Question

QUESTION TWO

Case Study Luangwa Mineral Resources is a State Owned Enterprise (SOE) that was in past managed parastatal before being privatize after liberalization of the Zambia economy. The privatization of the firm was decided because the firm had been run down and was not performing well as expected. Further the firm accrued huge liabilities and was running losses consistently. After being privatized the new owners (majority shareholders 75%) re capitalized the firm by investing $160 million to improve operation and clear outstanding debts. The new Board of Directors brought in goods expertise and knowhow which greatly improved the way the company was managed. The company was turned around within Three years and become profitable and as a result government was able to receive its share of profits. The company remained profitable until a regime changed policy that now required government to own majority share in a bid to accrue more benefits for the state. The changes in policy meant the minority foreign investors could not control decision making within the company as now government took more control of the affairs. The Government appointed a new board and new management took over. The company in a span of four years since these changes has reached a stage where it is now failing to meet its obligations. It has accrued huge debts and has started making losses due to poor decision making regards operations. Audits reports indicated that miss application of resources to non-value adding activities, poor cash flow management, over employment and abuse of company resources and board members (Chairperson) and management staff. It was reported that in previous quarter the board had spent $1.0 million on workshops, travel allowances and meetings alone much of the money obtained through an overdraft with a local bank. This was done at the expense of procuring a critical component of the production process that only costed $150,000. Consequently production was shut down for six months. This has led to wide spread uproar in the media and among concerned stakeholders and the company’s board and corporate governance system has been questioned. Among the many expectations from stakeholders is the effectiveness of the board through composition of members, integrity and ethical values of board members and ability to critically analyses the company’s long term sustainability.

Required:

i. Discuss the objective and importance of Corporate Governance in general to the operations of an organization.

ii. Identify and discuss the Agency Problem issues in this case study that may have led to the current situation how this can be rectified.

iii. Discuss how Corporate Finance can be applied in guaranteeing the company’s long term financial sustainability while balancing wealth maximisation.

Answer 1

Answer i)

Corporate governance

Corporate governance is way in which business runs it includes set of rules, regulations and laws in which the business runs. It is important for corporate governance to set a process and regulate this rules and laws in timely manner to run business smoothly and effectively.

Objectives and importance of corporate governance

The firs the foremost important objective of corporate governance is to maximise the shareholder and stakeholder values and protect their interest in the company. They should be informed with all developments and decisions taken by the company. Another important objective of corporate governance is to monitor and regulate management decisions.

Corporate governance is also important to manage management, mitigate risk, easy capital flow and protect shareholders interest.

Answer ii)

After going through the above case study I see that company was a full debt company however after privatisation it was in good reputation and again after the government owned the rights it was back to debt company tag.

I believe that this was mainly due to lack of financial planning and bad corporate governance. Below are some points which I believe where the main loopholes which resulted company to fail

• Cost of workshop which was too high
• Expense on travel and meeting which could be eliminated
• Over employment
• Bad corporate governance and management
• Not involving stakeholder in decisions

Now to rectify and bring company to a good reputation there should be a strong corporate governance and they should be able to guide management in proper way. Expenses should be eliminated which are not required or which don’t prove very helpful for the company.

Additionally there should be set of rules which need to be laid in order to increase the productivity, stakeholder’s interest should be increase, a strong financial planning and business ethic should be rolled over. All of this can help to rectify the problems of the company

Answer iii)

Corporate governance is very important for companies long term benefits as it reflect a strong business agenda and increase stakeholder’s interest. Hence if corporate governance is placed they can place a set of rules and process can be streamlined.

Also corporate governance can keep check on management and direct them in correct way this will help them to sustain for long term and along with this stakeholder’s interest and funding of the company can be increase which they can us for their business productivity and simultaneously it will help company to maximise their wealth.