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SBL Mock Test 2020-21
Strategic Business Leadership (SBL) (Association of Chartered Certified Accountants)
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ACCA
Paper SBL
Strategic Business Leader
September 2019 to June 2020
Mock Exam A (DOLLY VARDEN) – Answers
To gain maximum benefit, do not refer to these answers
until you have completed the mock exam questions and
submitted them for marking.
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© Kaplan Financial Limited, 2019
All rights reserved. No part of this examination may be reproduced or transmitted in any form or
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MO CK E XAM A ‐ ANSWERS
Key answer tips
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Time management is critical
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You will have four hours (240 minutes) to read and analyse the case study and
requirements, plan your approach to answering each of the tasks, and produce full
answers to them all.
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The examiners' recommended approach is that you allocate 40 minutes to RPRT ‐
reading and annotating the case, leaving 200 minutes for planning and writing up your
answers.
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Given the 20 professional marks are earned how you write your answers (rather than
writing anything extra), this means 200 minutes for 80 technical marks, or 2.5 minutes
per technical mark.
Using the reading time (RPRT) effectively
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Your objective here is to read and understand the scenario and requirements fully within
40 minutes.
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Start by reading the requirements, so that when you read through 12 or more pages of
exhibits, you can evaluate the information and link all pieces of relevant information to
the requirements. As you do this, start thinking about the implications of what you are
reading, and mentally compile a big picture of the organisation and the issues it is
currently facing.
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The exam you will be sitting is (currently) paper‐based so you should highlight and
annotate those areas of text that you consider to be useful to answering the questions,
linking them to the different requirements.
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Weaker candidates annotate far too much, so try to be selective and prioritise issues as
you go along.
Planning answers ‐ start by analysing the requirement itself:
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What role are you adopting?
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Who is the report for and what do they want?
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What verbs have been used to express the requirement?
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Are there any limitations of scope highlighted?
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Are there any key issues mentioned that need addressing?
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Are any calculations, ratios or other quantitative analysis required?
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Does the question lend itself to the use of a specific theoretical model?
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Which professional skill is being explicitly tested?
Writing up a plan:
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Set up key headings ‐ these should now be obvious from the wording of the requirement
and the choice of model (if any).
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Fill in key issues under the headings, firstly from what you remember and then by looking
again at your annotations on the exam paper.
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Earning professional skills marks as you write up your answers
To demonstrate professionalism and earn skills marks you need to do the following:
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Address the requirements as written, taking particular notice (again!) of the verbs used
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Make sure you include the most important, relevant and crucial points relating to the
requirement.
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Only make relevant points and try not to include superfluous information or make
unsupported points.
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Show deep/clear understanding of underlying or causal issues and integrate or link
different sources of information from various parts of the scenario or different exhibits to
make points
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Avoid repeating points already made.
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Show your ability to prioritise and make points in a logical and progressive way, building
arguments rather than using a random or ‘scattergun’ approach to answering the
question.
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Structure and present your answers in a professional manner through faithfully
simulating the task as would be expected of the person being asked to carry it out and
always have a clear stakeholder focus in mind when constructing the answer.
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Demonstrate evidence of your knowledge from previous learning or wider reading and
apply this knowledge appropriately to strengthen arguments and make points more
convincing.
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In addition to being clear, factual and concise, you should express yourself convincingly,
persuasively and with credibility.
Always keep your eye on the clock and do not over run on any part of any question!
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MO CK E XAM A ‐ ANSWERS
1
Report
From: Special Projects Assistant
To: CEO
Date: Today
STRICTLY PRIVATE AND CONFIDENTIAL
Growth and the ‘cultural web’ of Dolly Varden
The cultural web was devised by Gerry Johnson as part of his work to attempt to explain
why firms often failed to adjust to environmental change as quickly as they needed to. He
concluded that firms developed a way of understanding their organisation – called a
paradigm – and found it difficult to think and act outside this paradigm if it were
particularly strong. The components of Dolly Varden’s web, and how they may have
affected historic growth and development, are as follows:
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Routines and rituals – routines are ‘the way things are done around here’ and may
even demonstrate a beneficial competency. They can be the written or unwritten rules
of the game within the organisation. In Dolly Varden, such rituals abound. Restricting
margins by lowering prices may well have led to increases in sales volumes, but may
also have affected customer and consumer perceptions of the ‘value’ of our products. It
will certainly have adversely affected margins, and may have led to a shortage of funds
for investment. Making large charitable donations might improve staff loyalty, and
enhance the public image of Dolly Varden, but will also have had a detrimental effect
on margins. Unless such corporate activity leads to increased sales and profit, it is
detrimental to growth. Removing customers from our list, for applying ‘excessive’
mark‐ups to our products, will have stifled growth in turnover and may be a major
cause of our loss of market share. Supermarkets are very powerful customers, and they
will have access to many other soup suppliers. While I have no information which
supermarkets we currently do business with, it would be no surprise to learn that we
sell too few of the bigger supermarket chains.
