MARCH 2015 POSTGRADUATE EXAMINATIONS BLM113 CORPORATE GOVERANCE, REGULATION AND COMPLIANCE

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CASE STUDY Aston Electricals Plc Aston Electricals Plc (hereafter the company) has a premium listing on the London Stock Exchange. The company was incorporated over fifty years ago by its founding chief executive, Mr Harry Styles. The company manufactures household electrical goods, which it sells to retailers. It also has a small, but growing, business selling goods directly to the public through a new website. The companys board contains 15 executive directors and 2 non-executive directors. All of the directors are men and their average age is 64. The current chairman Mr John Styles (age 73) is also the companys chief executive (he is the grandson of Harry Styles). The Styles family own 20% of the companys shares and several of them act as executive directors, including Mr Robert Styles (finance director), Mr Dominic Styles (marketing director), Mr Stephen Styles (human resources director) and Mr Edward Styles (property director). The two non-executive directors (Mr Ben Baines and Mr Timothy Brown) were appointed at the same time in 2001 and also act as non-executive directors of several other listed companies. Both non-executives have considerable business experience but they both admit that they have not kept up to date with developments in accounting. In 2010, Mr Baines and Mr Brown entered into a joint venture with John Styles to redevelop some land. The venture proved extremely lucrative for the non-executive directors. John has promised them similar opportunities in the future but has told them not to tell the other directors because, according to him, what we do in our own time, and with our own money, has got nothing to do with the board. The companys board meets twice a year. John says that he prefers long meetings, held less frequently, because these are the most efficient way for the board to transact its business. In his view, board meetings should not get in the way of what matters: getting on with running the business. The dates of board meetings are usually fixed at times to suit the Styles family directors and it is often the case that the non-executive directors are unable to attend because of other commitments.

MARCH 2015 POSTGRADUATE EXAMINATIONS BLM113 CORPORATE GOVERANCE, REGULATION AND COMPLIANCE

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At a recent meeting of the board, one of the items raised under Any Other Business was a proposal to close one of the companys factories in the West Midlands and to move production to a new factory in mainland Europe. This proposal was a complete surprise to many of the directors, including the two non-executive directors. The companys finance director said that competition was fierce and the company needed to reduce its costs. In fact, the finance director told the board that they were all subject to a fiduciary duty to minimise costs and maximise shareholder wealth. The proposal was supported by a long document, over 100 pages in length, which many of the directors had not seen in advance and did not have time to read at the meeting. There was little time to discuss the proposal and several directors did not express their concerns or reservations with the proposal and its potential impact on the companys reputation. The two non-executive directors said nothing because they did not want to upset John Styles (it was common knowledge that John was bad tempered if he did not get his own way; at a previous board meeting he had thrown a glass of water over the company secretary: the secretary resigned and John decided not to replace her). Several years ago, John Styles reluctantly agreed that several board committees should be formed, including an audit committee, remuneration and nomination committee. Each of these committees has three members: John and the two non-executive directors. John acts as the chair of the remuneration and nomination committees, although sometimes sends Robert (the finance director) as his substitute. One of the non-executive directors, Mr Ben Baines, is chair of the audit committee. Robert acted as Johns substitute at a recent meeting of the remuneration committee. The committee met to decide the remuneration for the executive and non-executive directors. It decided that the executive and non-executive directors should receive an annual bonus linked to the companys share price performance over the previous six months. It was also agreed, following a benchmarking exercise organised by a firm of remuneration consultants, that the executive directors salaries would be doubled. Robert explained that this was necessary to protect the companys reputation: we cannot be seen to be paying less than our competitors because as everyone knows we are better than them if you pay peanuts you get monkeys the pay of our directors should reflect our superior status relative to our competitors he explained. At the most recent meeting of the audit committee it was agreed to reappoint the companys auditor, Aston Audit LLP, for another year. The auditors enjoy a close working relationship with the company. One of the audit partners is the godfather of Johns daughter. The auditors have acted as external auditor for the past 30 years; there are no plans for this to change because John believes that stability is important. The auditors provide other services for the company, including internal audit and tax advice.

MARCH 2015 POSTGRADUATE EXAMINATIONS BLM113 CORPORATE GOVERANCE, REGULATION AND COMPLIANCE

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An anonymous letter from one of the companys employees was also discussed at the meeting of the audit committee. The letter contained various allegations, including one relating to data security: it was said that the company was easily susceptible to fraud because its security procedures were weak. It was also alleged that a major contract recently gained by the company was secured as the result of bribery. John dismissed both of these allegations without discussion: they were, in his view, nothing more than the paranoid ramblings of a disgruntled employee wanting to cause me and my company trouble. The claims were not further investigated and John took great pleasure in tearing the letter into small pieces. In the past week, the company has been in the news. Its share price has fallen by 30%. The Serious Fraud Office has announced that it is investigating the allegations of bribery. A breach of data security has resulted in customers personal information being published on the web. The two non-executive directors have resigned. Several institutional investors have publicly criticised the board and have called for Johns resignation. In response, and in order to appear decisive, John has called an emergency board meeting. He plans to tell the board that he has found two new non-executive directors (one is his niece; the other is the wife of Mr Dominic Styles).