Organised volunteering and work experience has long been a vital companion to university d

costs in several currencies. The group develops, manufactures and markets products in the medical sector. The growth

of the group has been achieved by investment and acquisition. It is organised into three global business units which

manage their sales in international markets, and take full responsibility for strategy and business performance. Only

five per cent of the business is in the country of incorporation. Competition in the sector is quite fierce.

The group competes across a wide range of geographic and product markets and encourages its subsidiaries to

enhance local communities by reinvestment of profits in local educational projects. The group’s share of revenue in a

market sector is often determined by government policy. The markets contain a number of different competitors

including specialised and large international corporations. At present the group is awaiting regulatory approval for a

range of new products to grow its market share. The group lodges its patents for products and enters into legal

proceedings where necessary to protect patents. The products are sourced from a wide range of suppliers, who, once

approved both from a qualitative and ethical perspective, are generally given a long term contract for the supply of

goods. Obsolete products are disposed of with concern for the environment and the health of its customers, with

reusable materials normally being used. The industry is highly regulated in terms of medical and environmental laws

and regulations. The products normally carry a low health risk.

The Group has developed a set of corporate and social responsibility principles during the period which is the

responsibility of the Board of Directors. The Managing Director manages the risks arising from corporate and social

responsibility issues. The group wishes to retain and attract employees and follows policies which ensure equal

opportunity for all the employees. Employees are informed of management policies, and regularly receive in-house

training.

The Group enters into contracts for fixed rate currency swaps and uses floating to fixed rate interest rate swaps. The

cash flow effects of these swaps match the cash flows on the underlying financial instruments. All financial

instruments are accounted for as cash flow hedges. A significant amount of trading activity is denominated in the

Dinar and the Euro. The dollar is its functional currency.

Required:

(a) Describe the principles behind the Management Commentary discussing whether the commentary should be

mandatory or whether directors should be free to use their judgement as to what should be included in such

a commentary. (13 marks)

1 Rowlands & Medeleev (R&M), a major listed European civil engineering company, was successful in its bid to become

principal (lead) contractor to build the Giant Dam Project in an East Asian country. The board of R&M prided itself in

observing the highest standards of corporate governance. R&M’s client, the government of the East Asian country, had

taken into account several factors in appointing the principal contractor including each bidder’s track record in large

civil engineering projects, the value of the bid and a statement, required from each bidder, on how it would deal with

the ‘sensitive issues’ and publicity that might arise as a result of the project.

The Giant Dam Project was seen as vital to the East Asian country’s economic development as it would provide a

large amount of hydroelectric power. This was seen as a ‘clean energy’ driver of future economic growth. The

government was keen to point out that because hydroelectric power did not involve the burning of fossil fuels, the

power would be environmentally clean and would contribute to the East Asian country’s ability to meet its

internationally agreed carbon emission targets. This, in turn, would contribute to the reduction of greenhouse gases

in the environment. Critics, such as the environmental pressure group ‘Stop-the-dam’, however, argued that the

project was far too large and the cost to the local environment would be unacceptable. Stop-the-dam was highly

organised and, according to press reports in Europe, was capable of disrupting progress on the dam by measures such

as creating ‘human barriers’ to the site and hiding people in tunnels who would have to be physically removed before

proceeding. A spokesman for Stop-the-dam said it would definitely be attempting to resist the Giant Dam Project when

construction started.

The project was intended to dam one of the region’s largest rivers, thus creating a massive lake behind it. The lake

would, the critics claimed, not only displace an estimated 100,000 people from their homes, but would also flood

productive farmland and destroy several rare plant and animal habitats. A number of important archaeological sites

would also be lost. The largest community to be relocated was the indigenous First Nation people who had lived on

and farmed the land for an estimated thousand years. A spokesman for the First Nation community said that the ‘true

price’ of hydroelectric power was ‘misery and cruelty’. A press report said that whilst the First Nation would be unlikely

to disrupt the building of the dam, it was highly likely that they would protest and also attempt to mobilise opinion in

other parts of the world against the Giant Dam Project.

The board of R&M was fully aware of the controversy when it submitted its tender to build the dam. The finance

director, Sally Grignard, had insisted on putting an amount into the tender for the management of ‘local risks’. Sally

was also responsible for the financing of the project for R&M. Although the client was expected to release money in

several ‘interim payments’ as the various parts of the project were completed to strict time deadlines, she anticipated

a number of working capital challenges for R&M, especially near the beginning where a number of early stage costs

would need to be incurred. There would, she explained, also be financing issues in managing the cash flows to R&M’s

many subcontractors. Although the major banks financed the client through a lending syndicate, R&M’s usual bank

said it was wary of lending directly to R&M for the Giant Dam Project because of the potential negative publicity that

might result. Another bank said it would provide R&M with its early stage working capital needs on the understanding

that its involvement in financing R&M to undertake the Giant Dam Project was not disclosed. A press statement from

Stop-the-dam said that it would do all it could to discover R&M’s financial lenders and publicly expose them. Sally

told the R&M board that some debt financing would be essential until the first interim payments from the client

became available.

When it was announced that R&M had won the contract to build the Giant Dam Project, some of its institutional

shareholders contacted Richard Markovnikoff, the chairman. They wanted reassurance that the company had fully

taken the environmental issues and other risks into account. One fund manager asked if Mr Markovnikoff could

explain the sustainability implications of the project to assess whether R&M shares were still suitable for his

environmentally sensitive clients. Mr Markovnikoff said, through the company’s investor relations department, that he

intended to give a statement at the next annual general meeting (AGM) that he hoped would address these

environmental concerns. He would also, he said, make a statement on the importance of confidentiality in the

financing of the early stage working capital needs.

(a) Any large project such as the Giant Dam Project has a number of stakeholders.

Required:

(i) Define the terms ‘stakeholder’ and ‘stakeholder claim’, and identify from the case FOUR of R&M’s

external stakeholders as it carries out the Giant Dam Project; (6 marks)