Mr Smith feels greatly ______ with his son's performance in

(a) (i) Leaving the service of a board
Resignation with or without notice. Any director is free to withdraw his or her labour at any time but there is normally
a notice period required to facilitate an orderly transition from the outgoing chief executive to the incoming one.
Not offering himself/herself for re-election. Terms of office, which are typically three years, are renewable if the director
offers him or herself for re-election and the shareholders support the renewal. Retirement usually takes place at the end
of a three-year term when the director decides not to seek re-election.
Death in service when, obviously, the director is unable to either provide notice or seek retirement.
Failure of the company. When a company fails, all directors’ contracts are cancelled although this need not signal the
end of the directors’ involvement with company affairs as there may be ongoing legal issues to be resolved.
Being removed e.g. by being dismissed for disciplinary offences. It is relatively easy to ‘prove’ a disciplinary offence but
much more difficult to ‘prove’ incompetence. The nature of disciplinary offences are usually made clear in the terms and
conditions of employment and company policy.
Prolonged absence. Directors unable to perform. their duties owing to protracted absence, for any reason, may be
removed. The length of qualifying absence period varies by jurisdiction.
Being disqualified from being a company director by a court. Directors can be banned from holding directorships by a
court for a number of reasons including personal bankruptcy and other legal issues.
Failing to be re-elected if, having offered him or herself for re-election, shareholders elect not to re-appoint.
An ‘agreed departure’ such as by providing compensation to a director to leave.

(ii) Discuss Miss Hoiku’s statement
The way that directors’ contracts and company law are written (in most countries) makes it difficult to remove a director
such as Mr Smith from office during an elected term of office so in that respect, Miss Hoiku is correct. Unless his contract
has highly specific performance targets built in to it, it is difficult to remove Mr Smith for incompetence in the
short-term as it is sometimes difficult to assess the success of strategies until some time has passed. If the alleged
incompetence is within Mr Smith’s term of office (typically three years) then it will usually be necessary to wait until the
director offers himself for re-election. The shareholders can then simply not re-elect the incompetent director (in this
case, Mr Smith). The most likely way to achieve the departure of Mr Smith within his term of office will be to ‘encourage’
him to resign by other directors failing to support him or by shareholders issuing a vote of no confidence at an AGM or
EGM. This would probably involve offering him a suitable financial package to depart at a time chosen by the other
members of the board or company shareholders.
(b) Importance of the chairman’s statement
The chairman’s statement (or president’s letter in some countries) is an important and usually voluntary item, typically carried
at the very beginning of an annual report. In general terms, it is intended to convey important messages to shareholders in
general, strategic terms. As a separate section from other narrative reporting sections of an annual report, it offers the
chairman the opportunity to inform. shareholders about issues that he or she feels it would be beneficial for them to be aware
of. This independent communication is an important part of the separation of the roles of CEO and chairman.
In the case of TQ Company, the role of the chairman is of particular importance because of the dominance of Mr Smith.
Miss Hoiku had a particular responsibility to use her most recent statement to inform. shareholders about going concern issues
notwithstanding the difficulties that might cause in her relationship with Mr Smith. Miss Hoiku has an ethical as well as an
agency responsibility to express her independence in the chairman’s statement and convey issues relevant to company value
to the company’s shareholders. She can use her chairman’s statement for this purpose.

(c) Criticise the structure of the reward package that Mr Smith awarded himself
The balance between basic to performance related pay was very poor. Mr Smith, perhaps being aware that the prospect of
gaining much performance related income was low, took the opportunity to increase the fixed element of his income to
compensate. This was not only unprofessional and unethical on Mr Smith’s part, but it also represented very bad value for
shareholders. Having exercised his share options and sold the resulting shares, there was now no element of alignment of
his package with shareholder interests at all. His award to himself of an ‘excessively’ expensive company car was also not
in the shareholders’ interests. The fact that he exercised and sold all of his share options means that he will now have no
personal financial motivation to take strategic decisions intended to increase TQ Company’s share value. This represents a
poor degree of alignment between Mr Smith’s package and the interests of TQ’s shareholders.
(d) Criticise Miss Hoiku’s performance as chairman of TQ Company
The case describes a particularly poor performance by a company chairman. It is a key function of the chairman to represent
the shareholders’ interests in the company and Miss Hoiku has clearly failed in this duty.
A key reason for her poor performance was her reported inability or unwillingness to face up to Mr Smith who was clearly a
domineering personality. A key quality of a company chairman is his or her ability and willingness to personally challenge the
chief executive if necessary.
She failed to ensure that a committee structure was in place, allowing as she did, the remunerations committee to atrophy
when two members left the company.
Linked to this, it appears from the case that the two non-executive directors that left were not replaced and again, it is a part
of the chairman’s responsibility to ensure that an adequate number of non-executives are in place on the board.
She inexplicably allowed Mr Smith to design his own rewards package and presided over him reducing the performance
related element of his package which was clearly misaligned with the shareholders’ interests.
When Mr Smith failed to co-ordinate the other directors because of his unspecified business travel, she failed to hold him to
account thereby allowing the company’s strategy to fail.
There seems to have been some under-reporting of potential strategic problems in the most recent annual report. A ‘future
prospects’ or ‘continuing business’ statement is often a required disclosure in an annual report (in many countries) and there is evidence that this statement may have been missing or misleading in the most recent annual report.