Identify the Corporate Governance issues that are apparent from the above circumstances

QUESTION Colour Paints Ltd (‘Paints’) is a medium sized public company and is listed on the ASX. The annual sales for the company is $190 million and the after-tax profit is $40 million. It has five (5) Directors; two being executive Directors and the other three non-executive Directors. Black, White and Brown are the non-executive Directors. Green is the Managing Director and Blue is the executive Chairman of the company. Each of these Directors control a 10 percent shareholding in Paints with the other 50 percent being owned by the public. No other single shareholder holds more than a 5 percent shareholding in the company. Paints was established some time ago to manufacture paint products for small retail outlets and painting contractors. For 6 years the company has actively pursued the object of making paint but has recently decided to diversify and manufacture skin products for human use and sell them in pharmacy’s and supermarkets. It still makes paint but uses the same equipment to make both paint and skin products. However, at the last annual general meeting the shareholders were not happy about the diversification into skin products and voiced their concerns at the AGM. Also, they were not happy that the directors and executives had increased their remuneration by 600 percent with the managing director being paid $5 million per annum with bonuses of $4 million. Because the current directors own 50 percent of the shares the other shareholders could not obtain more than 22 percent of the vote against the executive pay. The shareholders have asked the Board to appoint independent directors to the Board and preferably women directors. The Chairman has refused the request and stated that two more independent directors were not necessary as they already had three non-executive directors and that the company runs best with the current board. Three months ago, Lilly Lee, a CPA was appointed the Chief Financial Officer for the company and became aware of the following matters that relate to the governance of the company. Lilly discussed the issues with the Managing Director, but he told her that corporate governance was a waste of time and did not result in increased profit or more sales of products. 1. The directors have been ignoring the concerns of the shareholders and the company does not have a compliance program. They do not believe that having governance policies makes any difference. They do not care what the ASX listing rules say about corporate governance,2. The company does not have an audit committee and the Executive Chairman appoints the auditor who is a long-time friend to conduct the audit. They play golf together every weekend,3. There is no remuneration committee as the Managing Director determines the salary that he is paid and that of the senior executives. He does not believe that anyone else should be involved in determining salaries and bonuses, 4. The Managing Director, Green decided to diversify into skin products because his wife has a business making skin products and Paint purchases many of the ingredients from his wife’s company. The directors all approved the move into skin products and the role played by Green’s wife.5. The paint products are sold to all retailers with a set fixed price and the retailers are not allowed to sell the products at a price below what has been determined by Paints. If they do not obey then Paints will not deal with them in the future.6. The employees are paid below the award rates of pay but are given paint and skin products as part of their wage and salary. The Managing Director maintains that their total remuneration package including products is far higher than the award rates of pay,7. The paint products are made with specific chemicals that can cause the workers to become very ill. The managing Director does not believe that the workers should be provided with special safety equipment or safety clothes when using these chemicals. He is not concerned about any occupational health and safety rules. 8. The skin products are being sold with the label saying that by using these products ‘you will look 10 years younger’. This claim has not been substantiated by any scientific evidence, but the Chairman thought that it would help in selling more skin products.9. Brown, the non-executive Director has told a stockbroker that the company is being targeted by a multinational company for a takeover. Brown has already purchased an extra 100,000 shares through his wife and he intends to sell them as soon as the share price increases on the rumours of a takeover. He has made the story up as he needs money to buy a second home in Sydney.10. The company disposes of its waste water containing toxic chemicals into the river running past the factory. The Board of Directors is aware of the environmental problem but thinks that it is a concern for the government and not for corporations trying to make a profit and employ people.REQUIRED:Identify the Corporate Governance issues that are apparent from the above circumstances and advise Lilly Lee as to what she should be recommending to the Board of Directors. (15 marks)

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