Section A – This ONE question is compulsory and MUST be attempted
1 Hayho is a large international company with direct investments in 65 countries. It is a manufacturer of high
technology products, with each Hayho factory typically employing over 3,000 people. Hayho factories also support
local supply chains employing many more people so each Hayho plant is considered a vital part of the regional
economy in which it is located.
Several years ago, Hayho was widely criticised for its operations in Arrland, a developing country with an oppressive
and undemocratic government. Investigative journalists produced material showing the poor conditions of workers,
and pollution around the Hayho factories in Arrland. They also showed evidence suggesting that Hayho had paid
bribes to the Arrland government so that local opposition to the Hayho operation could be forcefully stopped. After
this episode, the company became very sensitive to criticism of its operations in developing countries. A press
statement at the time said that Hayho, in future, would always uphold the highest standards of integrity, human rights
and environmental protection whilst at the same time ‘responsibly’ supporting developing countries by providing jobs
and opportunities to enable greater social and economic development.
The board of Hayho is now deciding between two possible large new investments, both directly employing about
3,000 people. Both options have a number of advantages and disadvantages and Mr Woo, Hayho’s finance director,
has recently made clear that only one can be chosen at this stage. The two options are of similar investment value
and are referred to as the ‘Jayland option’ and the ‘Pealand option’.
The ‘Jayland option’ is to build a new large factory in Jayland and to recruit a completely new local workforce to work
in it. Jayland is a developing country with few environmental and labour regulations. It has a poorly developed
education and training system, and is generally considered to be undemocratic. Its president, Mr Popo, has been in
office since he seized power in a military coup 30 years ago. Human rights organisations say that he maintains order
by abusing the rights of the people and cruelly suppressing any dissent against him. In early exploratory talks between
Hayho and the Jayland government, Hayho was given assurances that it could pursue its activities with little
regulation from the government as long as the Jayland president, Mr Popo, received a personal annual ‘royalty’
(effectively a bribe) for allowing Hayho to operate in his country.
Finance director Mr Woo said that some stakeholders would probably criticise Hayho, perhaps in the international
media, for investing in Jayland. Hayho may be accused of supporting the dictatorship of Mr Popo in that country,
especially if the ‘royalty’ was ever discovered. Mr Woo calculated that the NPV (net present value) of projected pretax returns of the Jayland option over a ten-year period was $2 billion but that there was also a risk of potential
political instability in Jayland during the lifetime of the investment.
The ‘Pealand option’ is to buy an existing plant in Pealand which would then be refurbished to facilitate the
manufacture of Hayho products. This would involve ‘inheriting’ the workforce of the previous owners. Pealand is a
‘new democracy’, and a transitional economy, having gained its independence ten years ago. In an attempt to purge
the corrupt business practices associated with its past, the Pealand government has become very thorough in ensuring
that all inward investments, including Hayho’s factory purchase, meet exacting and demanding standards of
environmental protection and work conditions. Mr Woo, the finance director, said that the NPV of projected pre-tax
returns over a ten-year period was $1 billion for the Pealand option but that the risk of political instability in Pealand
was negligible. Both of the returns, the forecast $2 billion for Jayland and the $1 billion for Pealand, were considered
to be acceptable in principle.
Mr Woo also said that there were issues with the two options relating to the effectiveness of necessary internal
controls. Whichever option was chosen (Jayland or Pealand), it would be necessary to establish internal controls to
enable accurate and timely reporting of production and cost data back to head office. So a number of systems would
need to be put in place to support the production itself. One staff member, Emily Baa, who had previously worked in
Jayland for another company, gave her opinion to the board about some of the issues that Hayho might encounter if
it chose the Jayland option. She said that Jayland was very under developed until relatively recently and explained
how the national culture was unfamiliar with modern business practice and behaviour. She said that property security
may be a problem and that there was a potential risk to assets there. She also said that, in her opinion, there was a
lack of some key job skills among the potential workforce in Jayland such as quality control and accounting skills.
She explained that quality control skills would be necessary to ensure product specifications were met and that
accounting skills would be necessary for the provision of internal and external reporting. As a manufacturer of very
technologically advanced products, a number of stringent international product standards applied to Hayho products
wherever in the world they were produced.
2Meanwhile, news that Hayho was considering a large investment in Jayland leaked out to the press. In response,
Hayho’s chief executive, Helen Duomo received two letters. The first was from a prominent international human rights
lobbying organisation called ‘Watching Business’ (WB). In the letter, the lobby group said that because of its ‘terrible
track record’ in Arrland and elsewhere, Hayho was being carefully monitored for its ‘unethical business practices’. WB
said its interest in Hayho’s activities had been rekindled since it had received intelligence about the possible
investment in Jayland and warned Mrs Duomo not to make the investment because it would provide credibility for
the ‘brutal dictatorship’ of Mr Popo.
Whilst Mrs Duomo, known for her forthright manner, would normally dismiss threats from groups of this type, she
knew that WB had a lot of support among senior politicians and legislators in many parts of the world. She believed
that WB could achieve some power through mobilising public opinion through effective use of mass media, such as
newspapers and television. WB was also respected as a research organisation and its advice was often sought by
politicians and trade organisations.
Mrs Duomo said she was frustrated whenever anybody got in the way of her accountability to the Hayho shareholders,
but that some interests could not be ignored because of their potential to influence. WB fell into this category.
The second letter she received was from the head of Quark Investments, Hayho’s single biggest institutional
shareholder. The letter sought to remind Mrs Duomo that the Hayho board was employed by its shareholders and that
Mrs Duomo should be determined and resolute in maximising shareholder returns. The letter encouraged the board
not to be diverted by ‘well meaning but misinformed outsiders concerned with things that were actually none of their
business’.
Aware that she had to manage two competing demands placed on her, Mrs Duomo sought advice from Emily Baa,
who had experience of life in Jayland. So she asked Emily Baa to prepare some notes for the next board meeting to
clarify whom the board of Hayho was actually accountable to and how it might respond to the letter from WB.