Symbols – such as logos, offices, cars, titles, type of language and terminology
commonly used, become a shorthand representation of the nature of the organisation.
Everything the company does is tied to the persona of the founder. Every can of soup
we produce is sold under the Dolly Varden brand name. There is a significant risk that
the company still operates as if it is the twentieth century, and a small, family company.
Stories and myths – employees tell one another and others about the organisation, its
history and personalities; used to communicate traditions, standards and role models.
Asking “what would Dolly have done?” as a way of prompting decisions, will certainly
reinforce the cultural paradigm. However, basing modern business decisions on views
held a century ago seems a risky way of doing business. Such resistance to change may
well have led to Dolly Varden’s processes and products becoming increasingly obsolete.
Power structure – formal or informal power or influence by virtue of position, control
of resources, who the person knows, or history. This may be based on management
position and seniority but in some organisations power can be lodged with other levels
or functions.
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The concentration of day‐to‐day executive power in the hands of family members may
lead to Dolly Varden being resistant to change and conservative. Although family
members can be out‐voted by employees, this has never happened.
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Organisational structure – reflects the formal and informal roles, responsibilities, and
relationships and ways in which the organisation works. Structures are likely to reflect
power. The participative management style of the company is good for motivation and
engagement, but might have led to it becoming increasingly risk‐averse and slow to
react. Allowing staff additional annual leave, to pursue voluntary activities is, again,
great for motivation and engagement, but bad for productivity. Not only are staff
overpaid, there are also too many of them.
Control systems – the measurement and reward systems that emphasise what is
important to monitor and to focus attention and activity upon. Paying salaries over the
market rate is good for engagement, but may lead to staff becoming complacent and
unproductive. The restriction of margins has probably shifted the emphasis of control
systems away from financial (cost) controls. This may have led to inefficiencies and
excessive, or out‐of‐control, costs.
Conclusion
Our market share has fallen from 20% to 15% over the last twenty years. Our gross margin
(30%) and pre‐tax margin (10%) both lag behind the sector averages (44% and 21%). The
loss of market share and low levels of margin can probably be attributed, to a great extent,
to the culture of the organisation.
The Ethical Code and the future
It is important to stress that having a strong ethical and moral approach to business is a
good thing. Dolly Varden appears to aspire to being a ‘shaper of society’ in this regard, and
that is to be applauded. However, there are elements in the Code that might limit the
company’s ability to achieve growth in the future;
1.1 The aim to create ‘moderate and sufficient wealth’ is incompatible with a growth
strategy that envisages short term profit growth. It is likely to leave the company short of
funds for investment. This is, however, tempered by the focus on sustainability, as it
suggests investment in projects with a long‐term return.
1.4 ‘Fair and just compensation’ does NOT mean excessive reward packages that are above
the average for the industry. This should not limit growth opportunities, but seems to
conflict with the approach being taken.
2.4 The maintenance of ‘equal voting rights’ might prove limiting to growth, as existing
minority shareholders might block attempts to raise any additional capital that is required
to fund growth. It is also contrary to the principles of shareholder democracy.
2.12 Settling payables ‘Without unjustified delay’ might be interpreted as a constraint on
the company’s ability to finance expansion through working capital management. It is also
difficult to reconcile with an industry where major customers take 90‐120 days’ credit.
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MO CK E XAM A ‐ ANSWERS
2.16 This limits the company’s choice of supplier, and may prove a barrier to growth if
suitable suppliers cannot be identified to support increased production. It would be ironic if
Dolly Varden’s growth aspirations were to be thwarted by a lack of suitable suppliers.
2.20 As mentioned previously, the exclusion of customers on the basis that they make
‘excessive profits’ is severely limiting. It is also questionable whether it is Dolly Varden’s
right to interfere in the free operation of product markets. Growth will be difficult to
achieve unless Dolly Varden is able to sell to any available market.
2.21 Obtaining a ‘dominant or privileged market position’ is the foundation of competitive
advantage. It could be argued that any behaviour related to achieving and maintaining a
competitive advantage is an abuse of position. If Dolly Varden is able to achieve a
competitive advantage, it must be allowed to exploit it.
2.31 It is only possible to ‘mitigate’ (reduce) risk, not to eliminate it. Aiming to ‘maximise
prevention’ could be prohibitively expensive.
2.39 As mentioned previously, reducing retained profit (and therefore cash) severely limits
the funds available for expansion.
Conclusion
In conclusion, several clauses in the Ethical Code are not consistent with the pursuit of a
growth strategy.
2
Report
From: Special Projects Assistant
To: The Board
Date: Today
STRICTLY PRIVATE AND CONFIDENTIAL
GROWTH STRATEGIES
1. Options for growth
We can discuss and evaluate the growth strategies available by reference to the various
models developed by Igor Ansoff.
Market penetration
These strategies pursue growth by increasing revenues from current products in existing
markets. For Dolly Varden, that means selling more soup in Europe. Examples of such
strategies include investing in marketing, finding more customers, or combining with
another European soup manufacturer. These strategies are safe and unexciting. They are
unlikely (other than merger or acquisition) to achieve significant growth, as it may take
years to change customer and consumer perceptions.
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Product development
These strategies involve finding new products for our existing customers. Examples would
include developing new soup recipes, fresh soups, or other canned foodstuffs. This is a
possible growth opportunity for Dolly Varden, but it is uncertain whether the brand would
readily translate onto non‐soup products. We would also have to overcome loyalty to
existing brands.
Market development
As all our revenues come from within Europe, markets for our existing soups exist further
afield. We could, for example, look for retailers operating in Asia, Africa or the US. It is also
possible that some of our current retailer customers have branch networks outside Europe,
where they might sell our soup. However, we would have to address the constraint to our
business from our requirement that customers do not impose ‘excessive’ mark‐ups. This
policy is likely to alienate precisely those customers who operate in multiple countries.
Diversification
Diversification means moving simultaneously into new product and market areas. For Dolly
Varden, this includes many different possible strategies:
‐ Backwards vertical integration: This would take Dolly Varden into product‐market areas
currently occupied by our suppliers. An example might be the acquisition of a farm, or
vegetable wholesaler. It is not really feasible for Dolly Varden to pursue such strategies by
organic growth. We also lack experience in these markets, so acquisition would allow us
access to a talent pool. However, we lack available investment funds to make an
acquisition.
‐ Forwards vertical integration: This would take us into product‐market areas currently
occupied by our customers. We might, for example, decide to open a chain of retail outlets.
This would seem to be a sensible move, but it comes with problems. Dolly Varden would be
competing with its own customers, something which they would see as a threat. We also
have no experience in retailing, and would probably have to acquire an existing retail
network in order to achieve significant growth in the short‐ or medium‐term.
‐ Horizontal integration: While not really ‘diversification’, as it achieves market
penetration, this method of integration would see us acquire or merge with another
European soup manufacturer. While this is the safest of the diversification options, and
achieves growth immediately, it would be unlikely to appeal to shareholders. We have a
very strong culture, which we would probably wish to impose on any acquisition target.
This would be very difficult, and might destroy any synergies available from combining
businesses. Many of the smaller manufacturers, that existed a decade ago, have already
been acquired by our rivals. The remaining small manufacturers in Northland represent
only a tiny share of the market.
‐ Conglomerate diversification: A conglomerate is a business made up of unrelated
elements. Conglomerates can be either ‘loose’, where there is little or no relationship
between the elements, or ‘tight’, where there is a clear theme to the conglomerate.
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For Dolly Varden, a loose relationship might be something like tourism (we could open a
visitor centre, at our factory, for example), whereas a tight relationship might be canned
drinks, or ready‐meals. This is the highest‐risk form of diversification, as it would take us
into areas in which we have no expertise, and which are unlikely to generate synergies with
our existing business.
Growth methods
Any of the above (except horizontal integration, which is always done by merger or
acquisition) can be pursued by three different methods:
‐ By organic growth, where Dolly Varden invests its own funds into developing the new
business area. This is a slower, but safer, method of growth.
‐ By joint venture or alliance, where Dolly Varden partners with another organisation,
sharing risk and reward. This would not generate as much growth as the other methods, as
it would have to be shared with our partner(s).
‐ By acquisition, where Dolly Varden buys an existing business, or a stake in one. This is a
risky, but much quicker, way of achieving growth.
Conclusion
Dolly Varden needs to decide on the direction and method it wishes to pursue. Each comes
with both risks and benefits.
