Strategic Case Study

Examination

Activity Summary Book

Akila Gunarathna

MBA (UK), ACMA, CGMA, ACCA Affiliate, [Link]. Engineering (Hons), Dip in Banking & Finance
Contents Page
Chapter Content Page
Activity A
1 Evaluate strategic options (digital and otherwise) 5
1.1 The SAF Framework 5
1.2 Digital Strategy 6

2 Recommend strategic decisions (digital and otherwise) 7

2.1 Strategy Process 7
2.2 Business Objectives 10
2.3 Strategic Option Generation 11

3 Evaluate potential acquisitions and divestment opportunities 15

3.1 Mergers & Acquisitions 15
3.2 Synergy 16
3.3 Other methods of business development 17
3.4 Hostile takeover 18
3.5 Divestment 18
3.6 Management Buy Outs (MBOs) 19

4 Recommend responses to opportunities and threats arising 20

from digital technologies
4.1 Digital Resilience 20
4.2 Digital Transformation Technologies 20
4.3 Big Data 23

Activity B
1 Select and apply suitable strategic analytical tools 25
1.1 Strategic Analytical Tools 26
1.2 Competitor Analysis 28
1.3 Customer Analysis 29

2 Conduct an analysis of stakeholder needs and recommend 30

appropriate responses
2.1 Stakeholder Analysis 30
2.2 Stakeholder Mapping 32

3 Recommend appropriate responses to changes in the 34

business ecosystem
3.1 Business Models 34
3.2 Business eco-systems 35
3.3 Change Management 35
3.4 Leadership 37

4 Recommend KPIs that encourage sound strategic 38

management
4.1 Performance Management 38

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4.2 Personal Goals of Management 39

5 Recommend responses to economic, political and currency 41

risks
5.1 Currency Risk 41
5.2 Exchange Rate Determination 42
5.3 Hedging Methods 43

Activity C
1 Recommend suitable sources of finance 46
1.1 Funding 46
1.2 Equity Finance 46
1.3 Rights issue 48
1.4 Initial Public Offering (IPO) 49
1.5 Debt Finance 50
1.6 Cost of Capital 51
1.7 Debt vs Equity 51
1.8 Corporate Treasury 52
1.9 Share Price 52
1.10 Share Price volatility 54

2 Recommend dividend policy 55

2.1 Methods of Dividend payment 55
2.2 Dividend policies 55
2.3 Share buy-back 57

3 Recommend and apply business valuation models 58

3.1 Business Valuations Methods 58
3.2 Startup Valuation Methods 62

Activity D
1 Evaluate risks and recommend responses and can maintain 64
the corporate risk register
1.1 Risk Identification 64
1.2 Scenario Planning 67
1.3 Stress Testing 67
1.4 Risk Mitigation 68
1.5 Enterprise Risk Management (ERM) 68
1.6 Reputational Risk 69

2 Identify ethical dilemmas and recommend suitable responses 70

2.1 CIMA Code of Ethics 70
2.2 Ethical Dilemma 70

3 Evaluate and mitigate cyber risks 71

3.1 Cyber Risk 71
3.2 Cyber Risk Controls 73

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4 Recommend internal controls 75
4.1 Internal Controls 75

4 Sustainability & Integrated reporting 77

4.1 Sustainable Reporting 77
4.2 Integrated Reporting 77
4.3 Global Reporting Initiatives (GRI) 79

Activity E
1 Apply internal audit resources 81
1.1 Internal Audit 81

2 Recommend appropriate controls and evaluate the 84

implications of compliance failures
2.1 Controls to prevent compliance failures 84
2.2 Implications of compliance failures 84

3 Recommend responses to the threats arising from poor 85

governance
3.1 Corporate Governance 85
3.2 The Board Committees 86

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Activity A:
Develop business strategy

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Chapter 1
Evaluate strategic options (digital and otherwise)

1. The SAF Framework

SAF is a framework used to evaluate the viability of a suggested solution (acquisition

or a new business venture):

• Suitability evaluates the strategic fit with the current business model by comparing
with company’s vision, mission, values and objectives.

• Acceptability evaluates whether the solution is socially, politically, and

environmentally acceptable by the stakeholders.

• Feasibility evaluates whether the solution can be put into action given the
available time and resources.

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Challenges in evaluating the acceptability of new project:

1. Establishing the future cashflows associated with the new project could be
challenging.
2. Establishing an appropriate WACC could be challenging (Can use simulation to
establish WACC).
3. Assessing the risk, checking the risk of failure and evaluating impact on company’s
brand is challenging.
4. Requirements of different stakeholders are different with regard to a project
5. Managing up to their expectations is challenging.
6. Checking whether the new project is sustainable is challenging.

2. Digital Strategy

The actions and plans a company do to use digital technologies to accomplish its
business goals are referred to as its digital strategy. Target audience selection, digital
channel choice, content creation, data analysis, and performance optimization are all
included under digital strategy.

List of digital technologies:

Technology Use case

Artificial Intelligence Can solve problems and learn from data
Cloud & Mobile Offers flexibility and collaboration to handle data at low costs
Computing
Internet of Things Consists of networked objects that report their position, status,
and behavior
Big Data Large volumes of data that can be analyzed in real-time using
data mining techniques
Blockchain A public, distributed, notarized ledger system that can track and
validate transfers and transactions
Data Visualization Visual representation of complex data to generate insights
3D Printing An additive manufacturing process that can produce
prototypes, components, medicines, clothes, and food
Process Automation The use of robotics to automate tasks in administration and
manufacturing

Following areas of an organization will be impacted with a digital strategy:

• Business model (How business make money)

• Business structure
• People
• Processes
• Platforms (Traditional to Digital platforms)
• IT capabilities
• Offerings to customers
• Stakeholder engagement

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 Chapter 2
Recommend strategic decisions (digital and
otherwise)

1. Strategy Process

Strategy formulation:

• Strategic analysis: This involves assessing the current state of the business and
understanding the expectations of stakeholders who will evaluate the success of
the strategy.

• Strategic choice: Managers must decide on ways to move the organization

forward. This may involve identifying new opportunities, addressing weaknesses,
and leveraging strengths.

• Strategic implementation: Once a strategy has been chosen, it must be

effectively executed. This involves putting plans into action, monitoring progress,
and making adjustments as needed.

Strategic Decision Making

Top-Down Method Bottom-Up Method

Benefits • Clear direction from senior • Encourages creativity and
leadership innovation
• Consistent with organizational • Increases employee buy-in
goals and commitment
• Efficient use of resources • Better understanding of on-
the-ground issues
Drawbacks • Lack of input from lower-level • May not align with overall
employees organizational goals
• May not reflect the needs and • May be less efficient due to
concerns of all stakeholders increased coordination and
• Can create resistance from communication needed
employees • May lacks direction and focus
without clear leadership
guidance

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Summary of Strategy Setting Tools

Strategy Use Cases Pros Cons

Setting Tool
Rational • Large • Logical and • Limited flexibility
Planning organizations with systematic and adaptability
Model established approach • Tends to ignore
structures • Enhances external factors
• Complex and coordination and • Assumes a top-
uncertain control down approach
environments • Comprehensive
• Stable and analysis of
predictable alternatives
markets
Emergent • New and • Agile and adaptive • Lack of strategic
Approach innovative approach direction and
organizations • Encourages focus
• Unstable and innovation and • Can be chaotic
unpredictable experimentation and unstructured
markets • Inclusive and • Can lead to
• Rapidly changing participatory inconsistencies
environments and conflicts
Incrementalism • Mature and stable • Low risk and low- • Limited scope for
organizations cost approach radical change
• Moderate and • Encourages • Tends to
predictable continuous reinforce the
markets improvement status quo
• Limited resource • Provides a • Can lead to
availability framework for missed
incremental opportunities
change
Freewheeling • Small and • Flexible and • Lack of strategic
Opportunism entrepreneurial responsive focus and
organizations approach direction
• Dynamic and • Seizes • Can be chaotic
uncertain markets opportunities and unstructured
• High resource quickly • High risk and
availability • Encourages high-cost
innovation and approach
risk-taking

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Rational Planning Model

• Vision: A clear and inspiring statement of what the organization hopes to achieve
in the future. It provides a sense of direction and a guiding principle for decision-
making.

• Mission: A statement that explains why the organization exists, what it does, and
who it serves. It defines the organization's purpose, its primary activities, and its
intended outcomes.

• Values: The guiding principles and beliefs that define the organization's culture
and guide its behavior. They reflect the organization's priorities and are used to
guide decision-making, actions, and interactions within the organization and with
external stakeholders.

Need of Vision, Mission and Values for an organization:

• Clarity and Direction: The organization's vision and mission provide it a clear
direction, ensuring that everyone is aware of its goals and how to get there.
• Alignment: A well-defined vision, mission, and strategy direct all members of the
organization toward a single goal, increasing effectiveness and efficiency.
• Competitive Advantage: By concentrating on the organization's strengths,
weaknesses, opportunities, and threats, a clear strategy aids in the development
of a competitive edge.
• Communication: The framework provided by the vision, mission, and strategy
helps to ensure that everyone understands their roles and responsibilities.
• Accountability: The vision, mission, and strategy provide as a foundation for
gauging success and holding people responsible for their contributions to
accomplishing the overall objective.
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 Features of Core competencies:

• Unique: Core competencies are unique capabilities that distinguish a company

from its competitors. They are the strengths and abilities that a company
possesses that are difficult for others to replicate.

• Valuable: Core competencies are assets that add value to a company's products
or services and provide a competitive advantage in the marketplace.

• Relevant: Core competencies are directly related to a company's business and

are critical to its success. They are not generic skills or abilities, but rather specific
to the company's operations.

• Difficult to imitate: Core competencies are difficult for competitors to replicate, as

they are often built up over time and through a variety of experiences, and require
a combination of skills, knowledge, and resources.

• Applicable across multiple products or markets: Core competencies are often

applicable across a range of products or markets and can be leveraged to create
new products or enter new markets.

