5 [P.T.O.4 Lum Co is a family business that has been wholly-owned and controlled by the Lum family since 1920. The current
chief executive, Mr Gustav Lum, is the great grandson of the company’s founder and has himself been in post as CEO
since 1998. Because the Lum family wanted to maintain a high degree of control, they operated a two-tier board
structure: four members of the Lum family comprised the supervisory board and the other eight non-family directors
comprised the operating board.
Despite being quite a large company with 5,000 employees, Lum Co never had any non-executive directors because
they were not required in privately-owned companies in the country in which Lum Co was situated.
The four members of the Lum family valued the control of the supervisory board to ensure that the full Lum family’s
wishes (being the only shareholders) were carried out. This also enabled decisions to be made quickly, without the
need to take everything before a meeting of the full board.
Starting in 2008, the two tiers of the board met in joint sessions to discuss a flotation (issuing public shares on the
stock market) of 80% of the company. The issue of the family losing control was raised by the CEO’s brother,
Mr Crispin Lum. He said that if the company became listed, the Lum family would lose the freedom to manage the
company as they wished, including supporting their own long-held values and beliefs. These values, he said, were
managing for the long term and adopting a paternalistic management style. Other directors said that the new listing
rules that would apply to the board, including compliance with the stock market’s corporate governance codes of
practice, would be expensive and difficult to introduce.
The flotation went ahead in 2011. In order to comply with the new listing rules, Lum Co took on a number of
non-executive directors (NEDs) and formed a unitary board. A number of problems arose around this time with NEDs
feeling frustrated at the culture and management style in Lum Co, whilst the Lum family members found it difficult to
make the transition to managing a public company with a unitary board. Gustav Lum said that it was very different
from managing the company when it was privately owned by the Lum family. The human resources manager said
that an effective induction programme for NEDs and some relevant continuing professional development (CPD) for
existing executives might help to address the problems.
Required:
(a) Compare the typical governance arrangements between a family business and a listed company, and assess
Crispin’s view that the Lum family will ‘lose the freedom to manage the company as they wish’ after the
flotation. (10 marks)
(b) Assess the benefits of introducing an induction programme for the new NEDs, and requiring continual
professional development (CPD) for the existing executives at Lum Co after its flotation. (8 marks)
(c) Distinguish between unitary and two-tier boards, and discuss the difficulties that the Lum family might
encounter when introducing a unitary board. (7 marks)
(25 marks)
End of Question Paper