2. Acquisition of Stagg
The acquisition of Stagg Group Ltd is either an example of product development, as it
would allow Dolly Varden to add a wide range of non‐soup canned foodstuffs to its
portfolio, or perhaps ‘tight’ conglomerate diversification, if Stagg’s customers differ
significantly from those of Dolly Varden.
We are told that the shareholders seek a cash offer for all of the share capital. Stagg is not a
listed company, and the Stagg family own enough equity to allow them to approve a sale.
We have been provided with limited information regarding Stagg’s financial performance
and position, so the following valuations are only a guide to the sort of level the Stagg
shareholders might find acceptable.
Several of the commonly‐used valuation methods are not appropriate in these
circumstances:
‐ Dividend‐based valuation is only appropriate for a small parcel of shares. We are acquiring
all of the equity.
‐ Market‐based valuation is not possible, as there is no market value for Stagg’s shares. If
Stagg were listed, we could simply apply a premium to Stagg’s market capitalisation.
‐ Cash‐based valuation is not possible without information regarding future free cash flows.
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We could approach Stagg, to ask for a forecast cash flow statement, but any information
provided would only be their estimate. If the shareholders are determined to sell, they will
be tempted to over‐inflate their forecasts.
‐ Earnings‐based valuation is not possible without information about Stagg’s future
earnings and cost of capital. We could perhaps assume that recent earnings are typical, but
that still leaves us unable to estimate Stagg’s cost of capital. Using ‘finance costs’
(N$7.902m) and the total of ‘loans and borrowings (N$138,240m), Stagg has an apparent
cost of debt of 5.7%. However, it is not possible to calculate their cost of equity, or its
market value. We could, of course, use our own cost of capital, but this would only give an
approximate value.
We can therefore seriously consider only the following methods of valuation:
Net assets
The book value of net assets of Stagg Group is N$76m. We have no information about the
market value, or replacement, cost, of those assets. It is inconceivable that the
shareholders of Stagg would consider an offer at this level, as their business is a going
concern, and profitable. Re‐valuing the assets would be a fairly pointless exercise, as even
this ignores the fact that Stagg is an active business entity. Net asset valuation does,
however, give us an ‘absolute floor’ to any range of estimates.
Proxy P/E ratio
We know that the sector average P/E ratio for food manufacturing is 17.2. Given that this is
the only available P/E ratio, we will assume that it is appropriate for valuation estimate
purposes. It is also the ratio that we use to value our own shares, for internal transactions.
The P/E ratio can be applied to Stagg’s profit before tax excluding exceptional items
(N$7,032m), giving an indicative valuation of N$121m.
We would have to question whether N$7m is a ‘normal’ level of profit, so asking Stagg for
historic (and planned) P&L accounts would be advisable. However, on the basis of the
information provided (which is ‘clouded’ by exceptional activity, in the two years seen), the
valuation of N$121m seems appropriate.
This valuation assumes that shares in Stagg are freely‐marketable, as the P/E ratio applies
to traded securities. As Stagg is a private company, this is not the case, so we should
discount this valuation quite significantly. A 20% discount for non‐marketability does not
seem unreasonable.
Conclusion
The owners of Stagg would certainly view it as a going concern, so would be unlikely to be
willing to sell for net asset value, however sympathetic they were to the buyer. I suggest,
therefore, that we should assume N$100m as a guideline valuation for planning purposes. If
we were to open negotiations with Stagg, their shareholders would almost certainly be
looking for a consideration in excess of this level.
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MO CK E XAM A ‐ ANSWERS
3
Report
From: Treasury Manager
To: CEO
Date: Today
STRICTLY PRIVATE AND CONFIDENTIAL
SOURCES OF FINANCE FOR THE PURCHASE OF STAGG GROUP LTD
1. Amount required
Firstly, we must recognise how much medium‐ and long‐term finance the Dolly Varden
Stagg Group (DVSG) might require.
The immediate issue is how to raise the N$100m required to fund the purchase of Stagg.
This ignores any further funds that might be needed, after the acquisition, to finance
restructuring. There may be relocation, rationalisation and redundancy costs as we seek to
exploit synergies. We also need to look into the medium term, at our requirement to re‐
finance our N$14m of existing debt, which is due for repayment in 2021 and carries a
restrictive covenant. It will probably also be necessary to re‐finance Stagg’s existing
N$140m of debt, as it is likely to carry similar restrictive covenants and may even become
repayable on acquisition.
I propose to base my evaluation on the assumption that we require about N$260m of total
long‐ and medium‐term finance.