• Sustainable: Core competencies are sustainable advantages that can withstand

changes in the marketplace or shifts in the company's operations. They are not
temporary advantages that will disappear over time.

2. Business Objectives

• Financial Objectives

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 • Non-financial Objectives

Value For Money

Value for money is a concept that evaluates whether a product or service provides
benefits that are worth its cost. It is often measured by considering the 3Es: Economy,
Efficiency, and Effectiveness.

• Economy: Economy refers to the cost of resources required to produce a product

or service. It involves minimizing the cost of inputs such as labor, materials, and
equipment while still producing a quality output.

• Efficiency: Efficiency refers to the ratio of outputs to inputs. It involves optimizing

the use of resources to produce the desired output with the least amount of waste
or effort.

• Effectiveness: Effectiveness refers to the extent to which a product or service

meets its intended purpose or objective. It involves ensuring that the output meets
the desired quality standards and provides the expected benefits to the customer.

3. Strategic Option Generation

Resource Audit

1. Manpower: The skills, expertise, and experience of an organization's employees.

2. Machinery: The physical equipment, technology, and tools used in production,
manufacturing, or service delivery.
3. Money: The financial resources available to the organization, including funding,
revenue, and investment.
4. Materials: The physical resources used in production or service delivery,
including raw materials, supplies, and inventory.
5. Minutes: The time available to complete tasks, meet deadlines, and achieve
objectives.
6. Market: The organization's position in the market, including its customer base,
market share, and brand reputation.

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7. Method: The processes, procedures, and systems used by the organization to
achieve its goals.
8. Message: The organization's communication strategies, including its branding,
marketing, and public relations.
9. Management: The leadership and management practices of the organization,
including its decision-making, planning, and organizational culture.

The Boston Consulting Group (BCG) Matrix

Limitations of using BCG matrix:

• Takes into account only two variables, relative market share and market growth
rate, which might not give a full picture of a product's performance or potential.
• Does not take into consideration elements that could affect a product's
performance, such as market dynamics, technical improvements, competitive
challenges, or shifting consumer preferences.
• Places more emphasis on a product's performance and place in the market than
on its potential for growth in the future or its capacity to disrupt the market.
• Relies on subjective estimations of market share and growth, which could result in
skewed or incorrect assessments.
• Considers each product in the portfolio to be independent of the others, which may
not accurately reflect the intricate relationships that exist between the goods in a
company's portfolio.

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Michael Porter’s value chain

SWOT Analysis

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Porter’s Generic Strategies

Ansoff Product-Market Matrix

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Chapter 3
Evaluate potential acquisitions and divestment
opportunities
1. Mergers & Acquisitions

• Mergers: Share capital of both the companies are swapped for the share capital
of a new combined company.
• Acquisition: Predator company purchases the share capital of the target
company.

Pros of acquisitions Cons of acquisition

Increased market share and High acquisition costs and financial risks
competitiveness
Diversification of products, services, or Cultural clashes and integration challenges
markets
Access to new technologies and resources Loss of company identity and autonomy
Expansion of customer base and Legal and regulatory hurdles
distribution
Synergies and economies of scale Resistance and resentment from
employees or customers

Factors to consider before an acquisition:

1. Strategic fit with the current business.

2. Investment size required for the acquisition.
3. Risk involved with the new business (Should be with our risk appetite).
4. Possible synergies arise with the acquisition.
5. Knowledge and the skillset required to operate the new business.
6. Any legal issues associated with the new company.
7. Cultural compatibility of the new company.

Ways to reduce the risks of an acquisition:

1. Perform due diligence with the support of consultants and professional advisors.
2. Employ a risk-adjusted cost of capital to assess the purchase.
3. Forecast the market or industry in which the target firm competes.
4. Calculate the odds of potential outcomes and evaluate the best and worst-case
scenarios.
5. Determine possible exit strategies from the investment in case it is unsuccessful.
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2. Synergy

Synergy in business can result in greater productivity and profitability as well as a

competitive edge. Businesses can do more than they could on their own if they
combine resources, share knowledge and skills, and take advantage of one another's
complementing qualities. This might appear in a variety of ways, such as reduced
costs, increased earnings, better product development, and improved brand
recognition. A culture of invention and collaboration can be fostered via synergy, which
can ultimately lead to growth and success. In the end, the ability to produce results
that are superior to what each separate organization might produce alone is the power
of synergy in business.

Different sources of synergies

Source of Synergy Possible synergies

Shared technology and expertise
Operational Consolidated supply chain and distribution networks
Coordinated research and development efforts
Streamlined operations and reduced duplication
Improved credit ratings
Financial Increased economies of scale
More favorable financing terms
Improved cash flow management
Enhanced leadership and decision-making
Managerial Greater efficiency and cost savings
Increased innovation and product development
Greater expertise and specialization
Access to new customer segments
Market Expansion into new geographic regions
Enhanced brand recognition and customer loyalty
Improved pricing power and negotiation leverage
Diversification of revenue streams
Risk reduction through insurance or hedging strategies
Risk-spreading Hedging against market volatility through portfolio diversification
Shared risk management resources and expertise

Post-Merger Value Enhancing with Drucker’s Model:

1. Ensure common core of unity.

2. Acquirer should think what we can offer them.
3. Acquirer should respect products, markets and customers of acquired entity.
4. Acquirer should provide skilled top management to acquire within 1 year.
5. Cross entity promotions within 1 year.

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Realization of anticipated synergies:

1. Interchanging senior employees of the two companies.

2. Identify duplicate roles & synchronize them.
3. Set common goals for the employees and hence the resistance between the
employees of 2 companies will get reduced.
4. Sell unwanted assets & improve cash position.
5. Held common events for employees of both the companies to reduce cultural
clashes.

3. Other methods of business development

Source of Possible synergies

Synergy
Renting out a company's business approach to external entities is
known as “franchising”. It necessitates teaching the franchisee about
Franchise the business approach and purchasing goods from the franchisor.
Furthermore, the franchisee must pay a lump sum to have the sole
right to use the approach in a specific area.
An independent company established by multiple business partners,
Joint Ventures who become shareholders in the venture. The purpose of this
arrangement is to combine their resources and knowledge in pursuit
of shared business objectives.
This doesn't involve the establishment of a distinct business entity.
Instead, the partners collaborate to achieve common goals and reap
Strategic Alliance mutual advantages. Typically, there is a legal agreement in place
between the parties, which may involve the exchange of equity to
ensure that each party benefits from the other's success.
A company can opt to outsource its strategy execution to external
Outsourcing organizations for a specified fee, instead of using its own resources
and management to complete the entire process.
The company grants permission for other companies to use its
Licensing intellectual property, which includes items like recipes, brand names,
mineral rights, and technologies. The recipient of the license can then
use these assets for commercial purposes in their designated area
and must pay a percentage of their sales turnover as a royalty fee to
the company that granted the license.

Advantages and disadvantages of synergy

Advantages Disadvantages
Access to new markets and resources Limited control over decision-making
Shared risks and costs Potential for conflicts with partners
Access to new technologies and resources Difficulties in finding suitable partners
Access to partner expertise Restrictions on business operations
Accelerated growth potential Potential for reduced quality and standards
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4. Hostile takeover

Pre-bid Defenses:

• Communicate to shareholders
• Revalue non-current assets
• Poison Pills
• Change article to require superior majority approval for a takeover
• Shark repellent (making the target less attractive)

Post-bid Defenses:

• Appeal to won shareholders

• Pac-Man (Counterbid for the acquiring company)
• White knight (friendly company takeover by making a counter-bid)
• Competition Authorities

5. Divestment

Selling or terminating a company or business unit that is no longer lucrative or

strategically important to the organization is the process of divesting a business.
Companies can use divestment to streamline their processes, concentrate on their
core skills, and raise money for investments in other parts of the company.

Reasons for divestment:

• Due to regulatory Requirements

• Due to changes in business strategy
• Due to poor performance
• To improve P/E ratio
• To gain more liquidity

Methods of divestment:

• Spin-off
• Bootstrap
• Sell-off
• Management Buy Out (MBO)

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6. Management Buy Outs (MBOs)

A management buyout (MBO) is a type of acquisition where a company's management

team purchases the company from its current owners, often with the assistance of
outside investors or lenders. MBOs can be a way for management to gain ownership
and control of the company and can also be used to facilitate succession planning or
divestment by the current owners.

Factors to consider before MBO:

• Business potential
• Loss of Head office support
• Quality of management team
• Employee considerations
• Business valuation
• Tax considerations
• Exit strategy (Trade sale, IPO)

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Chapter 4
Recommend responses to opportunities and
threats arising from digital technologies

1. Digital Resilience

Digital Resilience means doing more than the minimum to protect the company and
comply with regulations, but to integrate cyber-security into the business operations.

Steps in integrating cyber security into the business operations:

1. Identify all the issues.

2. Aim towards a well-defined target.
3. How best to deliver the new cyber security system?
4. Establish risk resource trade-offs (Select the best for organization)
5. Develop a plan that aligns business and technology.
6. Ensure sustained business engagement.

2. Digital transformation technologies

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1. Cloud Computing: The delivery of on-demand computing services over the
internet, such as storage, applications, and processing power.

Use Cases:

• Storing and accessing data from anywhere

• Scaling computing resources up or down as needed
• Developing and deploying applications quickly and cost-effectively

2. Process Automation: The use of technology to automate repetitive tasks and

workflows.

Use Cases:

• Streamlining business processes to increase efficiency and productivity

• Reducing errors and improving accuracy
• Saving time and freeing up employees to focus on more complex tasks

3. Artificial Intelligence: The simulation of human intelligence in machines, allowing

them to perform tasks that typically require human intelligence.

Use Cases:

• Chatbots and virtual assistants for customer service

• Personalized marketing and advertising
• Fraud detection and risk management

4. Data Visualization: The presentation of data in a graphical or visual format,

making it easier to understand and interpret.

