Question
QUESTION 2 (25 MARKS) Amadumbells Limited is a large manufacturer of various kinds of dumbbells and various gym equipment. The company's products are especially popular
QUESTION 2 (25 MARKS) Amadumbells Limited is a large manufacturer of various kinds of dumbbells and various gym equipment. The company's products are especially popular in Southern Africa and in 2019 it started exporting to Africa (Nigeria, Tanzania, Ghana and Nairobi) with plans to expand into more African countries. Two of the non-executive directors have served on Amadumbells Limited'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 Amadumbells Limited 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. Amadumbells Limited'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 Amadumbells Limited 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 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 Amadumbells Limited'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)
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