2. Internal sources (continuing operations)
Suitability: DVSG can access its current free cash balance and any cash flow generated by
operations. These sources are always preferable, as they incur very low (or zero) financing
costs and do not require stakeholder approval.
Acceptability: If DVSG could fund its growth from internal sources, stakeholders would be
indifferent.
Feasibility: DVSG currently has a very low cash balance (about NS13m), most of which is
earmarked for future capital investment projects. We also generate a relatively modest
amount of cash from operations. While the latter might be improved, by better working
capital management or improvements in operating efficiency, the amount involved is small
in relation to our financing needs.
Conclusion: This source is NOT feasible.
3. Debt
Suitability: Incurring N$260m of medium‐ or long‐term debt would leave DVSG very highly
geared. This would expose the company to very high liquidity risk, as interest and capital
payments would have to be funded.
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Acceptability: It is unlikely that our shareholders would approve a significant increase in
gearing, due to the risk of insolvency and the threat to dividend cover. Dolly Varden might
also find it difficult to persuade a bank to lend such a large amount, as we do not have a
track record managing a company the size of the combined entity, though Stagg may have
an existing relationship that we could utilise. Although we have a good relationship with
our bank, the amount required is far in excess of the sort of funds provided by a high‐street
bank. We would probably need to find a merchant bank, with whom we would not have a
relationship. Once again, Stagg may be able to help.
Feasibility: Such a level of debt would need to be secured. I initially estimate the debt
capacity of DVSG at about N$260m. This is the sum of the book values of Net Assets
available for fixed and floating charges, ignoring existing debt*. However, this includes a
value for intangibles (N$110m in Stagg), which a lender would probably exclude from their
security calculations. It also might change on acquisition due to revaluations or the disposal
of unwanted assets.
* Stagg: Net assets 76m, existing debt 138m. DV: Net assets 32m, existing debt 14m.
Conclusion: This source is unsuitable, unacceptable to stakeholders and infeasible in terms
of security, at the full amount of N$260. However, a lower level of debt such as N$100‐
150m might pass all three tests, depending on gearing (see below). This would require
further investigation.
4. Equity (existing shareholders)
Suitability: As a large combined entity, DVSG would certainly merit greater equity
participation than at present. We would need to investigate whether DV has authorised,
but unissued, share capital. However, any major capital issue would require the approval of
DV shareholders in General Meeting.
Acceptability: Existing DV shareholders are likely to resist any change in the balance of
shareholdings, despite the ‘one shareholder, one vote’ clause, unless they can be convinced
that it is for the good of the company and its employees. Certainly, the family (who own
89% of the existing shares) are unlikely to wish their holding to be diluted unless there is no
alternative.
Feasibility: It is highly unlikely that the current shareholders of DV have N$110‐160m of
cash available to buy additional shares, so a rights issue is infeasible.
5. Equity (new shareholders)
Suitability: Any major capital issue would require the approval of DV shareholders in
General Meeting. This option conflicts with our core value that Dolly Varden is ‘not for sale’.
Acceptability: Existing DV shareholders are unlikely to accept any change in the balance of
shareholdings, unless there is no option. A major capital issue, by whatever means (see
conclusion, below), would not be possible unless the ‘one shareholder, one vote’ clause
were removed. A new investor would expect voting rights in line with their holding. They
would also be unhappy with many of the unique characteristics of DV, such as its pricing
policy and charitable contributions.
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There is also the issue of DV being a ‘family company’ and ‘not for sale’. New shareholder(s)
would expect control in return for their investment. Existing shareholder would probably
resist any loss of control. Structuring equity into different classes (with different voting
rights) would make any new equity investment far less attractive and possibly unacceptable
to investors.
Feasibility: Investing in DVSG is likely to be attractive to investors. The combined entity will
have valuable brands, a strong market position, and great potential. The appetite of
potential investors will, of course, depend on the structure and terms of the issue. There
will also be significant issue and compliance costs, depending on the type of share issue.
6. Conclusion
The only financing option that is possibly suitable, acceptable and feasible is a combination
of a large equity issue (N$110‐160m) combined with debt for the remainder.
For this to be acceptable to the DV shareholders would require a major shift in culture, and
to be feasible would require significant changes to policy.
The only two ways to raise such a significant amount of new equity would be an Initial
Public Offering (IPO) or a placing with a Private Equity firm.
4
SLIDE PRESENTATION
By: Company Secretary
The Methods and Consequences of a Major Equity Issue
Title slide:
The methods and consequences of a major equity issue
Company Secretary
Slide 1:
Overview
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IPO – how it works
Private Equity – how it works
Institutional Investors
Private Equity investors
Governance after an IPO
Questions
Notes:
In this presentation, I am going to look at various issues relating to the suggested equity
financing of the Stagg acquisition.
