Charlie Bacon, the CEO, was satisfied he had beaten off the threat to his board of directors.
Question:
Charlie Bacon, the CEO, was satisfied he had beaten off the threat to his board of directors. A group of institutional investors had put up their own external candidate for election to the board at the next AGM. If successful they would have a voice on the inside at board meetings.
Board elections were staggered with one third being re-elected each year. In response to the threat, Mr Bacon simply shrunk the board by sacking three board members, reducing the total from nine to six. All those dismissed were up for re-election and so the crisis was averted. Next year may prove more difficult but with 25% of shares being owned by employees, and the board refusing to cede to the shareholder request for confidential voting on board elections, he was sure no member of staff would dare to take anything other than the board's position.
The business was experiencing difficult times. It had failed to deliver its forecast returns to shareholders for the tenth year straight, its credit rating had been reduced and last month's Fortune magazine ranked the firm 487 out of 500. These were tough times for the country's oldest and (now second) largest retailer.
The board of directors reflected the company's image, being steady and reliable. In clothing retail this had helped the company survive for over 100 years, until low cost retailers and fast-moving fashion retailers had entered the market. Now the retail sector was making huge losses, tied to main street real estate sites that were expensive to maintain, inflexible and unpopular in relation to out of town malls (shopping centres). In order to avoid breaking up his empire, Mr Bacon had transferred profits from the successful financial services division that provided credit and banking services to its retail customers.
Mr Bacon, along with the other board members, had long-standing personal and family relationships with the company. They all understood the need for change and a new direction but saw no need to move on another shareholder request, that of regular board performance evaluation.
Required:
(a)Identify and evaluate four governance issues raised in this scenario.
(b)Discuss the reasons why a board of directors should evaluate its own performance.
Foundations Of Financial Management
ISBN: 9781259265921
11th Canadian Edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta