STRATEGIC BUSINESS MANAGEMENT

Suggested Answers

Answer to the Question # 1(a):

i) Discuss how corporates could create strategic value to its stakeholders.
Answer:
Strategic Value Creation What constitutes “strategic value” will depend on stakeholder perception. Various groups of
stakeholders in a company could have different goals and values.
For instance:
Shareholders-wealth maximization
Suppliers- aim to be paid full amount by the date agreed, to continue the long-term trading relationship
Long-term lenders- To receive payment of interest and capital on the due dates
Employees- Maximise rewards paid to them
Government- Sustained economic growth, high employment
Management- Maximising their own rewards

For a generic strategic framework, it is important to conceptualize a generic framework to achieve a target so the value
may be created for the firm as a whole, in strict strategic sense. Key value drivers could include excellence in supply
chain, building brand equity, being an employer of choice, investing in people development etc.

The key to reach this objective and achieve a sustainable competitive advantage is the alignment of business strategy,
financial strategy, and technology strategy, marketing strategy and investor strategies.

ii) Discuss conflicting situations that could arise when corporates implement “value creation” in their organisations, and how
such issues could be mitigated.
Answer:
Agency theory and the conflicts of interest between principal and agency is a well-known topic especially in the fields of
economics and finance. As per agency theory, conflicting situations arise when managers act as agents for the shareholders
using delegated powers to manage the affairs of the company. For businesses to operate in a sustainable manner, it is
important to create value for all stakeholders. It is equally important to align the interests of all stakeholders in the same
direction.

If the amount of economic value generated in the company increases, some will wonder why they should not have an
equitable share and, if not why they shouldn’t appropriate their share from others. Conflicting situations arise, when
managers’ act as agents for the shareholders, e.g. manages may require higher perks at the expense of the company. In
order to align the management interests to shareholder interests corporates reward management based on the growth of
share price, awarding share option schemes etc. So, the criticisms leveled against the stakeholder model seems justified.

iii) Evaluate whether NTC has created economic value to its shareholders during the financial year 2018/19.
Answer:
Bulk Value added Total-Tk
Sales 4,000,000 kg x $2.95x 1,000,000 1,344,610,000
86 kg=$2.95x1.3x86= Tk.
Tk 1,014,800,000 329,810,000
Gross profit 152,220,000 (15%) 82,452,500 (25%) 234,672,500
Marketing expenses 3% 40,338,300
Adm, expenses 70,000,000
Depreciation 71,666,666
$5,000,000x86/6
Net operating profit 52,667,534
Less; tax 10% 5,266,753
NOPAT 47,400,781
Stated capital 1,000,000,000 0.58
Debt 725,000,000 0.42
1,725,000,000
Cost of equity=14.5%
Cost of debt = 0.05 (1-t)
=4.5%
WACC= 0.145*0.58+0.045*0.42
= 0.0841+0.0189
=10.3%
Approximately 10%
EVA= NOPAT-(WACC*invested capital)

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 = 47,400,781-(10% * 1,725,000,000)
(125,099,219)

Economic value has been destroyed (Taka 125 mn)

Answer to the Question # 1(b):

i) Advise Aadi Dhaka Limited how it can minimise the impact of Covid - 19 on its business.

Answer:
The ongoing pandemic and lockdown have affected all sectors of the economy, including the restaurant industry.
Restaurateurs are finding themselves on the wrong end of a worldwide lockdown. The culinary industry encompasses a
wider array of stakeholders and economic issues than meets the eye, and a majority of them are struggling through troubles
of an unforeseen scale at the moment.

A business continuity plan is essential to be as resilient as possible in this global health crisis.

It is important to make the restaurant feel like a safe spot to guests. Priority is obviously the safety of restaurant team and
the guests. But after ensuring a safe environment, the business need to get proactive — and creative — to stay afloat
during the current period of lower dine-in business.

Restaurants to minimize the revenue impact of the coronavirus, need to push for new revenue where possible.
Restaurant needs to take to accept dine-in guests, and therefore have to streamline operation and promotional initiatives
need to take to drive revenue.
A restaurant business needs to take three types of actions:
1. Preventative measures the restaurants can take to minimize the revenue hit of the current slowdown, and
2. proactive initiatives that can help drive incremental revenue now — while setting your restaurant up for an eventual
return to normalcy.
3. Accelerate on line business.

We know, the first step in combating coronavirus would be to make the restaurant as clean as possible. But only making
the restaurant clean safe may not be enough. Sending a message to customers that the restaurant is a haven from what’s
outside, may be necessary.

The following measures can help as well.

 Allow more flexibility for when guests can book.

 Allowing reservation of inventory across booking channels. This is a good time to leverage third-party booking
channels.
 Revisiting cancellation policies to accommodate the situation. If normally there is a charge a no-show fee, for
example, consider waiving it.
 Consider making changes to the floorplan or block some tables to allow social distancing. Some restaurants are
removing tables so they can put more space between each guest.

ii) Advise Aadi Dhaka how the application of “Porter’s Three Generic Strategic Model” could assist them in improving the
profitability of their restaurants (you are not required to recommend individual generic strategies for each of the restaurants of
Aadi Dhaka Limited).

Answer:
Porter’s logic behind his generic strategies model is that a firm should follow only one of the generic strategies in order
to achieve competitive advantage. According to Porter, if a firm tries to combine more than one of the strategies, it risks
becoming ‘stuck in the middle’ and losing its competitive advantage.

Applying these ideas could help the owners of Aadi Dhaka Limited to assess whether their restaurants are following a
coherent competitive strategy – either individually or as a group – or whether they are becoming ‘stuck in the middle’. If
they are becoming ‘stuck’ in this way, the lack of a clear strategy might be contributing to the decline in Aadi Dhaka
Limited’s profits.

Generic strategies
Porter suggests that firms should choose a potential strategy based on one of three generic strategies – cost leadership,
differentiation or focus.
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 Cost leadership
If Aadi Dhaka chooses to become a cost leader, it must ensure it has the lowest costs in the industry as a whole. By having
a lower cost base than its competitors, Aadi Dhaka could achieve a greater profit than them, even if its sales prices were
the same as theirs.

Although this aspect of Porter’s strategy focuses primarily on cost rather than price, it appears that Aadi Dhaka Limited’s
restaurants near the universities and shopping places, which mainly serve fast foods are pursuing this kind of strategy,
since these two restaurants claim to be “the cheapest in the town”. However, to maintain profitability, these two restaurants
must ensure they can continue to keep their cost base lower than any of its competitor’s cost bases.

Differentiation
If Aadi Dhaka chooses a strategy of differentiation, it must deliver a product or service that the industry as whole believes
to be unique. As a result of this uniqueness, Aadi Dhaka will be able charge its customers a premium price.

It appears that two Aadi Dhaka restaurants in Dhanmondi and Gulshan which offer expensive ‘fine dining’ are charging
a premium price in this way. However, to maintain their profitability these two restaurants must ensure they maintain their
distinguishing features – be they the quality of the ingredients, the variety of the menu, the service, or the ambience. These
features are what differentiates the restaurant from others in the industry and make it attractive to customers, even though
it is charging a premium price.

Focus
A focus strategy will involve segmenting the industry, such that Aadi Dhaka would then pursue a strategy of cost
leadership or differentiation within a single segment of the restaurant industry.

Only one restaurant of Aadi Dhaka seems to be following this type of strategy and tailoring its offering to specific market
niche: the restaurant at the golf course offering extremely expensive menu to the member of the golf course.

Stuck in the middle

Aadi Dhaka has six restaurants in total. We have identified five of them as following one or other of Porter’s generic
strategies, this means the other one restaurant located in the middle of Dhaka – Chittagong highway, offering average
price menu – is likely to be stuck in the middle.

Aadi Dhaka needs to look urgently at finding a way of establishing a competitive advantage toe this restaurant. This should
allow the restaurant to improve its profitability. This restaurant offering conventional menus at average price is easy to
compete and is vulnerable to competitors.

Strategy and Marketing

We do not know whether all the restaurants in the chain are branded unilaterally as “Aadi Dhaka” restaurants, or whether
they have retained their own names as well as their own styles and pieces. If Aadi Dhaka Limited is trying to run the
restaurants as a single group, under a single brand name, than the analysis of the restaurants’ current position indicates
that the group as a whole is at risk of being ‘stuck in the middle’ due to the diversity of its strategies.

In this respect, Porter’s generic strategies model suggests that Aadi Dhaka would be best advised to run the restaurants as
separate business units and develop marketing strategies which support each restaurant’s individual characteristics.

However, even if Aadi Dhaka chooses to do this, it still needs to consider whether the restaurants’ current strategies can
deliver a sustainable competitive advantage.

Given the overall economic context in which Aadi Dhaka is operating, Aadi Dhaka Limited’s might decide that Porter’s
focus strategies (either cost-focus, or differentiation-focus) offer them the most practical way of maintaining or improving
the profitability of their restaurants.

iii) Discuss major limitations of “Porter’s Three Generic Strategic Model”, if any.

Answer:
Limitations of “Porter’s Three Generic Strategies Model”.

In practice, it is rarely simple to draw hard and first distinctions between the generic strategies as there are conceptual
problems underlying them.

(i) Problems with cost leadership

 Internal Focus. Cost refers to internal measures, rather than the market demand. It can be used to gain market
share, but it is the market share that is important, not cost leadership as such. Economies of scale are effective
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 way to achieve low costs, but they depend on high volumes. In turn, high volumes may depend on low prices,
which, in turn, require low costs. There is a circular argument here.
 Only one firm. If cost leadership applies across the whole industry, only one firm will pursue this strategy
successfully. However, more than one firm might aspire to cost leadership, especially in dynamic markets where
new technologies are frequently introduced. Firms competing across the industry as a whole might have different
competences or advantages that confer cost leadership in different segments.
 Sustainability of competitive advantage. Even if a company manages to reduce costs below those of its
competitors in the short term, it is debatable whether this will enable it to achieve a sustainable competitive
advantage. Unless the company has an inherent cost advantage over its competitors, they respond to a company
becoming the cost leader by trying to reduce their own costs.
 Higher margins can be used for differentiation. Having low costs does not mean you have to charge lower
prices or compete on price. A cost leader can choose to ‘invest higher margins in R & D or marketing’. Being a
cost leader arguably gives producers more freedom to choose other competitive strategies.

There is often confusion about what cost leadership actually means. In particular, coast leadership is often assumed
to also mean ow price. However, ‘cost leadership’ and ‘low price’ are not necessarily the same thing.

(ii) Problems with differentiation

Porter assumes that a differentiated product will always be sold at a higher price.
 However, a differentiated product may be sold at the same price as competing products in order to increase
market share.
 Choice of competitor. Differentiation from whom? Who are the competitors? Do they serve other market
segments? Do they compete on the same basis?
 Source of differentiation. This includes all aspects of the firm’s offer, not only the product. For example,
restaurants try to distinguish themselves from their competitors through their ambience and the quality of their
service as well as by serving high quality of food.

Focus probably has fewer conceptual difficulties, as it ties in very neatly with ideas of market segmentation. In
practice, most companies pursue this strategy to some extent, by designing products/services to meet the needs of
particular target markets.

Stuck - in - the – middle is therefore what many companies actually pursue quite successfully. Any number of strategies
can be pursued, with different approaches to price and the perceived added value (i.e., the differentiation factor) in the
eyes of the customer.

In this way, “Porter’s Three Generic Strategies Model” no longer reflects the full range of competitive strategies and
organisation can choose from.

Answer to the Question # 2(a):

i) As a financial consultant to Sultan Ltd, advise on the maximum price that the company should be willing to pay for the
entire share capital of Sultana Ltd. showing clearly the basis of your advice.
Answer:
Sultan Ltd. Sultana Ltd
BDT000 BDT000

Total market value of equity 175,000 37,500

Value of Sultan Ltd. after the acquisition
Sales (37,500 + 20,000 + 1, 500) 59,000
Operating expenses (20,000 + 15,500 – 1,250) 34,250
Profit (dividends) 24,750
Taka
Present Value (PV) of future earnings (dividends)
= 24,750,000 = 0.10 247,500,000
Add cash flow from sale of machine 2,500,000
Total value of Sultan Ltd after merger 250,000,000
Therefore, the maximum price payable by the directors of Sultan Ltd is the increase in the value arising from the
merger i.e. Tk 250,000,000 – Tk175,000,000 = 75,000,000
Sultan Ltd is advised to pay maximum of BDT 75million for the acquisition.

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ii) Show how the entire benefit from the takeover will accrue to the present shareholders of Sultan Ltd. assuming that the
takeover price is agreed at half of the figure you advised, and that the purchase consideration will be settled by an exchange
of ordinary shares in Sultana Ltd.

Answer:
The takeover price agreed is ½ of BDT 75million i.e. BDT 37.5million. Let x represent the number of new shares to be
issued to Sultana Ltd.
Therefore, total number of shares in issue after takeover becomes 50,000,000 + x shares.
Total value of Sultan Ltd after acquisition = BDT 250m
For the entire benefit from the acquisition to accrue to the present shareholders of Sultan Ltd, value of Sultan Ltd.’s shares
issued to Sultana Ltd.’s shareholders must equal the agreed take-over price i.e. 250 = 37.5m
250,000,000 x = 37,500,000 (50,000,000 + x)
. = 50,000,000
+ 1,875,000,000 + 37.50x = 250x
x = 8,823,529 Shares
The market value per share after the acquisition or take-over
= 250,000,000/ 50,000,000 + 8,823,529
= 250,000,000 / 58,823,529 =BDT 4,25

Gain to shareholders of Sultan Ltd. (BDT4.25 – BDT3.50) x 50m = BDT 37,500,000. Thus, the entire benefit from the
take-over will accrue to the present shareholders of Sultan Ltd.

iii) Discuss briefly any other factors that the directors and shareholders of both companies might consider in assessing the
acceptability of the proposed takeover.

Answer:
The shareholders of Sultana Ltd. should negotiate a takeover price higher than the agreed BDT 37.5million, at a takeover
price of BDT 37.5m, the shareholders of Sultana Ltd will not get any benefit from the takeover. Therefore, they may not
agree to the takeover.

The directors of Sultana Ltd. might believe from the proposal that the increase in profits after the acquisition and the sale
of assets are indications that they are effectively utilising their assets hence the company may decide to put them (the
assets) to better usage rather than sell them.

The directors of Sultan Ltd. will have to reassess their estimates. How realistic is the increase in sales revenue of
BDT1,500,000 p.a. and a reduction in expenses of BDT 1,250,000.

Furthermore, will the reduction in expenses involve retrenchment of staff and what effect will this have on the morale of
the remaining staff? Also if staff are to be laid off, what about the redundancy payment?

What about the transaction costs of the acquisition? If the takeover is resisted by the directors of Sultana Ltd or other
interested buyers, then the cost of the acquisition could be quite high.

Further, since Sultan Ltd and Sultana Ltd. both manufacture and sell household items; the attitude of the government or
trade unions to forestall a monopoly situation may not have been considered.