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Slide 2:
IPO
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Initial public offering
Become a listed, public company
Shares issued to the public
Many shares will be acquired by institutions
Expensive and complex
Notes:
An IPO is an offer, for the first time to the general public, of shares in Dolly Varden. We
would offer for sale a very significant number of new shares, at an estimated market price,
through the securities exchange.
As a result of this, Dolly Varden would become a listed, public company. Its shares would be
listed on the exchange, and subsequent trades would take place between individual
shareholders on a market price basis.
While many shareholders might be ordinary members of the general public, including
ourselves, we should expect a significant percentage of the shares to be acquired by
institutional investors such as insurance companies, pension funds and other financial
institutions. We will no longer have any control over who holds shares in Dolly Varden.
An IPO is an expensive and complex exercise, and there is no guarantee of success. We
would have to give away a significant amount of information about our future plans, in
order to persuade investors to subscribe. We still may not raise the amount of new capital
that we need. Being a listed company would also add complexity to our business, and make
us accountable to a wide shareholder base, the market as a whole, regulatory authorities
and the media.
Slide 3:
Private Equity
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Private ownership
Negotiated terms
High returns
Shares or mezzanine instrument
Notes:
A Private Equity investment is precisely that. One organisation (or, occasionally, two) makes
a significant investment in the future of Dolly Varden. Unlike an IPO, we would have control
over who made the investment, and on what terms. However, a Private Equity investor
would require a say in our future, and would expect a significant return on their
investment.
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Typically, Private Equity firms either take ordinary shares, or preferred equity or debt that
ranks above the ordinary shares (known as mezzanine finance). Unlike venture capitalists,
Private Equity investors are not interested in a short‐term return. They specialise in funding
growth, and often stay involved for the medium‐term. They also tend to reduce their
holdings gradually, over an extended period (unlike venture capitalists, who tend to rely on
an IPO to realise their returns).
Slide 4:
Institutional Investors
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
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

Will hold fairly large minority holdings
Will expect to be treated differently
High power
Proactive management and communication
May block strategic options
Will require high returns
Notes:
Institutional investors, such as pension funds and other financial institutions, tend to view
their shareholdings as medium‐ or long‐term investments, rather than speculative trades.
They typically take a significant minority stake in a smaller company (1‐10%), and expect
preferential treatment over very small shareholders.
While an individual institutional investor would be unable to block strategic decisions, they
often work ‘in concert’ to exert influence over strategic directions. Institutional Investors
are normally ‘key players’, by any listed company.
Slide 5:
Private Equity Investors

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
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
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Will hold large majority holding(s)
Will expect Board representation
High power
Will offer management support and advice
May block strategic options
May be more accepting of ‘unconventional’ strategy
Will require high returns
Notes:
Unlike Institutional Investors, who are passive observers, Private Equity investors take an
active role in the running of the business. They wish to protect, and maximise, the returns
on their investment.
Also unlike Institutions, they will expect to be represented at Board level, in an executive
capacity. The Board representatives nominated by Private Equity always have valuable
senior management experience, and may have previously been involved with similar
projects or within the industry. This gives them the skills to support and influence the
strategy of the company.
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While a Private Equity investor may insist on a ‘veto’ over major decisions, at Board level,
they may also be more open and accepting of an unconventional business model or
strategy such as that pursued by Dolly Varden. However, like Institutional Investors, they
will be looking for a high return on their investment so they would be unlikely to support
any strategy that limited returns.
4
(b) Slide Presentation ‐ continued
Governance after an IPO
Slide 5:
Governance after an IPO
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
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

Northland Code of Governance
Non‐executive Directors
Board expertise and composition
Committees
Organisation structure change (Internal Audit)
Compliance costs
Notes:
If we were to pursue an IPO, as a way to raise funds for the acquisition of Stagg, we would
become subject to all of the provisions of the Northland code of Corporate Governance.
The code applies to all listed companies, and would require us to comply with the
provisions, or explain (in our published accounts) why we had chosen not to comply. Full
compliance would be expected, by our stakeholders, and any non‐compliance would
probably be perceived as a weakness or risk.
Many of the immediate requirements of adopting the code would directly affect you. The
code has a number of provisions relating to the composition and conduct of boards of
directors. We would be expected to implement the following changes:



We would need to identify, and appoint, at least six Non‐Executive Directors (NEDs).
