Duties of the Board of Directors of Mergent Ltd.

Please only answer section B in the doc provided and add your own sources

Section B: Case study       Total: 60 marks 

Case study: Mergent Ltd.  Task for you:  You have been asked by the newly appointed chairman of the board of Mergent Ltd for advice. What should the board really be doing? Is the board the right size and structure, does it have the right members to do this? How might the board’s effectiveness be increased? Please advise.  A brief history of the company 1953 Mergent Ltd incorporated by John Mergent to manufacture and sell fire alarms. 1950s–60s Company grows significantly, expanding its range of products and markets 1968  John Mergent’s son William appointed managing director,  John remains as executive chairman of the board. 1970s  Company continues to expand. Products now detection systems rather than fire alarms. 1978  John Mergent retires from chairmanship, William appoints himself chairman and CEO. 1984  Mergent acquires an Australian company in the same industry. Rate of growth slows. 1988  Cash flow problems due to over-expansion, falling markets, and more      competition.  1991  Company facing serious financial problems. The Australian venture is loss making.  1993  Peter Bird (47) appointed CEO. He has international business experience and a track record of business renewal. William remains as executive chairman of the board. 1994  The company declares a group loss for the first time in its history. Major contracts for detection and report systems in airports in Singapore and Hong Kong. Schroders make £4 million venture capital loan convertible to equity 1995  Company back in profit. Peter Bird says that ‘Mergent is no longer in the fire alarm business but in the information technology business. Our strategy is to provide companies and governments all round the globe with catastrophe avoidance systems.’ Joint ventures with companies in Japan and Canada. 1996 Hostile offer to buy controlling shares from non-management shareholders rejected. Mergent acquires two further subsidiaries (90% and 72% holdings) in US companies that had acted as their agents in North America. More strategic alliances with companies in China, Malaysia, and Germany. 1997 Competition has become fierce; rapidly changing products and services; new entrants offering control systems on the back of other communication systems; contracts fiercely contested. Serious down-turn in Asia Pacific markets. No growth this year. Profitability hit. William, facing ill-health, decides to retire and join his daughter in the United States. 1998 Robert Parker appointed to chair the board. Worsening international economic situation, with no slackening in rate of competitive product/service innovation, falling tender margins and down-turn in market demand. Nevertheless the executive directors have prepared a three-year strategic statement showing 8% p.a. growth through new product launches, strategic alliances, and acquisitions.  Mergent Ltd basis of governance  1953 Company incorporated in England. Equity capital £10,000 ordinary voting shares— John Mergent 63%, his wife 10%, his father-in-law 10%, David Perkins Ltd (a major supplier) 15%, an employee 2%. 1963 John Mergent 60%, his wife 18%, David Perkins Ltd. 12%, Patrick McGuire 5%, William Mergent 5%. 1968 John Mergent 51%, his wife 18%, William Mergent 14%,   David Perkins Ltd 7%, Patrick McGuire 5%, William Mergent 5%. 1983 John Mergent and his wife die: shares transferred to three members of the family and a new charitable trust. David Perkins Ltd sell their shares to William Mergent. William Mergent 35%, Patrick McGuire 4%, Robert Smith 2%, other (non-management) members of the Mergent family 48%, the Mergent charitable trust 11%. 1994  Schroders acquire right to convert a loan to equity shares, with the possibility of a stock market listing and public quotation. Some transfer of shares. New share issue. William Mergent 33%, Jo Clarke 3%, Robert Smith 5%, Roger Foy 2%, other (non-management) members of the Mergent family 44%, the Mergent charitable trust 13%. 1995  Directors’ share option scheme introduced using share price valuation formula produced by the company auditors.  Mergent board size and membership 1953 [4] Chairman and managing director—John Mergent.  Other directors—his wife, his father-in-law, a nominee of David Perkins Ltd. 1963 [6] As above plus the finance director and the operations director of Mergent. 1968 [6] Board substantially restructured to reflect the developing business situation  John Mergent—executive chairman, William Mergent—managing director,   Patrick McGuire—finance director, Harry Benefit—operations director,   Robert Smith—non-executive director, expertise in international contracting,  Roger Foy—non-executive director, electronics engineer. 1978  [5] William Mergent—chairman and CEO, Patrick McGuire—finance director,  Harry Benefit—operations director, Robert Smith—non-executive director, Roger Foy—non-executive director. 1985  [6] As above except Susan Glendower—finance director replaces Patrick McGuire who becomes a non-executive director 1990  [7] An additional non-executive director Robert Parker—chartered accountant, expertise in financial management and the husband of a (non-management) Mergent family shareholder. 1993  [10] William Mergent—executive chairman, Peter Bird—CEO, Susan Glendower— finance director, Jo Clarke (replacing Harry Benefit)—operations director, Gordon Wells—human resource director, Percy Tan Lai Kai—marketing director (International), Robert Smith—non-executive director, Roger Foy—non-executive director, Robert Parker—non-executive director, Patrick McGuire, non-executive director.  1994 [11] Schroders nominee—Frederick von Nuemann—appointed to the board. Patrick McGuire retires. Mary Mergent, a non-management family member appointed. 1997 [10] William Mergent retires. He is not replaced immediately; Peter Bird appointed acting chairman and CEO. Pressure from Mergent family for more representation at board level. 1998 [10] With prompting from Frederick von Neumann, Robert Parker appointed chairman of the board.  Key issues facing the new chairman of the board  Robert Parker has no experience as a board chairman. He has served on two other boards as an executive finance director and, subsequently, he also now serves as a non-executive director on another (non-competing) company. He joined the Mergent board as a non-executive in 1990, serving under the chairmanship of William Mergent until 1997. Since then, the board meetings had been chaired by the CEO, Peter Bird. Parker felt that William Mergent’s boardroom style was rather dominant and authoritarian. He called himself ‘executive chairman’, frequently referred to the earlier days when the business was built up by his father, and effectively treated the company as a though it was his own. Parker thinks that this may not be the most appropriate role model for him to follow. He also feels that during the short chairmanship of Peter Bird the board had been turned into a rubber-stamp for the CEO’s ideas, but Parker has some difficulty in knowing what to do.