2010 June Q2 Remuneration committee
Five years ago, George Woof was appointed chief executive offi cer (CEO) of Tomato Bank, one of the largest global banks. Mr Woof had a successful track record in senior management in America and his appointment was considered very fortunate for the company. Analysts rated him as one of the world’s best bankers and the other directors of Tomato Bank looked
forward to his appointment and a signifi cant strengthening of the business.
One of the factors needed to secure Mr Woof’s services was his reward package. Prior to his
acceptance of the position, Tomato Bank’s remuneration committee (comprised entirely of
non-executives) received a letter from Mr Woof saying that because his track record was so strong, they could be assured of many years of sustained growth under his leadership.In discussions concerning his pension, however, he asked for a generous non-performance related pension settlement to be written into his contract so that it would be payable whenever he decided to leave the company (subject to a minimum term of two years) and regardless of his performance as CEO. Such was the euphoria about his appointment that his request was approved. Furthermore in the hasty manner in which Mr Woof’s reward package was agreed,
the split of his package between basic and performance-related components was not carefully scrutinised. Everybody on the remuneration committee was so certain that he would bring success to Tomato Bank that the individual details of his reward package were not considered important.
In addition, the remuneration committee received several letters from Tomato Bank’s fi nance director, John Temba, saying, in direct terms, that they should offer Mr Woof ‘whatever he wants’ to ensure that he joins the company and that the balance of benefi ts was not important
as long as he joined. Two of the non-executive directors on the remuneration committee were former colleagues of Mr Woof and told the fi nance director they would take his advice and make sure they put a package together that would ensure Mr Woof joined the company.
Once in post, Mr Woof led an excessively aggressive strategy that involved high growth in the loan and mortgage books financed from a range of sources, some of which proved unreliable. In the fi fth year of his appointment, the failure of some of the sources of funds upon which the growth of the bank was based led to severe fi nancing diffi culties at Tomato Bank. Shareholders voted to replace George Woof as CEO. They said he had been reckless in exposing the company to so much risk in growing the loan book without adequately covering it with reliable sources of funds.
When he left, the press reported that despite his failure in the job, he would be leaving with what the newspapers referred to as an ‘obscenely large’ pension. Some shareholders were
angry and said that Mr Woof was being ‘rewarded for failure’. When Mr Woof was asked if he
might voluntarily forego some of his pension in recognition of his failure in the job, he refused, saying that he was contractually entitled to it and so would be keeping it all. Required:
(a) Criticise the performance of Tomato Bank’s remuneration committee in agreeing Mr Woof’s reward package. (10 marks)
(b) Describe the components of an appropriately designed executive reward package and explain why a more balanced package of benefi ts should have been used to reward Mr Woof. (10 marks)
2008 june Q3 Nomination Committee
3 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 company’s 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.
(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
2008 Dec Q2 Risk committee
2 Chen Products produces four manufactured products: Products 1, 2, 3 and 4. The company’s risk committee recently met to discuss how the company might respond to a
number of problems that have arisen with Product 2. After a number of incidents in which Product 2 had failed whilst being used by customers, Chen Products had been presented with compensation claims from customers injured and inconvenienced by the product failure. It was decided that the risk committee should meet to discuss the options.
When the discussion of Product 2 began, committee chairman Anne Ricardo reminded her colleagues that, apart from the compensation claims, Product 2 was a highly profitable product.
Chen’s risk management committee comprised four non-executive directors who each had
different backgrounds and areas of expertise. None of them had direct experience of Chen’s industry or products. It was noted that it was common for them to disagree among themselves as to how risks should be managed and that in some situations, each member proposed a quite different strategy to manage a given risk. This was the case when they discussed which risk management strategy to adopt with regard to Product 2.
(a) Describe the typical roles of a risk management committee.