There must be a simple majority of NEDs on the Board of any listed company. These
would have to be suitably‐experienced individuals, who could contribute to Board
meetings, advise on strategic direction, and ensure that we run the company in
compliance with the governance code and in the best interests of shareholders and
other stakeholders. In addition to their experience, these individuals must also be
‘independent’ from Dolly Varden – they cannot be ex‐employees, pensioners,
customers, suppliers, or family and friends of the executives.
One of those new NEDs would have to become Chair of the Board. Sir Marcus is a first‐
class Chair, but he is not deemed independent, under the code. This is because he is an
ex‐employee, family member, Chair of the Trust and also has executive responsibilities.
Sir Marcus could, of course, remain on the Board. However, he would be classed as an
executive member, for the purposes of calculating the majority.
We would also have to examine the qualifications and experience of all the executive
members of the Board. We would be expected to ensure that Board members were the
most appropriate individuals to hold their posts.
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MO CK E XAM A ‐ ANSWERS
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Once we had changed the composition of the Board, we would be expected to make
changes to a number of the Board sub‐committees. These would have to consist mainly
of NEDs, and some of them would have to be chaired by a NED. In particular, the Audit
Committee should only consist of NEDs (at least one with recent financial experience),
and the Nominations Committee should be chaired by the Chair of the Board and
consist of a majority of NEDs. Sergey would no longer be permitted to serve on the
Audit Committee, and Anna could no longer chair the Nomination Committee.
Remuneration policy and practice, for executives and senior managers, would have to
be overseen by a separate committee, consisting entirely of NEDs.
We would also have to make changes to our organisation structure. It would not be
seen as appropriate for the Internal Audit function to report to Sergey, due to a conflict
of interest. Instead, Internal Audit would report to the Chair, through the Audit
Committee.
There would most likely be many more changes to structure, policy and procedure.
These, and the amount of time and effort that we would have to put into reporting and
communication, would impose significant compliance costs of Dolly Varden. We would
have to investigate all the changes and costs, prior to making a decision whether to
proceed with an IPO.
Slide 6:
Any questions?
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MARKING SCHEME
Question 1
Technical marks
1
a
Up to 2 marks per relevant point made, within a theoretical framework, based on
evidence.
If there is no theoretical framework, maximum 3 in total, for this requirement
(Up to a maximum of 8 in total)
b
1 mark for each valid point made, based on evidence from the Code.
(Up to a maximum of 8 in total)
Professional skills marks
How well has the
candidate
demonstrated
professional skills as
follows:
Not at all
Not so well
Quite well
Very well
1 (a)
The candidate has
failed to
demonstrate any
scepticism
regarding the
culture described.
The candidate
demonstrated no
evidence of
challenging or
questioning the
information
provided.
The candidate has
demonstrated
some, but limited,
scepticism
regarding the
information
provided. The
candidate
questioned some of
the aspects of
culture. However,
others were
accepted at face
value
The candidate has
demonstrated
scepticism of the
information
provided. The
opinions expressed
were reasonably
sound.
The candidate has
demonstrated
deep scepticism
of the
information
provided. The
candidate
strongly
questioned the
validity of the
culture in a
professional and
justified manner.
0
0.5
1
2
The candidate has
failed to
demonstrate any
scepticism
regarding the
ethical code. The
candidate
demonstrated no
evidence of
challenging or
questioning the
reasonableness of
the information
provided.
The candidate has
demonstrated
some, but limited,
scepticism
regarding the
information
provided. The
candidate
questioned some of
the points in the
code. However,
others were
accepted at face
value
The candidate has
demonstrated
scepticism of the
information
provided. The
opinions expressed
were reasonably
sound.
The candidate has
demonstrated
deep scepticism
of the relevant
points of the
ethical code. The
candidate
strongly
questioned the
validity of the
points in a
professional and
justified manner.
0
0.5
1
2
Scepticism skills in
probing the
information
provided
1 (b)
Scepticism skills in
challenging the
information
provided
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MO CK E XAM A ‐ ANSWERS
Question 2
Technical marks
2
a
Up to 2 marks per relevant point made, within a theoretical framework, based on
evidence.
If there is no theoretical framework, maximum 5 in total, for this requirement
(Up to a maximum of 12 in total)
b
Up to 2 marks per relevant point made, based on evidence.
1 mark for each relevant calculation (maximum 4 in total, for relevant and
appropriate calculations)
(Up to a maximum of 12 in total)
Professional skills marks
How well has the
candidate
demonstrated
professional skills
as follows:
Not at all
Not so well
Quite well
Very well
2 (a)
The candidate has
demonstrated no
evaluation skills.