Use Cases:

• Analyzing complex data sets

• Identifying patterns and trends
• Communicating insights and findings to stakeholders

5. Augmented Reality: A technology that overlays digital information onto the

physical world.

Use Cases:

• Enhancing customer experiences in retail and e-commerce

• Improving training and education
• Assisting with product design and development

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6. Virtual Reality: A technology that creates a simulated environment, allowing users
to interact with a virtual world.

Use Cases:

• Immersive training and education

• Remote collaboration and communication
• Virtual tours and experiences

7. Blockchain: A decentralized and secure ledger that records transactions.

Use Cases:

• Secure and transparent supply chain management

• Digital identity verification
• Secure and fast payment processing

8. Cryptocurrencies and Non-Fungible Tokens (NFTs): Digital assets that use

cryptography to secure transactions and ownership.

Use Cases:

• Alternative payment methods

• Decentralized finance (DeFi)
• Digital collectibles and art

9. Internet of Things (IoT): The connection of everyday objects to the internet,

allowing them to send and receive data.

Use Cases:

• Smart homes and buildings

• Predictive maintenance and asset tracking
• Environmental monitoring and control

10. 3D Printing: The creation of three-dimensional objects from digital files.

Use Cases:

• Rapid prototyping and product development

• Customized manufacturing and production
• Medical and dental applications

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3. Big data

Characteristics of Big data

• Volume: The sheer amount of big data makes it impossible for conventional data
management technologies to handle. It includes petabytes and exabytes of data
that can originate from a variety of places, including social media, Internet of Things
(IoT) devices, and online transactions.

• Velocity: Big data is produced and used at a breakneck pace. Making choices
quickly for businesses now requires real-time data processing. It might be difficult
for traditional data storage and management systems to keep up with the rate at
which data is generated.

• Variety: Big data comes in a wide range of heterogeneous media, including text,
photos, videos, and audio. It is both structured and unstructured, and it is produced
from numerous sources. It is difficult to evaluate since traditional data processing
tools are not built to manage the variety of data formats.

• Veracity: It might be challenging to trust big data because of its potential for
unreliability and variable quality. Making sure the data is reliable, consistent, and
correct is a difficulty. Data input mistakes, data corruption, and processing
mistakes are only a few of the many causes of poor data quality.

Sources of Big Data

Source Description

Social media platforms such as Facebook, Twitter, Instagram, and

Social media LinkedIn generate vast amounts of data, including user-generated
content, interactions, and engagement.
Internet of Things (IoT) devices such as sensors, smart
IoT devices appliances, and wearables produce massive amounts of data
about usage patterns, performance, and environmental conditions.
Transactional data generated by financial institutions, e-commerce
Transactional data websites, and other organizations provide information about
customer behavior, purchasing patterns, and transactional history.
Machine-generated data produced by servers, applications, and
Machine-generated other automated systems can provide insights into system
data performance, usage patterns, and potential issues.
Video and image data generated by security cameras, drones,
Video and image and other devices can provide insights into people's behavior,
data environmental conditions, and other factors.
Open data Open data refers to publicly available data sets generated by
governments, academic institutions, and other organizations.
Examples include weather data, census data, and scientific
research data.

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How Big Data can be used in a company?

• For customer acquisition and customer retention

• Redevelop products from customer feedbacks.
• Perform Risk Analysis by quantifying risks.
• To create new revenue streams.
• To enhance supply chain of the company.
• Social Media Marketing.

*These are the common ways in which big data can be used. More specific uses can
be derived with the pre-seen & unseen.

Concerns over Big Data and Analytics

• Privacy: Concerns regarding privacy and data protection may be raised by the
gathering and use of vast volumes of personal data. To avoid any legal or moral
concerns, businesses must make sure they are in compliance with data protection
laws and regulations.

• Security: Due to the volume of data, it is a desirable target for cybercriminals and
hackers, which can result in data breaches, data loss, and other security risks.

• Bias: When algorithms and machine learning are used to analyze data, the results
may be biased, which may result in unjust or inaccurate choices.

• Interpretation: Big Data analysis calls for a high level of knowledge and experience,
and misinterpretations might result in wrong findings and judgments.

• Infrastructure: Big Data processing, management, and storage demand a

substantial amount of computational power, which can be costly and challenging
to manage.

• Data Quality: Bad data quality, missing data, or erroneous data can affect
analytics' performance and result in poor or ineffective judgments.

• Ethical issues: Using big data and analytics can bring up ethical issues, such as
the use of personal information for targeted advertising or the use of data to make
decisions that may have a harmful effect on a certain group of people.

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Activity B:
Evaluate business
ecosystem and business
environment

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Chapter 1
Select and apply suitable strategic analytical tools

1. Strategic Analytical Tools

Porter’s 5 forces

• Threat of new entrants: This force refers to the likelihood of new competitors
entering the market and potentially disrupting the existing players. High barriers to
entry, such as high capital requirements, can deter new entrants.
• Bargaining power of suppliers: This force refers to the power that suppliers have
over the industry in terms of pricing and quality. If there are only a few suppliers or
if they provide unique products, their bargaining power can be high.
• Bargaining power of buyers: This force refers to the power that customers have
over the industry in terms of pricing and quality. If there are many buyers and they
have many options, their bargaining power can be high.
• Threat of substitutes: This force refers to the likelihood of customers switching to
a substitute product or service. The availability of close substitutes can limit the
pricing power of the industry.
• Intensity of competitive rivalry: This force refers to the level of competition within
the industry. High levels of rivalry can lead to price wars and pressure on profits.
Factors such as the number of competitors, market growth rate, and differentiation
can influence the intensity of rivalry.

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Porter’s Diamond

Main Factors:

• Demand conditions: the Addressable Total Market (ATM) - product/service

specifications, pricing, potential buyers, spending power

• Factor conditions: resources available to support the business - land, labor

availability and costs, skills, natural materials

• Related and supporting industries: supply-chain partners - transportation,

energy, components, technological infrastructure and support

• Firms strategy, structure and rivalry: competition, ownership, strengths, and

weaknesses

Other Factors:

• Government: assistance or obstacles placed by the government - grants, taxes,

obstacles to staff working in the country

• Chance: why firms sometimes succeed or fail despite favorable/unfavorable

configuration of other factors.

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 PESTEL Analysis

2. Competitor Analysis

1. Identify Competitor types

Brand competitors Appeal to similar customer group

Industry competitors Offer similar products and technologies
Form competitors Sell substitute technologies that satisfy the same need
Generic competitors Compete for the same income

2. Analyze Competitor types

Objectives Competitor goals and how well they are being achieved
Strategy Competitor markets and methods of competition
Assumptions Competitor's view of the future of the industry and its position in it
Resources and Competitor's key strengths and weaknesses, costs, and brands
competences

3. Develop Competitor Response Profiles

Laid back Does not respond

Selective Reacts only in selected markets that it believes are important
Tiger Always responds aggressively
Stochastic Responses are random and hard to predict

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3. Customer Analysis

1. Assessing Customer Value:

Purchasing frequency and price How often and how much customers buy
Range of product bought What types of products they purchase
Costs of supply and Costs associated with maintaining their business
maintenance
Influence on other buyers The impact they have on other buyers in the market
Forecast growth or decline of Expected growth or decline of the segment they are in
segment

2. Identifying Buyer Behavior:

Purchasing characteristics How customers make purchasing decisions

Influencing factors Factors that influence their decision-making process

3. Understanding Potential Future Value:

Satisfaction and service How satisfied customers are with the service they
receive
Potential to acquire or lose them The likelihood of gaining or losing customers
Potential lifecycle value The potential lifetime value of customers
Changes and development in How customers' needs may change over time
their needs

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Chapter 2
Conduct an analysis of stakeholder needs and
recommend appropriate responses

1. Stakeholder Analysis

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General set of Stakeholders, their interest and powers in an organization:

Stakeholder Interests Powers

• Maximizing profits and • Electing the board of directors,
shareholder value, receiving approving or rejecting major
Shareholders dividends and capital decisions, voting on company
appreciation, ensuring long- policies and strategies, selling
term growth and sustainability or buying shares
• Job security, fair • Collective bargaining, forming or
compensation, career joining unions, participating in
Employees advancement, safe working company decisions through
conditions, job satisfaction employee representation on
boards or committees, going on
strike or protesting
• High-quality products or • Choosing to buy or not buy from
services, competitive prices, the company, providing
good customer service, trust feedback and reviews, suing the
Customers and reliability company for damages or
breach of contract, impacting
the company's reputation
through word-of-mouth
• Stable and profitable • Negotiating contracts and
business relationship, timely terms, refusing to supply or
Suppliers and fair payment, clear terminate the contract, suing the
communication and company for breach of contract
transparency or unpaid bills
• Compliance with laws and • Setting and enforcing laws and
regulations, paying taxes, regulations, providing incentives
promoting economic growth or subsidies, imposing fines or
Government and social welfare, protecting sanctions, controlling licenses
public interests and permits, protecting public
health and safety
• Environmental sustainability, • Protesting or boycotting the
social responsibility, company, influencing
contributing to local economy, government regulations or
Community creating job opportunities, policies, collaborating with the
minimizing negative impacts company for mutual benefits,
filing lawsuits or complaints for
damages or social harm

*Depending on the pre-seen and unseen scenario, there may be more or less
stakeholders.

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2. Stakeholder Mapping

Mendelow’s matrix

• Keep Players: These stakeholders are extremely interested in the company's

operations and have a major impact on it. It is essential to keep up good contact
with them and keep them happy. To effectively manage these stakeholders, regular
communication, engagement, and involvement are essential.

• Keep satisfied: These stakeholders have a lot of influence but little interest in the
business's operations. By giving them information on the business's success and
including them in crucial decision-making processes, it's critical to keep them
happy. It's important to keep a positive relationship with these stakeholders in case
their interest rises in the future.

• Keep informed: Although these stakeholders don't have much influence, they are
very interested in what the business is doing. It's crucial to keep them informed and
involved by sending them frequent updates and asking for their opinion. Interacting
with these parties can also aid in identifying potential hazards or business
possibilities that may have gone unnoticed.

• Minimal Effort: These stakeholders have little influence on and little interest in the
business's operations. To prevent them from developing into a problem in the
future, it is crucial to keep an eye on them. Managing these stakeholders does not
require considerable resources but keeping them informed can help avoid
problems in the future.

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Importance of Stakeholder engagement for an organization:

• Builds trust with customers, employees, investors, and communities.

• Provides valuable insights for better decision-making.
• Helps identify and mitigate potential risks.
• Fosters innovation and creativity.
• Ensures compliance with legal and regulatory requirements.
• Demonstrates commitment to social responsibility and sustainability.

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Chapter 3
Recommend appropriate responses to changes in
the business ecosystem
1. Business Models

What is the meaning of "value"?

Value refers to the worth that something has to people. However, CGMA expands on
the simple concept that value equals profit. In other words, value can also mean the
benefit that something provides to its customers, society, or employees.

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2. Business eco systems

3. Change Management

Sources of resistance to change

• Parochial self-interest: Individuals or groups may resist change if they perceive

that it will threaten their self-interest or power within the organization. They may
feel that the change will negatively impact their job security, status, or influence
within the organization.

• Misunderstanding and lack of trust: Resistance to change can also occur when
individuals do not fully understand why the change is necessary, how it will be
implemented, or what the potential benefits are. If individuals lack trust in the
leadership or the change process, they may be resistant to the proposed changes.

• Low tolerance of change: Some individuals or groups may have a low tolerance
for change due to personality traits, fear of the unknown, or past negative
experiences with change. They may resist change even if they understand the
need for it, and this can make it difficult to implement organizational changes
successfully.

• Different assessments of the situation: Individuals or groups may have different

assessments of the situation, the potential risks and benefits of change, and what
is required to implement the change successfully. These differing views can lead
to resistance and conflict, particularly if individuals feel that their concerns or
perspectives are not being heard or taken into account.

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How to Implement Change Management for employees?

• Good leadership to drive change by setting an example.

• Communicate the future goals & objectives and the sense of urgency.
• Remove resistance by training and supporting.
• Get the employees involved in the process & get their inputs.
• Provide quick wins and rewards for employees.
• Delegate duties & responsibilities to each & every employee.
• If results in any redundancies, support them with an employment agency.

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4. Leadership

How to be effective?

• Build recognition by executives of their contribution in order to promote openness

and trust.
• Be well informed about the company and the external environments in which it
operates.
• Have a strong command of issues relevant to the business.
• Insist on a comprehensive, formal and tailored induction, continually develop and
refresh their knowledge and skills to ensure that their contribution to the board
remains informed and relevant.
• Ensure that information is provided sufficiently, accurate, clear and timely.
• Uphold the highest ethical standards of Integrity and probity.
• Question intelligently, debate constructively, challenge rigorously and decide
dispassionately.
• Promote the highest standards of corporate governance and seek compliance with
the provisions of the Combined Code wherever possible.

Threats to independence:

• Material business relationship with the company in last 3 years.

• Employee in last 5 years.
• Cross director in other companies.
• Receive other remuneration from the company besides directors' fee.
• Close family ties with director.
• Significant shareholder.
• Served on board more than 9 years.

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Chapter 4
Recommend KPIs that encourage sound strategic
management

1. Performance Management

Formulation of Key Performance Indicators (KPIs)

Balanced Scored Card

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Implications of using wrong KPIs:

• Misleading performance results

• Wasted resources
• Misguided decision-making
• Poor performance management
• Lack of accountability

2. Personal Goals of Management

• Risk Appetite

Managers may be more risk-averse than principals due to being heavily invested in
the business, whereas investors may be less affected due to diversified investments.
Alternatively, managers may be less risk-averse than investors because they can
change jobs before the profits fall, limiting their personal investment loss. In either
case, the mismatched risk attitudes create a potential conflict of interest.

• Business Growth

Growth in sales revenue is typically the main objective of business growth, with market
share also playing a role. While profit or net asset growth can also be objectives,
they're less common. Concerns exist over managerial ambition driving business
growth rather than investor considerations. Higher sales don't necessarily mean higher
profits, especially if they're gained through price cuts or expensive marketing
initiatives. Growing a business requires more capital investment, which depletes cash
flows and could lower profitability. Economic analysis suggests growth often leads to
higher managerial pay and power, even if investors' returns suffer due to weaknesses
in investor control over management.

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• Pay Scheme for Managers

Different payment systems can incentivize managers to prioritize their own interests
over those of shareholders. For instance, short-termism is encouraged when bonuses
are tied to annual or quarterly measures of performance, leading managers to prioritize
short-term gains over long-term sustainability. Similarly, share options or bonuses may
encourage risk-seeking behavior, as managers can benefit from unexpected earnings
increases without losing anything if the share price falls. This creates a potential
conflict of interest between managers and shareholders, as their attitudes toward risk
may differ.

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Chapter 5
Recommend responses to economic, political and
currency risks
1. Currency Risk

Types of currency risk:

i. Transaction risk: This refers to the risk of loss that arises from changes in
exchange rates between the time a transaction is initiated and the time it is
settled. Transaction risk can be mitigated through the use of internal and
external hedging techniques.

ii. Translation risk: This refers to the risk of loss that arises from converting
financial statements denominated in foreign currency into the reporting
currency of the business. Translation risk can be mitigated through the use of
accounting techniques such as currency translation adjustments, but no active
hedging mechanism.

iii. Economic risk: This refers to the risk of loss that arises from changes in
exchange rates that impact the competitiveness of a business's products or
services. Economic risk can be mitigated through the use of strategies such as
diversification and local currency invoicing.

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2. Exchange Rate Determination

i. Purchasing Power Parity (PPP) Theory

It suggests that the exchange rate between two countries should adjust to equalize
the prices of a basket of goods and services in both countries. This means that if a
basket of goods is cheaper in one country than another, the exchange rate should
reflect this difference, making the currency of the cheaper country appreciate relative
to the currency of the more expensive country. PPP theory assumes that there are no
trade barriers, transportation costs, or taxes that affect the prices of goods and
services. The theory also assumes that exchange rates will adjust to reflect differences
in inflation rates between countries. However, the theory is not always accurate, as
there can be significant differences in the quality and availability of goods and services
between countries. The formula for PPP is:

ii. Interest Rate Parity (IRP)

According to the Interest Rate Parity (IRP) theory, the difference in interest rates
between two countries should match the variation in their exchange rates. If one
country has higher interest rates than another, the higher-interest country's currency
ought to gain value in comparison to the lower-interest country's currency. According
to the theory, exchange rates will vary to reflect the difference in interest rates, and
investors will aim to maximize return on investment while reducing risk. Exchange
rates, however, can be influenced by other variables. The IRP formula is:

iii. Fisher Effect

The Fisher Effect is an economic theory that suggests there is a relationship between
inflation rates and interest rates. According to the theory, if the inflation rate in a
country increase, the nominal interest rate (the rate without adjusting for inflation) will
also increase. This is because lenders and borrowers will demand a higher nominal
interest rate to account for the expected increase in inflation. The Fisher Effect formula
is:

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Other Factors affecting Foreign Exchange Rates:

• Interest rates and Inflation

• Political stability and economic performance
• Balance of trade
• Geo-political events (Ex: Wars)
• Central bank intervention
• Government policies

Currency Risk involved with a foreign investment:

• Exposure to economic risk: Impact on price elasticity of demand, changes of

interest rate risk, inflation, etc.

• Exposure to transaction risk: Arise due to timing differences between the invoice
date and the transaction date.

• Exposure to translation risk: Arise if when we have non-current assets or non-

current liabilities dominated with a foreign currency. (No active hedging mechanism
is available for translation risk).

3. Hedging Methods

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Advantages and disadvantages of different currency risk management tools:

Instrument Advantages Disadvantages

• Provide flexibility to the buyer • Higher premiums than
in choosing whether or not to other hedging tools
exercise the option • Options may expire
• Fixed cost to the buyer, as the worthless if the exchange
premium paid upfront is the rate does not move in the
Currency Options only cost direction expected by the
• Limited downside risk, as the buyer
buyer is not obligated to
exercise the option if the
exchange rate moves against
them
• Fixed exchange rate at the • Obligation to buy or sell the
time of the contract currency at the agreed
• Standardized contracts, price, regardless of
Currency Futures making them easier to trade whether it is favorable or
• Lower cost than options, as no not
upfront premium is required • May require a margin
deposit, which ties up
capital
• Customizable to the buyer's • No flexibility in changing
Forward specific needs the exchange rate once the
Exchange • Fixed exchange rate at the contract is signed
Contracts time of the contract • Requires creditworthiness
• No upfront premium required of both parties
• Provides a higher rate of • Exchange rate risk if the
Foreign Currency interest than domestic currency depreciates
Money Market accounts before conversion
Account • No obligation to convert the • Limited availability and
currency until needed liquidity compared to
domestic accounts
• Customizable to the needs of • Counterparty risk, as the
both parties swap requires
• Lower transaction costs than creditworthiness of both
Currency Swaps other hedging tools parties
• No upfront premium required • Exchange rate risk if the
currency depreciates
before the swap is
completed

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Activity C:
Recommend financing
strategies

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Chapter 1
Recommend suitable sources of finance

1. Funding

2. Equity Finance

Criteria to select equity sources:

• Cost
• Duration to get the funds
• Impact on debt covenants
• Impact on gearing and liquidity of the company
• Tax implications and credit worthiness
• Impact on currency risk (If finance providers are foreign)

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Sources of equity finance for listed companies:

• Public Offering - Companies can raise capital through public offerings like Initial
Public Offerings (IPOs), Follow-on Public Offerings (FPOs), or Rights Issue.
• Private Placement - Listed companies can also raise capital by selling their shares
to select investors like institutional investors, private equity firms, or high net worth
individuals.
• Employee Stock Option Plans (ESOPs) - Companies can also issue shares to
their employees as a part of their compensation package or reward scheme.
• Preferential Allotment - Listed companies can also issue shares to specific
investors on a preferential basis, subject to approval from regulatory authorities.
• Convertible Debentures - Companies can also issue convertible debentures to
investors, which can later be converted into equity shares at a pre-determined
price.

Sources of equity finance for unlisted companies:

• Angel Investors - Unlisted companies can raise capital through angel investors,
who are high net worth individuals or groups of individuals who provide capital in
exchange for ownership equity or convertible debt.
• Venture Capitalists - Unlisted companies with high growth potential can raise
capital from venture capitalists, who invest in early-stage or high-growth companies
in exchange for ownership equity.
• Crowdfunding - Unlisted companies can also raise capital from the general public
through crowdfunding platforms, where individuals can invest small amounts in
exchange for ownership equity or rewards.
• Private Equity Firms - Unlisted companies can also raise capital from private
equity firms, which are investment firms that invest in companies in exchange for
ownership equity.

*Retained earnings is not a possible source of equity finance for both the listed
and unlisted companies.

Advantages and disadvantages of funding through a new share issue

Advantages Disadvantages
• Can raise significant capital to finance • Dilutes ownership and control of the
growth opportunities company, which may not be desirable
• Allows the company to diversify its for existing shareholders
shareholder base and attract new • Transaction costs can be high,
investors including underwriting fees and legal
• Can improve liquidity of the company's fees
shares • Can lead to negative signaling if the
company is issuing new shares to
finance its ongoing operations rather
than growth opportunities

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3. Rights Issue

A rights issue is a process through which a company raises capital by offering existing
shareholders the right to buy additional shares in proportion to their existing holdings.

Factors to be considered before a Rights issue:

• Purpose: Determine the reason for the rights issue and ensure it aligns with the
company's goals.
• Market conditions: Analyze current market conditions and demand for the
company's shares.
• Shareholders' interests: Evaluate the impact on existing shareholders and their
financial position.
• Regulatory requirements: Ensure the rights issue complies with legal and
regulatory requirements.
• Timing: Consider the timing of the rights issue, including the company's financial
position and competition.
• Costs: Assess the costs associated with the rights issue, including fees and
administrative expenses.

Suitability of a rights issue for an acquisition:

• Improved effect on gearing ratio & more room for borrowing.

• No debt covenants and hence no hindrances to carry out operations.
• No regular commitments on interest payments.
• Increased shareholder confidence on the company as the profit is high (No interest
payments).
• Rights issue is more suitable than debt sources if the business risk of the
investment is high.

*Funding through a rights issue has a high risk involved, lots of stakeholders
(underwriters, regulators, etc.) and it will dilute the shareholder stake.

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4. Initial Public Offering (IPO)

An IPO, or Initial Public Offering, is the process of a private company offering its shares
to the public for the first time. This allows the company to raise capital by selling
ownership in the company to outside investors, and can also provide increased
visibility, credibility, and liquidity for shareholders.

Steps in floating a firm:

1. Choose the stock exchange to float on, with enough liquidity and investor
recognition.
2. Hire financial advisors to assist with compliance and introduce the firm to the stock
exchange regulator.
3. Prepare a prospectus containing financial results, assets, future plans, projections,
board backgrounds, and equity usage.
4. Decide the offer price based on interest generated by the prospectus and meetings
with investors and analysts.
5. Conduct the issue on the day of the IPO.

Advantages & disadvantages of an IPO

Advantages Disadvantages
Access to capital Costly (Underwriting fees, legal fees,
regulatory compliances, etc.)
Increased visibility and brand recognition Loss of control (Ownership is diluted)
Liquidity for existing shareholders Increased regulatory burden

Incentives for employees Increased scrutiny

Improved credibility & reputation Subject to pressure from investors and
analysts to deliver short-term results

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5. Debt Finance

Criteria to select debt sources:

• Cost
• Time-scale (Short-term or Long-term)
• Liquidity
• Securities
• Currency risk
• Securities required to obtain debt
• Covenants involved

Short-term debt financing is typically used for financing current assets and working
capital needs, while long-term debt financing is used for financing fixed assets and
long-term investments. Companies must carefully consider the costs and risks
associated with each type of debt financing before deciding which one to use.

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6. Cost of Capital

WACC is influenced by:

1. The Cost of Debt (Kd)

2. The amount of debt in the firm’s capital structure
3. The Cost of Equity (Ke)
4. The amount of equity in the firm’s capital structure

7. Debt vs Equity

Source Debt Financing Equity Financing

• Interest on debt is tax- • No interest payments required
deductible • No obligation to repay
• Debt doesn't dilute ownership shareholders
Advantages • Creditor doesn't have voting • No required payments;
rights dividends are optional.
• Fixed payment schedule
creates certainty
• Interest must be paid • Dilutes ownership of existing
regardless of profits shareholders
• Too much debt can affect • Higher cost of capital for equity
credit rating financing
Disadvantages • Collateral may be required • Shareholders may demand a
• Limited flexibility in high return on equity
repayment terms • Equity financing can be difficult
to obtain

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8. Corporate Treasury

Following are the roles of corporate treasury:

• Cash management: The treasury department is responsible for handling payment

transactions, managing bank accounts, and monitoring cash flow to ensure there
is enough liquidity to meet obligations.

• Liquidity planning and control: Treasury also oversees cash flow forecasting
and manages liquid investments to deposit and redeem cash as required.

• Management of interest, currency, and commodity risks: The treasury team

controls financial risks using derivatives and other policies, monitors hedging
periods, and maintains documentation of hedging transactions and risk exposure.

• Procurement of finance and financial instruments: Treasury manages money

market dealings, working capital finance, factoring/invoice discounting, and
financial investment.

• Contacts with banks and credit rating agencies: The treasury department
cultivates successful relationships with banks and credit rating agencies to ensure
access to financing and maintain a strong credit rating.

• Corporate finance: The treasury team assists with medium and long-term
financing, issues capital market instruments, and uses group financing, credit,
leasing, and shareholder loans to manage the company's finances.

9. Share price

Share Price is the present value of the future cashflows discounted at cost of equity.

Implications to share price due to company's activities:

• Strong financial performance: High revenue growth or increased profitability can

lead to a rise in share price.

• Merger or acquisition: The acquiring company's share price typically decreases

while the target company's share price increases.

• Product launches or new investments: A successful product launch can

increase investor confidence, leading to an increase in share price.

• Legal or regulatory issues: Product recalls or lawsuits can negatively impact a

company's share price.

• Dividend announcements: An increase in dividend payments or a new dividend

policy can attract investors seeking income, leading to an increase in share price.

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Implications to the company due to the decrease of share price:

• Lower market valuation: Falling share prices can decrease the company's overall
market valuation.

• Difficulty in raising capital: Declining share prices can make it more difficult and
expensive for the company to raise capital (Ke= Dividend / Share Price).

• Employee morale: Falling share prices can negatively impact employee morale
and create uncertainty about job security.

• M&A activities: A low share price may make the company a target for hostile
takeover attempts.

• Perception and reputation: Declining share prices can negatively impact the
public perception of the company and its reputation.

• Risk of Hostile Takeover: Declining share price reduces the company valuation
making it easier for the bidders to takeover.

Reasons for share price movements

• Company earnings: Changes in a company's earnings, whether positive or

negative, can cause its share price to move.
• News and events: News or events that affect the company or the industry it
operates in, such as mergers, acquisitions, or regulatory changes, can influence
its share price.
• Economic indicators: Economic indicators such as inflation, interest rates, and
unemployment can have an impact on the share prices of companies in certain
sectors.
• Investor sentiment: Investor sentiment and market psychology can play a role in
share price movements, with positive or negative sentiment driving buying or
selling activity.
• Political factors: Changes in government policy or geopolitical events can affect
investor sentiment and cause share prices to move.

Efficient Market Hypothesis

Share Price should reflect all available information of a company.

1. Weak form: Share price should reflect all past trends in Share Price.

2. Semi-Strong form: Share price should reflect all available information about the
company.

3. Strong form: Share Price should reflect al information including information which
are not publicized.

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10. Share price volatility

Share price volatility refers to the degree of fluctuation in the price of a share over a
period of time. It is affected by various factors such as market sentiment, company
performance, economic conditions, and investor behavior. High volatility can indicate
higher risk, while low volatility can suggest stability but also lower returns.

The Beta coefficient:

The Beta coefficient measures the level of price volatility of a particular share or group
of shares in comparison to the overall market movement.

• β = 1 : share moves in the same proportion as the market

• β > 1 : signifies higher risk as the share price fluctuates more than the market
• β < 1 : lower risk as the share price moves less than proportionately compared to
the market
• β < 0 : share price moves in the opposite direction to the overall market movement

Geared Beta:
Also known as Equity Beta, it reflects the level of share price volatility in the market
and indicates the risk involved in purchasing shares of the company.

Ungeared Beta:
Also called Asset Beta, is a measure of share price volatility with the effect of capital
leverage eliminated. It represents the risk associated with the business model of the
company and shows the potential risk if the capital structure is altered.

*Systematic risk can’t be reduced with diversification, by unsystematic risk can

be reduced with diversification.

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Chapter 2
Recommend dividend policy

1. Methods of dividend payment

• Cash dividend: Payment made to shareholders in the form of cash on a specified

date.
• Scrip dividend: Payment made in the form of stock, allowing the firm to utilize
existing cash reserves. Shareholders may sell the bonus share to receive money
as a capital gain, but it would reduce their proportionate ownership of the firm.
• Property dividend: Firm distributes assets to shareholders at their fair market
value, enabling the firm to record gains or losses as profit or loss in its income
statement.
• Liquidating dividend: Return of capital to shareholders, usually during
downsizing or business closure. This dividend may have special tax benefits for
the shareholder.

2. Dividend policies

i. Stable Dividend Policy

Advantages Disadvantages
Provides shareholders with a consistent Limits the company's ability to invest in
income stream, which can increase growth opportunities or respond to
investor confidence and loyalty unexpected changes in the market
Signals the company's financial stability Can create pressure on management to
and long-term commitment to shareholders maintain the dividend even during periods
of low earnings or cash flow
Reduces uncertainty for shareholders and May result in higher tax liabilities for
investors, which can improve the shareholders compared to capital gains
company's stock price
Can attract income-oriented investors who Can reduce flexibility in managing the
prioritize reliable dividends company's financial resources

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ii. Constant Payout Ratio

Advantages Disadvantages
Provides a stable income stream for Can result in widely varying dividend
shareholders, which can improve investor payments from year to year, which can
loyalty create uncertainty for shareholders
Helps align dividend payments with May not be suitable for companies in
changes in earnings over time volatile or cyclical industries
Allows the company to maintain a Can limit the company's ability to invest in
consistent dividend policy even during growth opportunities
periods of fluctuating earnings
Signals the company's commitment to May create pressure on management to
shareholders by returning a portion of maintain the payout ratio even when
profits to them earnings decline

iii. Residual Dividend Policy

Advantages Disadvantages
Ensures that the company invests in Can lead to inconsistent dividend payments
profitable opportunities first, which can from year to year, which can create
improve long-term growth prospects uncertainty for shareholders
Allows the company to maintain flexibility in May not be suitable for companies with
managing its financial resources highly cyclical or unpredictable earnings
Can lead to more stable dividends over Can create pressure on management to
time as earnings increase pay higher dividends, even when profitable
investment opportunities are scarce
Signals the company's commitment to Can be more difficult to communicate to
long-term growth and financial discipline shareholders and investors than other
dividend policies

iv. Zero Dividend Policy

Advantages Disadvantages
Allows the company to retain earnings for Can disappoint income-oriented investors
future investment and growth opportunities who prioritize regular dividend payments
Signals the company's commitment to Can reduce investor confidence and loyalty
long-term growth and financial discipline in the short term
Can improve the company's financial May signal a lack of confidence in the
flexibility and ability to respond to company's ability to generate future profits
unexpected changes in the market
Can reduce the company's tax liabilities Can create pressure on management to
compared to paying out dividends invest earnings in less productive or risky
projects

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3. Share Buy-back

Share buy-back is a form of returning capital to its shareholders.

Implications of share buy-back on the company:

• Boost to earnings per share

• Increase in share price, hence shareholder wealth
• Return of excess cash to shareholders.
• Reduction in equity
• Can be expensive and funds used may be better used for other purposes

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Chapter 3
Recommend and apply business valuation models

1. Business Valuation methods:

i) Asset-based Valuation:

Asset-based valuation is a method used to determine the value of a company based

on its assets, including tangible assets such as property, plant, and equipment, as well
as intangible assets like patents and trademarks. It is often used in scenarios such as
liquidation or bankruptcy, where the value of the assets is critical. However, asset-
based valuation can result in the lowest valuation compared to other methods. One of
the disadvantages of this method is that it does not consider the future earnings
potential of the assets, which may not reflect the actual value of the company. Asset-
based valuation is typically suitable for companies with a high asset base, but it may
be less relevant for service-oriented businesses, where intangible assets play a more
significant role.

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Advantage and Disadvantages of Asset-based valuation method

Advantages Disadvantages
Provides a clear picture of a company's Does not account for future growth or
assets and liabilities earnings potential
Useful for companies with a lot of tangible Can undervalue intangible assets such as
assets, such as real estate or brand recognition, intellectual property, or
manufacturing companies human capital
Provides a conservative estimate of a Can be time-consuming and expensive to
company's value, as it focuses on tangible conduct a thorough asset appraisal
assets
Easier to understand and calculate than Can be less relevant for service-based
other valuation methods companies or companies with few tangible
assets
Helpful in bankruptcy or liquidation Does not take into account market trends,
scenarios, as it provides a minimum value competition, or other external factors
for a company's assets
A useful starting point for valuation, to be Can undervalue or overvalue assets based
used in conjunction with other methods on factors such as depreciation, market
conditions, or replacement costs

ii) Market Multiple Valuation

Market multiple valuation is a method used to determine the value of a company by

comparing it to similar companies in the same industry. It involves calculating multiples
such as price-to-earnings or price-to-sales ratios and applying them to the target
company's financial metrics to determine its value.

Advantages Disadvantages
Uses market data and comparable Relies heavily on the availability and
companies to determine the valuation, accuracy of market data, which may not
making it more relevant to current market always be reliable or relevant
conditions
Relatively easy to understand and May not reflect the unique qualities or
calculate compared to other valuation competitive advantages of a particular
methods company
Considers multiple financial metrics and Can be affected by market fluctuations and
ratios, providing a more complete picture of other external factors beyond the
a company's value company's control
Can be useful for companies with stable May not be appropriate for companies with
earnings and growth prospects unusual or non-comparable business
models
Can be applied to companies in different Can be sensitive to the choice of
industries and sectors, making it versatile comparable companies and the metrics
used for comparison

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Types of market multiple methods:

1. Price-to-Earnings Ratio (P/E Ratio): This method compares a company's stock

price to its earnings per share (EPS). It's often used to compare companies within
the same industry.
2. Price-to-Sales Ratio (P/S Ratio): This method compares a company's stock price
to its revenue per share. It's often used for companies that have negative earnings
or when earnings are not a reliable indicator of the company's value.
3. Price-to-Book Ratio (P/B Ratio): This method compares a company's stock price
to its book value per share. It's often used for companies with a lot of tangible
assets, such as real estate or manufacturing companies.
4. Enterprise Value-to-EBITDA Ratio (EV/EBITDA Ratio): This method compares
a company's enterprise value (which includes debt and equity) to its earnings
before interest, taxes, depreciation, and amortization (EBITDA). It's often used for
companies with a lot of debt or when comparing companies with different capital
structures.
5. Revenue Multiple: This method provides an extreme high valuation and hence it
acts as a ceiling for valuation.

These methods can be combined and applied in various ways depending on the
company and industry being analyzed. It's important to note that market multiple
methods are just one of several valuation methods available, and their suitability
depends on the specific circumstances and goals of the valuation.

iii) Dividend-based Valuation

Dividend-based valuation is a method of valuing a company based on the dividends it

pays to its shareholders. This approach uses the present value of expected future
dividends to determine the current value of the company. It is a straightforward and
tangible method of valuation, but may not be suitable for all companies, especially
those with high growth potential or that do not pay dividends.

Advantages Disadvantages
Uses actual cash flows (dividend May not be relevant for companies that do
payments) to determine the value of a not pay dividends
company
Provides a clear and tangible return for May not accurately reflect the future growth
investors in the form of dividends prospects of a company
Can be useful for companies with stable May not be suitable for companies with
earnings and a long history of paying high growth potential that reinvest earnings
dividends
Provides a simple and straightforward Can be influenced by external factors such
method for valuation as changes in interest rates or investor
sentiment
Can be applied to different industries and Assumes a constant dividend growth rate,
sectors which may not be realistic for all companies

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iv) Discounted cashflow Valuation

From a theoretical perspective, the best valuation method for a company is often
considered to be the discounted cash flow (DCF) model. This model calculates the
present value of a company's expected future cash flows, which are then discounted
to their present value using the appropriate discount rate. In the DCF model, the firm
value is calculated by discounting the free cash flow to the firm at the weighted average
cost of capital (WACC), while the equity value is calculated by discounting the free
cash flow to equity at the cost of equity. This method considers the net present value
(NPV) of the company, taking into account the time value of money and providing a
more accurate valuation of the company's future earnings potential.

Advantages Disadvantages
Considers the time value of money and Requires accurate forecasting of future
future cash flows cash flows, which can be difficult and
uncertain
Provides a comprehensive and holistic Relies heavily on assumptions, which can
valuation approach introduce significant error into the valuation
Takes into account a company's specific Requires detailed knowledge of a
risks and cost of capital company's financial statements and market
conditions
Can be customized for a variety of Small changes in assumptions can lead to
scenarios and goals significant changes in the valuation
Can be used for companies with different Valuation can be highly sensitive to the
capital structures and growth prospects discount rate used
Can provide a basis for decision-making Can be time-consuming and resource-
and strategy planning intensive to perform

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1. Startup Valuation methods:

i) Cost to duplicate method:

The cost to duplicate valuation method estimates the value of a startup by calculating
the cost to recreate the startup from scratch, including expenses such as research and
development, equipment, and hiring personnel. While this method can provide a
conservative estimate, it may not account for intangible assets or the potential for
growth and future earnings.

Advantages Disadvantages
Objective and easy to calculate Ignores intangible assets such as
intellectual property
Provides a conservative estimate of value Assumes that the cost to recreate is equal
to the value of the startup
Useful for startups with physical assets May not reflect the potential for growth and
future earnings
Can be helpful for insurance or tax Ignores the value of the startup's brand or
purposes reputation

ii) Valuation by development stage method:

The valuation by development stage method is a way to value startups based on the
company's stage of development, such as seed, early, or growth stage. This method
considers factors such as the company's revenue, market size, and competition, as
well as the level of risk and potential for future growth, to determine a fair valuation for
the startup.

Advantages Disadvantages
Tailored to startups Subjective
Reflects growth potential Limited comparability
Easy to understand Lack of precision
Considers qualitative factors Ignores external factors such as market
trends or regulation

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Activity D:
Evaluate and mitigate risk

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Chapter 1
Evaluate risks and recommend responses and can
maintain the corporate risk register

1. Risk Identification

Background

Risk Management

Responsibility of Risk Management can't be passed only to risk manager, but its
responsibility of all. Risk Management is part of overall business strategy.

