Problem:
New Mission Plc is a well-established listed Ugandan chemical company involved in research into, and the production of, a range of chemical used in industries such as agrochemicals, oil and gas, paint, plastics and building materials. A strategic priority recognized by the New Mission Plc board a long time ago was to increase the national presence as a means of gaining international market share and servicing its increasingly geographically dispersed customer base. The New Mission Plc board which operated as a unitary structure, identified Cnooc as a possible acquisition target because of its good product "fit" with New Mission Plc and the fact that its geographical coverage would significantly strengthen New Mission Plc internationalization strategy. Based outside East African Community (EAC) of growth in the chemical industry, Cnooc was seen by analysis as a good opportunity for New Mission Plc, especially as Cnooc's recent flotation had provided potential access to a controlling shareholding through the regional stock market where Cnooc operated.
When the board of New Mission Plc met to discuss the proposed acquisition of Cnooc, a number of issues were tabled for discussion. Nicholas Kawooya, New Mission Plc chief executive, had overseen the research process that had identified Cnooc as a potential acquisition target. He was driving the process and wanted the New Mission Plc board of directors to approve the next move, which was to approve the valuation process with a view to making an offer to Cnooc's shareholders. Nicholas said the strategic benefits of this acquisition was increasing overseas market share and gaining economies of scale.
While New Mission Plc was a public company, Cnooc had been family owned and operated for most of the thirty-five year history. Seventy-five percent of the share capital was floated on its own country's stock exchange two years ago, but Phiona Kiwanuka New Mission Plc company secretary suggested that the corporate governance requirements in Cnooc country were not as rigorous as in many parts of the world. She also suggested that the family business culture was still present in Cnooc and pointed out that it operated a two-tier board with family members on the upper tier. At the last annual general meeting, observers noticed that the Cnooc board, mainly consisting of family members, dominated the discussions and had discouraged the expression of views from the company's external shareholders. Cnooc had non- executive board directors and none of the board committee structure that many listed companies like New Mission Plc had in place. Nicholas reported that although Cnooc's department heads were all directors they were not invited to attend board meetings when startegy and management monitoring issues were being discussed. They were, he said, treated more like middle management by the upper tier of the Cnooc board and that important view may not being heard when devising startegy. Phiona suggested that these features made the Cnooc board's upper teir less externally accountable and less likely to take advise when making decisions. She said that the boards accountability was fundamental to public trust and that Cnooc's board might do well to recognise this, especially if the acquisition were to go ahead.
New Mission Plc financial director, Faith Uwera, advised caution over the whole acquisition proposal. She saw the proposal as being very risky. In addition to the uncertainties over exposure to foreign markets, she believed that New Mission Plc would also have difficulties integrating Cnooc into the New Mission Plc culture and structure. While New Mission Plc was fully compliant with corporate governance requirements. Robert Asingwire, New Mission Plc operations director, asked Nicholas if he knew anything about Cnooc risk exposure. Robert suggested that the acquisition of Cnooc might expose New Mission Plc to a number of risks that could not only affect the success of the proposed acquisition but also potentially New Mission Plc itself. Nicholas replied that he would look at the risks in more detail if the New Mission Plc board agreed to take the proposal forward to its next stage.
Finance director Faith, had obtained the most recent annual report for Cnooc and highlighted what she considered to be an interesting yet unexplained, comment about negative local environmental impacts in its accounts. She asked chief executive Nicholas if he could find out what the comment meant and whether Cnooc had any plans to make provision for any environmental impact. Nicholas was able to report, based on his previous dealings with Cnooc, that it did not produce any voluntary environmental reporting. The New Mission Plc board broadly supported the idea of environmental reporting although company secretary Phiona recently told Nicholas white that she was unaware of the meaning of the terms 'environmental footprint' and 'environmental reporting 'and so couldn't say whether she was supportive or not. It was agreed, however, that relevant information on Cnooc's environmental performance and risk would be necessary if the acquisition went ahead.
Required:
1. Evaluate Cnooc's current corporate governance arrangements and explain why they are likely to be considered inadequate by the New Mission Plc board. Need Assignment Help?
2. Robert suggested that the acquisition of Cnooc might expose New Mission Plc to a number of risks. Illustrating from the case as required, identify the risks that New Mission Plc might incur in acquiring Cnooc and explain how risk can be assessed.
3. Construct the case for Cnooc adopting a unitary board structure after the proposed acquisition. Your answer should include an explanation of the advantage of unitary boards and a convincing case FOR the Cnooc board changing to a unitary structure.
4. Explain four roles of non-executive directors (NEDS) and assess the specific contributions that NEDs could make to improve the governance of the Cnooc board.
5. Write a memo to Phiona Kiwanuka defining 'environmental footprint' and briefly explain the importance of environmental reporting for Cnooc.