Case Study 1 and 2: Family Business and Public Listed Company Issues and Corporate Governance in Top

Differences between Insider-Dominated (Family) Businesses and Public Listed Companies

Case Study 1Good Food Sdn Bhd (“Good Food”) is a traditional health food business that has been run as a family company for 35 years by Tom and Jenny. As a couple they have always more concerned about the quality of the foods they sell than the financial detail of their business. Siva & Co., a local audit firm has been auditing Good Food since the company started in 1985. Mr Siva has overseen Good Food audit for all the years and has always taken the opportunity to meet with Tom and Jenny informally at the end of each audit to sign off the financial statements and to offer a briefing and some free financial advice to Tom and Jenny. In these briefings, Mr Siva, who has become a close family friend of both Tom and Jenny over the years, always points out that the business is profitable (which Tom and Jenny already knew without knowing the actual figures) and how they might increase their margins. Tom and Jenny have never been too concerned about financial performance as long as they can provide a good service to their customers, make enough to keep the business going and provide continued employment for themselves and their only son, Jerry. Tom and Jerry have gradually increased Jerry's shareholding proportion over the years while Tom and Jerry still remain as the majority shareholder of Good Food. They currently own 60% to Jerry’s 40%. Jerry was appointed a director in 2017.Jerry has helped his parents in the business since he was a young boy. Tom and Jenny gave Jerry more and more responsibilities in the hope that Jerry would one day take over the business. By the end of 2018, Tom made sure that Jerry drew more salary than Tom and Jenny combined as they sought to ensure that Jerry was happy to continue in the business after they retired.During the audit for the year ended 31 December 2019, an auditor of Siva & Co. was performing the audit when he noticed a dramatic drop in the profitability of the business as a whole. He noticed that whilst food sales continued to be profitable, a large amount of inventory had been sold below cost to Lelong Company with no further explanation. This was the reason that had caused the reduction in the company's operating margin. The invoices showed all transactions with Lelong Company have been authorised by Jerry.Mr Siva was certain Tom and Jenny would not know anything about this and he is prepared to tell them about it at the audit meeting. Before the meeting, he found out that Lelong Company is a separate business owned by Jerry and his wife. Mr Siva's conclusion was that Jerry was effectively stealing from Good Food to provide inventory for Lelong Company at a highly discounted cost price. Although Mr Siva now had to recommend certain disclosures to the financial statements in this meeting, his main fear was that Tom and Jenny would be devastated if they found out that Jerry was stealing and that it would have long-term implications for their family relationships and the future of Good Food.

BAC 3107Page 3 of 4Required:(a)Discuss how an insider-dominated (family) business differs from a Public Listed company in the governance issues. (24 marks)(b)Discuss the ethical dilemma faced by Mr. Siva in deciding whether to inform Tom and Jenny about Jerry’s activity. (12 marks)(c)Propose the most appropriate course of action for Mr. Siva. (8 marks)(Total: 44 marks)Case Study 2Top Gun Corporation Berhad (“Top Gun”) is a Malaysian rubber glove manufacturer. The company owns and operates 44 manufacturing facilities in Malaysia, Thailand, and China. It also has marketing offices in these countries as well as the United States, Germany, and Brazil.The company was founded in Malaysia in 1991 by Mr. Steven Tan, as a business venture of 1 factory, 1 glove production line and 100 staff. Top Gun has since emerged as the world's largest manufacturer of gloves, commanding 26% of the world market share.It has also aggressively expanding its business scope. There was a big surge in orders and demandas the pandemic COVID 19 is good for rubber glove manufacturing business.Top Gun has recently been listed in Bursa Malaysia. Top Gun is required to comply with the corporate governance principles in order to maintain its listed status. Therefore, the compliance director has undertaken a review of whether or not the company complies with the corporate governance principles.As one of the requirements in the corporate governance principles, Top Gun has maintain an internal audit department. The board of directors reckon that more manpower with specialist skills are required in the internal audit department. The board of directors are considering the options of whether to recruit more internal auditors, or to outsource the whole audit function to external auditors.Ms. Clara was the Chief Executive Officer of Top Gun until last year. She is appointed as the chairman of Top Gun recently. Clara is unsure if Top Gun needs more non-executive directors as there are currently three non-executive directors out of the eight board members. Clara is considering appointing one of her close friends, Tammy as a non-executive director. Tammy was a retired Chief Executive Officer of a food and beverage (F&B) company.Currently, all remuneration of the directors of Top Gun is being paid in the form of an annual bonus based on profits. Mr. Satchit, the finance director of Top Gun, decides on the amount of remuneration each director is paid. Mr. Satchit is also considering setting up an audit committee, but has not been undertaken this task yet as he is too busy with his work. BAC 3107Page 4 of 4James was appointed as Top Gun new marketing director eight months ago. However, he has yet to undertake his board of directors training as this is normally provided by the chief executive officer and this role is currently vacant.There is a large number of shareholders in Top Gun. The directors believe that it is impractical and too costly to hold an annual general meeting of shareholders. Instead, the board has suggested sending out the financial statements and any voting resolutions by email. The shareholders can then vote on the resolutions via email.Required:Discuss the corporate governance weaknesses faced by Top Gun Corporation Berhad and provide a recommendation to address each weakness to ensure compliance with the corporate governance principles