QUESTION 1: (13 MARKS) (following King IV report - Principle 7 and 8)

East Coast Equipment Limited (ECE Limited) is a large company which manufactures and sells a diverse range of products. The company is structured into two main divisions a factory located in Uitenhage and a large warehouse-style retail outlet in Tshwane. The factory is overseen by the Production Manager, Mrs Lavish, while the retail outlet is managed by the Sales Manager, Mr Yuppy. These two managers report to the CEO, Mr Myway, who is based at the company head office in Sandton, Johannesburg. For the last number of years, the company has been extremely profitable, and the shareholders have not paid much attention to the company operation, nor the spending patterns of the management. However, at last years Annual General Meeting (AGM) an economically tough year ahead was forecast. The shareholders expressed their wish that the company minimise all expenditure to weather the predicted economic hardship. During the current (2021) financial year, Mrs Lavish suggested to Mr Myway that the company should acquire a helicopter, to be based at the factory in Uitenhage, so that she could more easily attend the quarterly company meetings at the companys head office in Sandton. Mr Myway agreed with her and the helicopter was duly acquired at a cost of R3 400 000 and a contract pilot obtained on a monthly retainer of R35 000. Mr Yuppy organised that the company send him on an overseas trip to Dubai to supposedly attend a trade-fair meanwhile his wife, unknowingly speaking to the wife of a shareholder, bragged that she and her husband were on their way to Dubai to attend the international golf tournament being held there. Mr Myway upgraded his company car at a cost of R1 400 000 in January 2021, despite having received a brand-new company car in February 2020. Then in March 2021, Mr Myway declined to pursue a contract which would have been profitable for the company because he felt that it was simply too risky, despite the fact that the management accountant of ECE Limited had prepared detailed risk analysis report showing the opposite to be the case. ECE Limited continued with their support of the Adult Literacy Centre in the local township in Uitenhage, a project that the company first became involved in during 2018. In 2018 they renovated the facility completely. During the 2019 and 2020 financial years, they donated computer equipment and reading books. Mr Myway believes a positive correlation exists between corporate social responsibility and increased profitability. The interim financial results for 2021 have been released recently and are 20% down on what they were a year ago. Several the shareholders are concerned at this news, as well as the spending by the directors.

REQUIRED:

a) Identify and briefly explain the problem which has arisen between the management and the shareholders of ECE Limited. List three specific examples from the current year at ECE Limited which illustrates the problem in action. (6)

b) Briefly describe measures the shareholders can implement to minimise or prevent the problem identified in (1) above. (3)

c) Briefly comment on whether you think that the company should continue its involvement and support of the Adult Literacy Centre from a Financial Management perspective. (4)