends in return.
The only state company under Gordhan’s portfolio to have paid anything out was the South
African Forestry Company SOC Limited, which delivered a total dividend of R1 million over
the five years.
If it is to be taken that these are “capital investments” and not bailouts, as emphasised by the
minister, this means that the government’s return on equity over the past five years equates
to 0.0003% for all SOCs under the Public Enterprises portfolio.
While it could be argued that the money pumped into these companies is to ensure they fulfil
their respective mandates and not to make a profit and pay dividends the well documents and
widely reported power (Eskom), logistics (Transnet) and defence (Denel) crises show that
these companies are still far off from even that.
SAA, meanwhile, has had its own troubled path back to the skies, with its privatisation saga
still far from over.”
Source: Adapted:https://businesstech.co.za/news/government/770242/state-companies-
bleeding-south-africa-dry-giving-nothing-back/ January 2024

Required
4.1 The extract highlights the peculiarities of the state as shareholder in the context
of South Africa’s SOCs. Briefly discuss the traditional division of powers
between the board of directors and the shareholders in the case of public
companies generally and compare this with the role of the state as a
shareholder. Your answer must serve to illustrate the potential governance
dilemmas presented by the balance of power in the case of an SOC. (15)
4.2 Consider the main reasons that are commonly given for the underperformance
of South Africa’s SOCs and in the light of these deficiencies, consider whether
the capital investments mentioned in the extract are likely to prove effective and
profitable in the long term. (10)
[25 marks]
QUESTION 5
Read the extract below and answer the following questions:

“Delta’s forensic audit results in a censure from the JSE and a suspended fine”
The JSE’s censure of Delta Property Fund on Friday shows how its financial statements were
significantly manipulated by its former executives during the 2018, 2019 and 2020 financial
years.
The JSE on Friday censured Delta, a … JSE-listed Property Fund, for publishing “incorrect,
false, and misleading in material aspects” information in financial statements for these years,
and additionally imposed a R7.5 million fine. However, R5m of the fine was suspended for
five years taking into account that a forensic investigation by Delta had uncovered the

Advanced Corporate Governance October 2024 Page 5 of 7

 irregularities, the company had worked with the JSE on the matter, measures were taken by
the current executives to remedy the situation and considering the tough economic climate.
An independent forensic investigation was started in 2020 into practices involving governance
failings and suspected wrongdoing that had occurred in previous financial reporting periods.
Subsequent restatement of the financial results show just how the results were misstated.
For instance, profit for the 2019 annual financial statements decreased by 219% into a loss.
“The company was transparent by correcting the prior period errors and disclosing the
improprieties to the market,” the JSE said in a statement on its censure. “The accuracy and
reliability of financial information published by companies play a pivotal role in maintaining a
fair, efficient, and transparent market,” the exchange said.”
Source: https://www.iol.co.za/business-report/companies/deltas-forensic-audit-results-in-a-
censure-from-the-jse-and-a-suspended-fine-e6caadb0-9c1f-4c14-bbd7-137e035b8f0f
February 2024

Required
5.1 According to the extract, Delta was censured by the JSE and a R 7.5 million
fine was imposed. Discuss any other sanctions that the JSE would be entitled
to mete out under these circumstances, with reference to relevant conditions
and procedures and consider whether the sanctions imposed in this instance
were appropriate. (10)
5.2 In terms of the extract, the company in question published ‘incorrect, false, and
misleading’ information in financial statements. Identify and summarise at least
two requirements imposed by the JSE LR that relate to the publication of
financial information and explain how these requirements may have been
contravened by the censured company in the extract. (6)
5.3 In addition to the JSE’s sanctions, Delta’s board might face other
consequences. Assess the possible liability of the directors in terms of the
provisions of the Companies Act and briefly explain how shareholders could
enforce these provisions. (9)
[25 marks]
QUESTION 6
Read the extract below and answer the following questions:

“GameStop stock tanks 15% during shareholder meeting as few details on strategy
emerge”
GameStop stock (GME) fell as much as 15% during the struggling video game retailer's
annual shareholder meeting on Monday as the company gave few details on its strategy going
forward. Chairman and CEO Ryan Cohen spoke briefly during the highly anticipated
gathering, emphasising [sic] the company's focus on achieving profitability. “With respect to
retail operations, we plan to continue reducing costs and focusing on profitability,” said
Cohen, citing "a smaller network" of stores. “We are focused on building shareholder value
over the long term. We are not here to make promises, or hype things up. We’re here to work,”
he added.
GameStop shares have been volatile over the past month amid the reemergence of retail
trader Keith Gill, credited with sparking the meme frenzy of 2021. “Having a strong balance
sheet, especially in times of economic uncertainty, is a strategic advantage,” Cohen said on
Monday. Beyond Cohen's opening remarks, the company did not give any further details on

Advanced Corporate Governance October 2024 Page 6 of 7

 its strategy or future plans. The shareholder meeting was postponed last week after a high
volume of listeners led to a technical glitch with the stream. The meme frenzy revival began
last month, when GameStop rallied 180% over a span of two days after Keith Gill, known as
Roaring Kitty online, posted for the first time on social media platform X since 2021.
Earlier this month the stock sank nearly 40% in one day as GameStop released its quarterly
results early and filed to sell millions of shares hours before millions of viewers tuned in for a
YouTube livestream from Roaring Kitty. "It becomes a bet on the management. In particular,
of course, Ryan, f***ng Cohen. Ryan Cohen and his crew. That's what folks should be
focused on," Gill said. He added, "I see enough where I believe this guy may be able to do
it." Gill also said that the screenshots of GameStop holdings posted on social media were his.
"The accounts showing my positions are mine. These are my positions. I'm not working with
anybody else. I'm not working with hedge funds," he said.”
Source: https://finance.yahoo.com/news/gamestop-stock-tanks-15-during-shareholder-
meeting-as-few-details-on-strategy-emerge- June 2024

Required
6.1 The extract mentions the postponement of the shareholder meeting due to
technical glitches. List some of the key statutory requirements for a valid
shareholders’ meeting in terms of the Companies Act and specifically consider
whether shareholders of GameStop could validly participate in a meeting
through an electronic platform (such as Zoom or Teams) if GameStop had been
a South African company. (10)
6.2 The extract highlights both the difficult balance that companies must achieve
when they manage communication with stakeholders as well as the challenges
that social media presents when it comes to managing communications and the
company’s public profile. Draft a memorandum that explains these challenges
to the board of GameStop and that sets out appropriate guidelines that will
assist them in future. (15)
[25 marks]
(Total: 100 marks)

END OF QUESTION PAPER

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