iv) List the defense tactics that could be used by Sultana Ltd to frustrate the takeover bid of Sultan Ltd.
Answer:
If the director of Sultana Ltd. considered the takeover bid unfriendly, the following defense tactics are available:

i. Seek Government injunction i.e. restricting the predator company under antimonopoly or anti-trust law where this
is in existence.
ii. Embark on effective public promotion.
iii. Appeal to shareholders not to sell their shares by promising them better prospect and share appreciation
iv. White knight Defense: The target company may seek for a friendly company whose offer is more appealing for
the takeover bid.
v. ‘Crown Jewel’ Defense: This is a strategy that is employed by the management of the target company whereby a
third party is granted the right to buy the firm’s assets in order to discourage the predator firm from going ahead
with the bid. The plan is particularly effective when the target company offers for sale its crown jewel – the target
firm most valued asset.
vi. Litigation
vii. Asset Restructuring: The target firm purchases assets that effectively restructure its statement of financial position.
These assets may simply be ones that are unattractive to the bidder or may cause anti-trust problems if the merger
creates significant monopoly power.

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 viii. Green mail: This technique involves an agreement allowing the target company to repurchase its own shares back
from the acquiring company, usually at a premium to the market price. It is the termination of a hostile take-over
through a payoff to the acquirer.
ix. Share repurchase: Rather than repurchasing only the shares held by the acquiring company as a greenmail, a target
company might initiate a cash tender offer for its own outstanding shares.
x. Pacman Defense: This is called after the video game in which characters try to eat each other before they are eaten
themselves, that is, the firm under attack from a hostile bidder turns the table by bidding for the aggressor.
xi. White Squire Defense: This is similar to white knight defense in that the two parties, target firm and white squire,
seek to implement a strategy to preserve the target firm’s independence. This is done by placing shares in the
hands of a friendly firm or investor who is not interested in acquiring control of the target firm and will not sell
out to the predator

Answer to the Question # 2(b):

i) Calculate weighted average cost of capital of the firm;

Answer:
Determination of Weighted Average Cost of Capital
Source of Funds Cost (%) Weights Total (%)

Equity 16.00 0.60* 9.60

12% Debt 8.40 .040** 3.36
12.96 Say 13.00%
* (Taka 120 million/Taka 200 million); ** (Taka 80 million/Taka 200 million)

ii) Calculate the depreciation from year 1 to 8;

Answer:
Determination of Depreciation (Years 1 – 8) Taka million
Long-term assets at Additions during Total at the Depreciation
Year beginning of Year the Year Year – end @ 15%

1 170.00 5 175.00 26.25

2 148.75 8 156.75 23.51
3 133.24 20 153.24 22.99
4 130.25 25 155.25 23.29
5 131.96 35 166.96 25.04
6 141.92 25 166.92 25.04
7 141.88 15 156.88 23.53
8 133.35 10 143.35 21.50

iii) Calculate investment required (capital expenditure + current assets);

Answer:
Determination of Investment (Capital Expenditure + Current Assets (CA)) Required, years 1-8
In million Taka
Investment required
Year Capital CA Existing Additional
Expenditure (Sales X 0.2) Total investment in CA investment required

1 5 16 21 30* Nil
2 8 20 28 25 3
3 20 30 50 20 30
4 25 44 69 30 39
5 35 60 95 44 51
6 25 52 77 60 17
7 15 46 61 52 9
8 10 40 50 46 4

* Including marketable securities

** Balance of CA in year 1 : TK 30 million – Capital expenditure incurred in year 1, TK 5 million

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iv) Calculate the free cash flows from year 1 to 8 and total present value of the cash flows;
Answer:
Determination of Present Value for Explicit Period Projections (Years 1-8)
Year
Particulars 1 2 3 4 5 6 7 8
A Sales revenue 80 100 150 220 300 260 230 200
B Less: Expenses
Variable costs 32 40 60 88 120 104 92 80
Fixed cash operating costs 16 16 16 16 20 20 20 20
Advertisement 5 15 15 30 30 30 10 10
Depreciation 26.25 23.51 22.99 23.29 25.04 25.04 23.53 21.50
C EBIT (A – B) 0.75 5.49 36.01 62.71 104.96 80.96 84.47 68.50
D Less: Taxes (30%) 0.22 1.65 10.80 18.81 31.49 24.29 25.34 20.55
E NPOAT 0.53 3.84 25.21 43.90 73.47 56.67 59.13 47.95
F Non-operating income 0.50 - -- - - - - -
G Gross cash flow 27.28 27.35 48.20 67.19 98.51 81.71 82.66 69.45
( E + F + Depreciation)
H Less: Investment (in - 3 30 39 51 17 9 4
capital expenditure and
current assets) 27.28 24.35 18.20 28.19 47.51 64.71 73.66 65.45
I Free cash flow (G – H) 0.885 0.783 0.693 0.613 0.543 0.480 0.425 0.376
J PV Factor ((0.13)
24.14 19.07 12.61 17.28 25.80 31.06 31.31 24.61
K Total PV (I X J)
Total Present Value Taka 185.88 million
.
v) Calculate the present value of the free cash flows after the explicit period;
Answer:
Determination of PV in Respect of Continuing Value

