You are the auditor of Galen Holdings (Pty) Ltd, a large agricultural fertilizer manufacturer. Due mainly to the size of the workforce and its turnover, the company has a public interest score of nearly 1200. Darren Roberts, the chief executive ofthe company has called you to a meeting to clarify certain issues relating to corporate governance.At the meeting, Darren Roberts informed you that the company was coming under increasing pressure from a number of sources, including one of the company’s shareholders, a listed company, to adhere to the principles of corporate governance contained in the King IV Code of Corporate Governance. He concluded by saying, “I personally think these corporate governance codes are a load of rubbish, we didn’t have those 30 years ago and we don’t need them now. But if there are superficial changes I can make to keep everyone happy, I’ll think about it. Our responsibility is to maximize profits for shareholders and not to spend them on charity and do good causes.”

Galen Holdings (Pty) Ltd has always been a tightly run company. Darren Roberts and his sons Peter and Paul, together have held 45% of the shares in the company since its inception in 1985. In addition to being shareholders, Darren Roberts is the chairperson of the Board, and Peter and Paul fill the roles of financial director and production director respectively.The Roberts’ influence has always ensured the appointment of executive directors of their choice to fill the remaining two positions on the company’s Board, which are held by Connor McGraw and Usain Holt. Darren Roberts insists on the Board of Directors is totally committed to and involved in the company. He demands that the directors work as a team to get the job done themselves, without “engaging outsiders and forming committees.”

The company’s basic operational and reporting philosophy is one of secrecy and minimum disclosure. Darren Roberts’reasons for adopting this philosophy is that in the highly competitive agricultural fertilizer industry, Galen Holdings (Pty)Ltd has a record of being more successful and profitable than any of its competitors. In his opinion, “the less information available to competitors and other parties, the better the company is able to protect this competitive advantage and limit exposure to groundless lawsuits and strikes by workers. As far as financial reporting goes our policy has been to follow the requirements of IFRS to the extent necessary to satisfy the auditors. We are not interested in integrated reporting because our shareholders are simply not interested in masses of other useless information.”

5.1 Briefly discuss the points you would raise to explain to Darren Roberts why codes of corporate governance should not be regarded as a “load of rubbish”.
Comment on Darren Roberts’ statement that “if there are superficial changes I can make to keep everyone happy, I’ll think about it”.
5.2 Discuss the instances of non-compliance with the recommended practices in the King IV Code pertaining to the existing Board of Directors at Galen Holdings (Pty) Ltd.
5.3 Identify the Board Committees, other than a remuneration committee, which Galen Holdings (Pty)Ltd should appoint to satisfy the recommendations of King IV. Provide reasons as to why the appointment of each committee would be beneficial to Galen Holdings (Pty) Ltd.

Answer rating: 100% (QA)

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