• Risk Capacity: Amount of risk the company can bear

• Risk Attitude: Overall approach to risk
• Risk Appetite: Amount of risk an organization willing to accept in pursuit of value
(Depends upon company's reputation, nature of the product, background of BOD,
change in the market, etc.).

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Risk Register vs Statement of Principal Risks

Risk Register Statement of Principal Risks

Purpose To record and track risks To communicate top risks
Contents Detailed information on risks High-level summary of top risk
Scope Covers all risks in the project Focuses on the most significant
Frequency of Continuously updated Annual or periodic
update
Audience Project team and Board of directors and investors
stakeholders
Level of detail Detailed and specific Broad and general
Focus Mitigation and management Identification and
communication

Risk Classification

TARA Framework

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Political Risks

Forms of Political Risks:

• Confiscation of Assets
• Imposing Super Tax
• Profit repatriations
• Insist on a minimum local % of ownership
• Invalidate patents
• Restrict local borrowings
• Restrictions on dividends
• Price fixing

Methods to assess political risks:

• Business magazines and publications (Ex: Harvard Business Review, Wall Street
Journal)
• Refer a bank
• Evaluate the current government (ex: Historical Stability)

Possible controls to reduce political risk:

• Joint Ventures with a local party (Give access to local distribution chains, local
contracts, knowledge on local rules and regulations)- *Most efficient way.
• Pre-agreements with government (Eventual local ownership, Employment
opportunities, Use local or government borrowings / Funding).
• If local borrowing is used, government is less likely to act against the company.
• Negotiate with Government.
• Should not favor any government or political party.
• Should not engage too much with people who can influence the government as it
can create a bad perception about the company.

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2. Scenario planning

Scenario planning is making assumptions on what the future is going to be and how
your business environment will change overtime in light of that future. More precisely,
Scenario planning is identifying a specific set of uncertainties, different "realities" of
what might happen in the future of your business.

Ex:) Farmers use scenarios to predict whether the harvest will be good or bad,
depending on the weather. It helps them forecast their sales but also their future
investments.

*In the exam, you may get to develop certain scenarios based on the reference
materials and unseen by identifying the factors which could affect the future of
the business. Ex:) Interest rate changes, government changes (political risk),
etc.

3. Stress testing

Stress testing is a computer simulation technique used to test the resilience of

institutions and investment portfolios against possible future financial situations.
Such testing is customarily used by the financial industry to help gauge investment
risk and the adequacy of assets and help evaluate internal processes and controls.

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4. Risk Mitigation

Risk cannot be eliminated, can be mitigated. Risk mitigation methods gives only a
reasonable assurance, not an absolute guarantee to avoid risk, result in remaining a
residual risk. If residual risk is not reduced by recommendations the controls are not
worth implementing.

5. Enterprise Risk Management

The key underlying principles of ERM include:

• Consideration in the context of business strategy

• It is everyone's responsibility, with the tone set from the top
• A focused strategy, led by the board
• Active management of risk
• Creation of a risk aware culture
• A comprehensive and holistic approach to risk management
• Consideration of a broad range of risks (strategic, financial, operational and
compliance)
• Implementation through a risk management framework or system.

ERM framework was designed to help management and boards of directors

answer these relevant business questions:

1. What are all the risks to our business strategy and operations (coverage)?
2. How much risk are we willing to take (risk appetite)?
3. How do we govern risk taking (culture, governance, and policies)?
4. How do we capture the information we need to manage these risks (risk data and
infrastructure?
5. How do we control the risks (control environment)?
6. How do we know the size of the various risks (measurement and evaluation)?
7. What are we doing about these risks (response)?
8. What possible scenarios could hurt us (stress testing)?
9. How are various risks interrelated (stress testing)?

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6. Reputational Risk

Sources of reputational risk:

• Business operations • Labor disputes

• Corporate governance • Competitive actions
• Compliance and regulatory issues • Media coverage
• Cybersecurity • Economic downturns or market
• Social media volatility
• Financial performance • Mergers and acquisitions
• Corporate social responsibility • Brand perception
• Product recalls • Political and social issues
• Litigation and legal disputes • Ethical concerns
• Executive behavior and misconduct • Supply chain disruptions
• Environmental incidents

Ways to manage the company's reputational risk:

• Make reputational risk part of the company's strategy and planning.

• Control processes.
• Understand all actions that can affect public perception.
• Understand and manage stakeholder expectations.
• Focus on a positive image and communication.
• Create response and contingency plans.

*These are general ways to manage reputational risk. Can be more specific
depending upon the unseen data.

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Chapter 2
Identify ethical dilemmas and recommend suitable
responses
1. CIMA Code of Ethics:

1. Integrity- Being straight forward and honest in all business dealings

2. Objectivity- Being unbiased over business decisions

3. Professional Competence & Due Care- Maintaining required level of expertise

4. Confidentiality- Information obtained in professional capacity should not

disclosed to get an undue advantage

5. Professional Behavior- Adhering to professional standards

2. Ethical Dilemma

Reponses to address ethical dilemmas:

• Transparency and disclosure: Be transparent about the situation and disclose
all relevant information to stakeholders and regulators. This can help build trust
and establish accountability.

• Compensating actions: Consider compensating those who have been harmed

by the ethical dilemma, such as offering refunds or compensation packages. This
can help mitigate the harm caused and show a commitment to addressing the
situation.

• Express empathy and awareness of the harm: Show empathy and

understanding towards those who have been affected by the ethical dilemma.
Acknowledge the harm caused and take responsibility for the situation.

• Remedial action: Take remedial action to address the situation and prevent
similar issues from occurring in the future. This can involve implementing new
policies, procedures, or training programs.

• Communicate with victims and regulators: Keep victims and regulators

informed of the steps being taken to address the situation and prevent future harm.
Open and honest communication can help rebuild trust and demonstrate a
commitment to ethical behavior.

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Chapter 3
Evaluate and mitigate cyber risk
1. Cyber Risk

Background

Cyber Tools & Techniques

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Cyber Risk Reporting

Cyber Risk Principles

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2. Cyber Risk Controls

Control Type Controls

Personal Controls • Recruitment, training and supervision
• Training is required on how to identify social
engineering attacks
• Induction on IT when employees are recruited
• Separation of duties
• Policies and policy management – Remote
working, acceptable use of internet, protection of
personal information.
Logical Access • Username and Password
Controls • 2 factor authentication
• Authorization levels in the system
Facility Controls • Security guards
• Locked doors
• Using safes
Protection • CCTV
• Doors getting automatically locked when a
security alarm rings
• Shredding computer disks and papers when they
are not wanted
• IT facilities should be located in a place which is
not disturbed by Flood, Fire,
• Smoke, Food, Drinks, Power failure, Environment
• Raised Floors
• Locating the Server on 1st floor or above
• Laptops being locked when not working
Software Controls • Software updates
• Configurations - Removing unnecessary
functionalities from system
Network Controls • Security Products - Virus Guards
• Encryption
• Firewalls
• VPN access when remote working
Application Controls • Controls to ensure data are correctly processed
• Input controls - Checking and authorizing source
documents manually, use of
• batch controls
• Processing controls - Controls while data is being
processes in an application
• Output controls - Manually checking output

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 • Event monitoring - Log of activities in a system,
so unusual activities can be detected
• Intrusion detection and prevention system
Detection - IDS - Monitor for unusual activity in a
network
- IPS - Similar to firewall
• Threat monitoring
Proactive Controls • Business Continuity (Allow business to operate
Response minimal downtime while recovery is being
managed)
Reactive Controls • Acting to restore data, applications and hardware

Special Case 1: Social Engineering Attacks

Controls
• Training employees
• Restrict access to company directories which has employee details
• Discourage staff to reveal their workplace in social media

Possible Audit tests:

• Checking if users are given a training
• Checking social media posts contain company's name
• Penetration testing

Special Case 2: Data Privacy

Controls
• Do not use personal devices for company work
• Username and password protected devices
• IT policies on using data, hardware and software
• Training on best practices
• Personal responsibility for own devices

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Chapter 4
Recommend internal controls

1. Internal Controls

Background

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Internal Control Classification

Limitations of Internal Controls

• Management, not auditors, have responsibility for internal controls. Although the
board is responsible for reviewing the adequacy of those controls.
• A good control system cannot turn a poor manager to a good one.
• Internal controls provide a reasonable assurance, not an absolute guarantee
• There is always possibility of error in any accounting system. This may include the
deliberate circumvention of controls by a determined person; the overriding of
controls by management; the internal controls may not have kept pace with
changing business conditions.
• Resource controls in maintaining a system of internal controls

COSO model for Internal Controls (Can be used to assess an IC system)

• Control environment (Culture and organization structure)
• Risk assessment (Controllable? Internal or External)
• Control activities (Authorizing, Policies and procedures)
• Monitoring (Internal Audit)
• Information and communication.

Classification of Controls:
• Preventive (Segregation of duties, Physical access controls)
• Detective (Audits. Bank reconciliation, inventory counts)
• Directive (Job description, training, policies)
• Corrective (Credit notes issue, reprocess Internal Controls)

*Role of Internal Auditor: Monitor and review effectiveness off the control. Primary
responsibility for providing assurance on risk and controls lies with management.

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Chapter 5
Sustainability & Integrated reporting

1. Sustainability reporting

Businesses have since been reporting their sustainability efforts through Corporate
Social Responsibility reports and ESG accounting methods that cover a wide range of
areas beyond just the environment, including labor treatment, social and health
impacts of products, and business accountability. To systematize these accounts,
frameworks such as:
• International Integrated Reporting Initiative Council (IIRIC)
• Global Reporting Initiative (GRI) and
• Sustainability Accounting Standards Board (SSAB) have been developed.

3Ps

The 3Ps refer to the three main aspects of sustainability:

1. People: Represents the social and ethical impacts of a business, including the
benefits to society as a whole
2. Planet: Pertains to the environmental impacts of business activities and their
efforts to mitigate negative impacts and promote sustainability
3. Profit: Refers to the economic value generated by an organization, emphasizing
the importance of financial sustainability and growth.