The answer is
largely theoretical,
or superficial.
The candidate has
demonstrated
some evaluation
skills in assessing
the options
available to DV.
However, the
answer lacks
insight or answers
are purely
theoretical.
The candidate has
demonstrated
some sound
evaluation skills in
assessing the
options available
to DV. Value has
been added to the
theory, using the
information
provided.
The candidate has
demonstrated
excellent
evaluation skills.
The candidate has
used significant
professional
judgement to
evaluate the
alternatives
available to DV.
0
1
2
3
The candidate has
demonstrated no
commercial
acumen. The
candidate has
failed to recognise
that many
methods are
inappropriate to
the circumstances.
The candidate has
demonstrated
some commercial
acumen. The
candidate has
identified
reasonable
methods, but the
arguments are
invalid and the
conclusions
inappropriate
The candidate has
demonstrated
some sound
commercial
acumen. The
candidate has
provided
appropriate
valuations, but
failed to justify
their conclusion (or
concluded
inappropriately).
The candidate has
demonstrated
excellent
commercial
acumen,
calculating
appropriate values,
concluding at an
appropriate level,
and supporting this
with clear and valid
justification
0
1
2
3
Evaluation skills in
assessing the
options available
2 (b)
Commercial
acumen skills in
using your
judgement
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Question 3
Technical marks
3
Up to 2 marks per relevant point made, within the framework, based on evidence.
If there is no attempt to use the framework, maximum 8
If points are inappropriately‐classified, award only 1 mark for them
(Up to a maximum of 18 in total)
Professional skills marks
How well has the
candidate
demonstrated
professional skills
as follows:
Not at all
Not so well
Quite well
Very well
3
The candidate has
demonstrated very
limited analysis
skills. The answer
is either
unstructured (with
no reference to the
SAF model) or
theoretical (with
no application to
DV)
The candidate has
demonstrated
some analysis skills
in using scenario
information to
apply the model;
however this
application is often
superficial and/or
too theoretical.
The candidate has
demonstrated
analysis skills in
using scenario
information to
apply the SAF
model. However, a
few instances lack
depth or clarity.
The candidate has
demonstrated
excellent analysis
skills in using
scenario
information to
apply the SAF
model. Arguments
are clear and valid.
0
1
2
4
Analysis skills in
your consideration
of the information
provided
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MO CK E XAM A ‐ ANSWERS
Question 4
Technical marks
4
a
Up to 2 marks per relevant point made, based on evidence.
(Up to a maximum of 14 in total, maximum 8 for each part)
b
Up to 2 marks per relevant point made, based on evidence.
(Up to a maximum of 8 in total)
Professional skills marks
How well has the
candidate
demonstrated
professional skills
as follows:
Not at all
Not so well
Quite well
Very well
4 (a)
The candidate has
demonstrated no
commercial
acumen. The
candidate has
failed to recognise
that the
expectations of
shareholders
differ.
The candidate has
demonstrated
some commercial
acumen. The
candidate has
recognised the
differing nature of
the stakeholders,
but the arguments
regarding role and
influence
inappropriate
The candidate has
demonstrated
some sound
commercial
acumen. The
candidate has
recognised the
differing role and
influence, but
failed to recognise
the consequences
for DV.
The candidate has
demonstrated
excellent
commercial
acumen,
recognising the
consequences for
DV and supporting
this with clear and
valid justification
0
1
2
4
The candidate has
demonstrated
poor
communication
skills. They have
failed to present
the required
information in a
clear, objective
and unambiguous
way. The answer is
not communicated
in an appropriate
format
(presentation) or
tone (delivered by
the Company
Secretary, at Board
level)
The candidate has
demonstrated
some basic
communication
skills in presenting
an appropriate
presentation
format. Some
relevant
information is
contained in the
answer but the
tone is not
persuasive
/appropriate.
The candidate has
demonstrated
good
communication
skills in the
presentation to the
Board. The
candidate has
presented most of
the relevant issues
and has done so
concisely and in
most cases, clearly.
The candidate has
demonstrated
excellent
communication
skills. The
presentation was
correctly
structured,
covered all of the
relevant points
needed by the
Board in
understanding the
issues and was set
at the correct tone.
A persuasive
response.
0
0.5
1
2
Commercial
acumen skills in
demonstrating
your awareness of
the external
factors in the
financing decision
4 (b)
Communication
skills in persuading
the Board
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