CV8 = FCF9/(k0 – g) = Taka 65.45 (1.05/(13% - 5%) Taka 68.7225 million /8%
= Taka 68.7225/0.08
= Taka 859.03 million
PV of CV0 = Taka 859.03 million/(1.13)8 = Taka 859.03 X 0.376
=Taka 323 million

vi) Calculate total value of the firm based on the DCF technique;
Answer:
Total value of the Firm, based on the DCF approach of Free Cash Flow
In Taka million
PV of free cash flow during explicit period Taka 185.88
PV of free cash flow after the explicit period (known as CV) 323.00
__________
Total Value Taka 508.88

vii) Calculate equity value of the firm.

Answer:
Value of Equity
In Taka million
Total Value of the Firm Taka 508.88
Less: Value of Debt 80.00
-------------------
Value of Equity Taka 428.88

Answer to the Question # 3(a):

i) Explain the term money laundering and identify TWO major perpetrators.
Answer:
Money laundering constitutes any financial transactions whose purpose is to conceal the identity of the parties to the
transaction or to make the tracing of the money difficult. Money laundering is used by:

- Corrupt officials
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 - Terrorist organisations
- Tax evaders
- Distorters of accounting information

ii) State the steps involved in assessing the risks associated with money laundering.
Answer:
Steps involved in assessing the risks associated with money laundering:
- Identifying the money laundering risks that are relevant to the business.
- Carrying out a detailed risk assessment on such areas as customer behaviour and delivery channels.
- Designing and implementing controls to manage and reduce any identified risks.
- Monitoring the effectiveness of these controls and make improvements where necessary.
- Maintaining records of actions taken and reasons for these actions.

iii) State THREE necessary steps in curbing the spread of money laundering.
Answer:
Steps involved in curbing money laundering:
- Legislation - Information and education
- Identifying the likely businesses such as new customers carrying out large one-off transactions
- Probing suspicious deals and lodgments
- Prosecution - On-going monitoring of businesses
- Introduction of Bank Verification Number

Answer to the Question # 3(b):

Advantages of Islamic Finance:
(i) Following the principles of Islamic finance, it allows access to a source of worldwide funds. Access to Islamic
finance is also not just restricted to Muslim communities which may make it appealing to companies that are focused
on investing ethically.
(ii) Since there is asset backing, uncertainty, risk or speculation is not allowed, reducing the risk of losses.
(iii) Excessive profiteering is also not allowed; only reasonable mark-ups are allowed.
(iv) Banks cannot use excessive leverage and are therefore less likely to collapse
(v) The rules encourage all parties to take a longer term view and focus on creating a successful outcome for the venture,
which should contribute to a more stable financial environment.
(vi) The emphasis of Islamic finance is on mutual interest and cooperation, with a partnership based on profit creation
through ethical and fair activity benefiting the community as a whole.

Answer to the Question # 3(c):

i) What sort of information would help the new board carry out an effective review of internal control systems in Teesta
Islami Life Insurance Company?