The 3P concept is often used as a framework for businesses to ensure they consider
a broad range of impacts in their decision-making and reporting.

2. Integrated Reporting

Objectives for integrated reporting:

• Improve the quality of information available to providers of financial capital

• Provide more cohesive and efficient approach to corporate reporting
• Enhance the accountability and stewardship for the broad base of capitals
• Support integrated thinking and decision making.

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6 capitals of IR:

1. Financial capital: Obtained through financing via debt, equity, grants, etc.

2. Manufactured capital: Manufactured physical objects that are utilized in the

production of goods or services. Ex:) Buildings, Machinery, water utilities, etc.

3. Intellectual capital: Intellectual property such as patents, copyrights,

software, rights, organization procedures and protocols.

4. Human capital: Competencies, capabilities and experience, motivation of the

employees. Enhancing of human capital through education and trainings is
critical to an organizations' future.

5. Social and Relationship capital: Institutions and the relationships within and
between communities, groups of stakeholders and other networks, and the
ability to share information to enhance individual and collective well-being.
Ex:) Intangibles associated with brands, shared norms, relationships with
stakeholders, etc.

6. Natural capital: All environmental resources and processes that support the
organization. Ex:) Biodiversity, land, forests, climate, carbon emissions, etc.

Key components of integrated report:

• Business model
• Risks and opportunities and how they are dealing with them and how they affect
the company's ability to create value
• Governance structure and how this supports its ability to create value
• Strategy and resource allocation
• Basis of preparation and presentation
• Performance and achievement of strategic objectives for the period and outcomes

Benefits and limitation of Integrated reporting

Benefits Limitations
Improved transparency and improved Reluctance to disclose information for
reputation fear of losing competitive advantages
Integrated thinking may lead to Providing too much information for the
improved efficiencies within users and not easy to digest
organization
Increases the understanding with new Potential for bias as reports are not
information which are not being required to be audited
disclosed before
Increase the level of forward-looking

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 Benefits and limitations of the IR Framework

Benefits Limitations
Can use as a guidance to prepare the Difficult to compare different entities
report
Being principle based enable entities of Being principle-based increases
any industry to use subjectivity
Increases user familiarity with the Requires experienced staff to apply the
terminology and the format of IR concepts properly

Factors to report under IR Capitals:

• Alignment with our company's vision

• Impact on company's performance
• Risk & Opportunities for the company
• Impact on company's future outlook

3. Global Reporting Initiatives (GRI):

GRI standards are used by companies, governments, and organizations worldwide to

report on their economic, environmental, and social performance. The GRI
Standards provide a framework for organizations to measure and report on their
sustainability efforts in a systematic and transparent manner, enabling stakeholders
to understand their impacts and contributions towards sustainable development. The
GRI Standards are widely recognized and used as a benchmark for sustainability
reporting, providing a consistent language for stakeholders to compare and assess
the performance of different organizations. The GRI Standards are also regularly
updated to reflect evolving stakeholder needs and emerging sustainability issues.

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Activity E:
Recommend and maintain a
sound control environment

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Chapter 1
Apply internal audit resources

1. Internal Audit

Background

Factors affecting the need for an Internal Audit

• Number of employees in the company

• Cost-benefit consideration
• Effect on the key risks
• Reporting Process (Frequency of reporting, which aspects are reported, etc.)

Audit Risk for financials:

• Inherent Risk (From the nature of the business and its environment)
• Control Risk (Weak controls related to financial statements)
• Detection Risk (Auditor is weak to detect)

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 Internal Audit Standards

Audit Plan

Approach to deploy Internal Audit Resources:

• Verify that the auditor possesses the necessary knowledge and expertise in the area
to be audited.
• Investigate and document the current procedures and system.
• Evaluate the effectiveness of the current systems in place.
• Evaluate how the current systems are functioning in practice.
• Report the findings to management.

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Advantages and Disadvantages of Outsourcing Internal Audit function:

Advantages Disadvantages
Access to specialized expertise: Loss of control:
Outsourcing can provide access to a wider Outsourcing can result in a loss of control
range of specialized skills and expertise over the internal audit function, as the
that may not be available in-house. This organization may have less influence over
can help to improve the quality of the audit the audit process and outcomes.
function and identify areas for improvement.
Cost savings: Risk of confidentiality breaches:
Outsourcing can often be more cost- Outsourcing can increase the risk of
effective than maintaining an in-house audit confidential information being
function, as it can reduce the need for compromised, as external auditors may
expensive staffing, training, and equipment. have access to sensitive data and
information.
Flexibility: Difficulty in managing relationships:
Outsourcing can provide greater flexibility in Outsourcing can create challenges in
the audit process, allowing the organization managing the relationship with the external
to scale up or down as needed and to auditors, particularly in ensuring that they
respond quickly to changing circumstances. are meeting the organization's needs and
expectations.
Improved objectivity: Communication and coordination
External auditors can provide a more challenges:
objective and independent perspective on Outsourcing can create challenges in
the audit function, which can help to identify communication and coordination between
potential conflicts of interest or bias. the external auditors and the organization,
particularly if there are language or cultural
barriers.
Access to advanced technology: Risk of reduced institutional knowledge:
Outsourcing can provide access to Outsourcing can result in a loss of
advanced audit technology and tools, which institutional knowledge and expertise, as
can help to improve the efficiency and external auditors may not have the same
effectiveness of the audit process. level of understanding of the organization's
operations and culture.

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Chapter 2
Recommend appropriate controls and evaluate the
implications of compliance failures
1. Controls to prevent compliance failures
• Conduct a risk assessment: Identify the areas where compliance failures are
most likely to occur. A risk assessment can help identify potential areas of risk and
prioritize control implementation.
• Develop policies and procedures: Policies and procedures should be clearly
written, communicated to all relevant stakeholders, and regularly reviewed and
updated as necessary.
• Establish internal controls: Internal controls are mechanisms that ensure
compliance with policies and procedures. Examples of internal controls include
segregation of duties, approval processes, and access controls.
• Train employees: Employees are often the first line of defense against compliance
failures. Therefore, it is important to provide training to all employees on the
policies and procedures that are in place to prevent compliance failures.
• Monitor and audit: Regular monitoring and auditing of internal controls can help
identify potential compliance failures before they occur.

2. Implications of compliance failures

• Financial penalties: Failure to comply with regulations may result in hefty fines
assessed by regulatory organizations or legal action.
• Reputational Damage: Failures in compliance can harm an organization's
reputation and result in the loss of clients, partners, or investors.
• Legal repercussions: Failure to comply with regulations may give rise to legal
repercussions, such as litigation, regulatory enforcement activities, or criminal
accusations.
• Business Disruption: Failure to comply with regulations can disrupt corporate
operations, resulting in lost sales and lower productivity.
• Loss of competitive advantage: By harming an organization's reputation or
forcing it to lag behind rivals in completing regulatory requirements, compliance
mistakes can reduce an organization's competitive advantage.

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Chapter 3
Recommend responses to the threats arising from
poor governance
1. Corporate Governance

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2. The Board Committees

Summary on Committees

Nominations Audit Committee Remuneration

Committee Committee
Composition Majority Independent NEDs NEDs
Independent NEDs

Special Conditions Chairman can be a Chairman should Chairman can be a

member, should not be a member, member, should not
not chair the should meet at chair the committee,
committee least 3 times a before being
year (One should chairman of REMCO
be with external member should be in
auditors) the committee for 12
months at least
Additional 1 member with
Requirements recent financial
experience
Minimum number of 3 3 3
members
Minimum number of 2 2 2
members for small
companies

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i) Nominations Committee

Responsibilities of Nominations Committee:

• Review regularly structure, size and composition of the board and make
recommendations
• Consider the balance between EDs and NEDs
• Ensure appropriate management of diversity of the board composition
• Provide an appropriate balance of power to reduce domination in executive
selection by CEO/ Chairman
• Regularly evaluate the balance of skills, knowledge and experience of the board
• Give full consideration to succession planning for directors
• Prepare a description of the role and capabilities required for any particular board
appointment including that of chairman
• Identify and nominate for the approval by the board candidates to fill board
vacancies as and when they rise
• Make recommendations to the board concerning the standing for reappointment of
directors
• Be seen to operate independently for the benefit of shareholders

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ii) Audit Committee

Audit committee and Financial Reporting:

• Significant accounting policies that have been used, and whether these are
appropriate
• Any significant estimates or judgments that have been made and whether these
are reasonable
• The methods used to account for any significant or unusual transactions, where
alternative accounting treatments are possible
• The clarity and completeness of the disclosures in financial statements

Audit committee and Internal Controls:

• Review internal financial controls

• Review all internal controls and risk management systems (unless task is taken by
a separate risk committee or full board)
• Give approval to the statements in the annual report related to internal control and
risk management
• Receive reports from management about the effectiveness of the control system it
operates
• Receive reports on the conclusions of any tests carried out on the controls by
internal or external auditors

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Audit committee and Internal Audit:

• Approve appointment and termination of head of internal audit

• Ensure that the internal auditor has direct access to the board chairman and is
accountable to the audit committee
• Review and assess the annual internal audit work plan
• Receive a report periodically about the work of the internal auditor
• Review and monitor the response of management to the findings of the internal
auditor
• Monitor and assess the role and effectiveness of the internal audit function within
the company’s overall risk management system

Audit committee and External Audit:

• Recommendation to the board on appointment, re appointment or removal of

external auditors
• Oversee the selection process when new auditors are being considered
• Approve term of engagement with external auditors and their remuneration
• Have annual procedures for ensuring the independence and objectivity of external
auditors
• Review the scope and the audit with the auditor
• Make sure appropriate plans are in place for audit at the start of each annual audit
• Post completion audit review

iii) Remuneration Committee

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Wishing you all the best on your examination!

~ Akila Gunarathna

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