In a previous post we wrote about corporate governance in light of the new FRC rules that come into force in July 2019. In this post we wanted to take a look at what can happen when you take your eye of the corporate governance ball. This is particularly pertinent after the news that Patisserie Valerie found £10M in ‘secret’ overdrafts. These that follow are all extreme examples but should serve as warnings to others.
Tesco’s Social Media Meltdown
In 2013 it was discovered that horse meat had entered the food chain ending up in products from several supermarkets that were labelled as beef. The UK’s largest chain, Tesco, was, perhaps, an easy target for those looking to make light, and memes, of the situation and images such as these quickly surfaced.
In that respect there was not much that Tesco could do to prevent these appearing but they didn’t have to make matters worse by tweeting the following. And remember these days things live on forever. if you do a Google search today, some five years later, you will get about 374,000 results.
Enron files for Bankruptcy (and takes down Arthur Anderson with it for good measure)
Enron were a US energy company formed in 1985 following a merger of other, smaller, energy companies. Several years later, when Jeffrey Skilling was hired, he developed a staff of executives that – by the use of accounting loopholes, special purpose entities, and poor financial reporting – were able to hide billions of dollars in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives not only misled Enron’s Board of Directors and Audit Committee on high-risk accounting practices, but also pressured Arthur Andersen to ignore the issues.
In December 2001 Enron filed for bankruptcy which also led to the downfall of auditor Arthur Anderson and the introduction of the Sarbanes–Oxley Act which “increased penalties for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders. The act also increased the accountability of auditing firms to remain unbiased and independent of their clients.”
Stafford Hospital – Poor Care and High Mortality Rates
While the FRC code doesn’t apply to the public and charity sectors that doesn’t mean that the sort of corporate governance issues seen in the private sector can’t happen there. One such failure was at Stafford Hospital where concerns over poor care and high mortality patient rates had ramifications for the rest of the NHS.
Concerns were initially raised in 2007 and this was followed by an investigation that identified “apparently high mortality rates in patients admitted as emergencies”. This investigation was followed up by a full public inquiry in 2010 led by Sir Robert Francis which, amongst many recommendations, suggested that there should be more honesty and openness in the NHS and the Freedom to Speak Up Guardian role was as a direct result of that.
VW Emissions Scandal Reputation Damage
VW have long been seen as a quality car manufacturer but this was called into question late in 2015. It was discovered that the software controlling the cars engines contained a feature that made the emissions seem much better than they actually were. During tests they appeared to emit 40 times less emissions in tests than on the road. The fallout from the scandal has been costly for VW with the total including fines and buy-backs topping €27bn. Another consequence of the issues has been many of VW’s marques move away from diesel engines completely. How long it takes to repair the damage to its reputation is anyone’s guess.
What can you do to avoid such Corporate Governance issues?
All the above have high profile with plenty of coverage in the national media. A lapse of corporate governance doesn’t have to be as high profile for it to similarly affect your business. It could be just an article in the local press or trade publication that has an impact on a similar scale.
In many of the cases above someone knew about the issues but didn’t come forward. What can board members, managers and other interested parties do to help ensure they hear of similar issues early? Keep your ear to the ground. Talk to staff and Be interested.