QUESTION $3(25$ MARKS$)$

Hats Galore Limited is a large manufacturer of various kinds of hats. The company$$s products are especially

popular in Southern Africa and in $2013$ it started exporting to Belgium and France.

Two of the non$-$executive directors have served on Hats Galore$$s board for five years. The company has a

policy of asking non$-$executive directors to stand down after six years and so the Chairman has established

a Nominations Committee to start the process of selecting replacements. The Chief Executive has noted that

the new non$-$executive directors should be independent to make the board more effective.

The Chairman of Hats Galore is also keen to recruit more non$-$executive directors as a matter of priority

because the Remuneration Committee faces a difficult task. The executive directors are presently

remunerated with a combination of a salary and executive stock options. Hats Galore$$s shareholders have

expressed concern about the pressures created by these stock options and have asked that they be

replaced by individual bonuses that reflect the personal contribution made by each of the executive

directors.

The Chairman and the non$-$executive directors are discussing the level of bonus that should be awarded for

the current year. This has been complicated because Hats Galore made a loss for the first time. The Chief

Executive has stated that it would not be appropriate to accept a bonus from a loss$-$making company, but

the other executive directors claim that the loss was attributable to economic and industrial conditions and

that their leadership minimised the loss. All of the executive directors other than the Chief Executive have

asked for substantial bonuses to reflect their leadership in difficult times.

The Risk Manager also recently reported a case of fraud committed by a creditor$$s clerk. The Chief Executive

is now concerned that there could be more cases of fraud and fears that more employees may be involved.

REQUIRED:

a$)$ Discuss the problems associated with determining a suitable level of bonus for each of P$$s executive

directors. $(10)$

b$)$ Provide the Chief Executive with some preventative controls which could be introduced to prevent

fraud. $(8)$

c$)$ Discuss issues that could affect the independence of Non$-$Executive directors that the nomination

committee members need to be aware of when making the new appointments. $(7)$