Answer:
The Teesta Islami Life Insurance board may consider following information in order to carry out an effective review.
 The code of business conduct of Teesta Islami Life Insurance Company Limited.
 Confirmation that line managers are clear to their objectives.
 The overall results of a control self-assessment process by line management
 A report from the audit committee on the key procedures that are designed to provide effective internal control.
 Reports from internal audit department on audits performed.
 The audit committee’s assessment of the effectiveness of internal audit.
 Reports on special reviews commissioned by the audit committee from internal audit or others.
 Internal audit’s overall summary opinion on internal control.
 The external auditors’ report on weaknesses in the accounting and internal control systems and other matters,
including errors, identified during the audit.
 Intelligence gathered by board members during the year.
 A report on any material developments since the reporting date and up to the present.
 The board’s proposed wording of the internal control report for publication.

ii) What sort of employee attitudes would help or hinder an effective review of internal control?
Answer:
The following employee attitude will be relevant

Responses to management behaviour

Employees may not take controls with the same degree of seriousness that management does. They will take into account
how strictly controls are applied by senior managers, whether senior managers override controls, and whether follow-up
action is taken by management if control weaknesses are identified.

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 Realism of controls
If employees see controls as unrealistic because, for example, there is insufficient time to operate them, management may
not review controls seriously.

Employee collusion
If employees do collude, the evidence available to management may be undermined. Collusion may not necessarily be
hiding fraud. It could be a shared intention to thwart what is seen as unnecessary bureaucracy. The fact, for example, that
there are two signatures on a document does not necessarily mean that it has been checked properly.

Focus on certain controls

If a lot of emphasis is placed on certain controls, reports on which the annual review is based will stress the operation of
those controls and provide less detail of other controls that are also significant.

Prioritization
Many employees may feel that controls are bureaucracy and, as such, interfere with more important day-to-day work. This
may mean, for example, that controls are not operated when they should be, but sometime later, and so the evidence the
annual review is relying on may not as strong as it appears.

Reliance on memory
Some controls may be dependent on knowledge held in the mind of employees. The employees concerned may be happy
about this because it reinforces their position, but it can lead to a lack of clarity about whether controls have operated; and
also inconsistency and misunderstanding, when controls depend on the attitudes of the person operating them.

Answer to the Question # 4(a):

The multiple stakeholder obligations stance is that many groups have a stake in what the organisation does.
 This is particularly important in the business context, where shareholders own the business but employees,
customers and government also have particularly strong claims to having their interest considered. It is suggested
that modern corporations are so powerful, socially, economically and politically, that unrestrained use of their
power will inevitably damage other people’s rights.
 Under this approach, the exercise of corporate social responsibility constrains the corporation to act all times as
good citizen. Particular emphasis is laid on the preservation of employment and protection of the environment.
 Stakeholder stance posits that the essence of business primarily lies in building relationships and creating value for
all its stakeholders. Though the composition of stakeholders may differ depending on company’s industry and
business model, the main stakeholders typically include employees, customers, communities, suppliers, and
financiers (owners, investors). All these stakeholders are equally important for the company and any trade-off
among the stakeholders should be avoided.
 Performance should not be measured simply through the financial bottom line. Long term survival is dependent on
social and environmental performance as well as economic (financial) performance, and therefore it is important to
take account of the views of stakeholders with interests relating to social and environmental matters.
NOTE: The following points can also be considered as significance of the CSR stance taken by the Board:
 Redeem Company’s image through damage control.
 Reliable source of supply of inputs to ensure continuity of operations.
 Reduce labour turnover and improve service quality to customers.
 Avoid legal suits and associated costs.

Answer to the Question # 4(b):

 Improving corporate image/reputation/brand loyalty - Strong ethical principles that go beyond upholding the law can
add value to Supreme in terms of improving its brand. Failure to act ethically can cause social, economic and
environmental damage and undermine Supreme's long-term survival. Being such a large, multinational organisation,
Supreme’s ability to demonstrate strong ethical principles across its whole organisation will help to sustain its future
viability. Ethics must be embedded in its business models, organisational strategy and decision making processes.
 Often organisations which adopt strong ethical approaches will also see an improvement in profitability. Although
this may not be the main driver for Supreme, it is a consideration in a highly competitive global marketplace.
 By having a range of suppliers which Supreme has trained in its ethical ways of operating, it is investing in the future
and can work with them on repeated projects globally. This will tie these suppliers into Supreme and provide a stable
working relationship which will deliver cost savings in the long-term. This is a complete contrast to many companies
which operate a short term focus and change suppliers regularly or which are let down by non-delivery or poor
performance of its subcontractors. Supreme should not experience these problems and should gain a better reputation
with its customers for on time delivery and good quality of work. All suppliers (services and products, such as
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 building materials) will be at the standard that Supreme expects and requires as it has established a good working
relationship with the companies it works with. Also, by being ethically responsible, Supreme can reduce its cost by
avoiding fines and law suits as well as payment of compensations which are associated with being ethically
irresponsible.
 The ethical tone has to come from the top of the organisation. Therefore, the ethical tone is set at a strategic level.
The senior managers and business leaders of Supreme must demonstrate an ethical approach by example. This will
show that middle and junior managers will be rewarded for taking an ethical stance and create the appropriate
organisational culture.
 Supreme places high regard towards ethical and sustainable business practices which appear to be clearly
communicated to staff and suppliers and by communicating its positive actions this should assist in achieving its
overall business objectives.

Answer to the Question # 4(c):

Situation 1
Integrity – this situation could be in conflict with the fundamental principle of integrity.
The IFAC Code of Ethics adopted by ICAB for members highlights that the principle of integrity requires accountants to
be ‘honest, straightforward and truthful’ in all business relationships. The principle of integrity also applies that
accountants should not associated with any information which they believe contains a materially false or misleading
statement, or which is misleading by omissions.
Contain a materially false or misleading statement – The CEO has presented a very optimistic forecast for SOCCAR’S
profits, but this could be misleading if the government’s claim for damages against the company is successful.
Omits information where such omission would be misleading – Although the government’s claim for damages would
‘materially affect’ SOCCAR’s profit for the next year if it was successful, the CEO did not mention the claim in his
presentation to the analyst and journalists. This omission is misleading, because it prevents the audience from being
aware that SOCCAR’s profit for the next year might be materially lower than the figure given in the forecast.
Disassociation – The principle of integrity also requires professional accountants to disassociate themselves from
statements or information which have been ‘furnished recklessly’.
Contain statements or information furnished recklessly – The CEO prepared his forecast in a hurry, and did not check
the figures with anyone else in SOCCAR. Given that SOCCAR is an international company, the CEO could be seen as
reckless for presenting a forecast without asking anybody else in the company to confirm it.
Advice – The CEO’s forecast and presentation demonstrate the characteristics of communications which conflict with the
principle of integrity. The CEO has not been honest in his dealings with the analysts and the journalists, and therefore
Situation 1 represents a conflict with the principle of integrity.

Situation 2
Confidentiality – The principle which could be jeopardised here is confidentiality. The Code requires professional
accountants and firms to refrain from disclosing, outside a firm, confidential information which has been acquired as a
result of business relationships with that firm.
Many of the documents which the government’s lawyers have requested contain confidential information, which suggests
there could be a conflict with the principle of confidentiality if they are handed over.
Exception: Legal proceedings – However, the Code makes an exception to the principle of confidentiality in the context
of legal proceedings. In other words, the principle of confidentiality is not breached if confidential information is disclosed
when it is required in the course of legal proceedings.
This is the case in Situation 2. SOCCAR has been required to produce the documents as a result of the court order obtained
by the Department of Patents, Designs and Trademarks (DPDT) of Bangladesh.

Advice
Although the documents contain confidential information, Situation 2 does not represent a conflict with the Code of
Ethics.

Situation 3:
Professional competence and due care - The CEO has clearly not displayed professional competence nor due care in
discharging his responsibility. His unrealistic forecasts are not based on evidence and he has hidden material adverse
information that is clearly unprofessional.

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