The objective of this report is to conduct an audit of Dick Smith Holdings Limited to evaluate the governance and risk management strategy of the company. This report will analyse the commitments and practices undertaken by the corporation which leads to its failure. The case of Dick Smith Holdings Limited’s collapse will be evaluated in this report understand the corporate governance failures which lead to failure of the company. Dick Smith was an iconic retailing corporation in Australia and its operations were situated across different locations in the country. The company collapsed in January 2016, and the brand name of Dick Smith Holdings Limited was acquired by Kogan.com in May 2016 (Robertson, 2016). There is a wide range of key factors which resulted in causing the collapse of Dick Smith which range from corporate governance failure to unethical operations of the company.
The purpose of this report is to evaluate the case of Dick Smith in order to understand how lack of effective compliance with corporate governance policies leads to negative consequences for corporations (Business Insider, 2016). Firstly, the report will evaluate the background of Dick Smith Holdings Limited to understand the organisation’s profile and its nature of operations. Secondly, this report will analyse the type of competition faced by the company along with analysed of acknowledgement given in the annual report of the company. Thirdly, this report will evaluate the case issue to understand the consequences through analysis of the risk. Lastly, this report will provide recommendations for Dick Smith which to comply with corporate governance principle which would have helped in the company to avoid its collapse.
Dick Smith Holdings Limited or Dick Smith was an Australia based retailing chain which sold consumer electronics, electronic project kits and other electronics relating goods for its customers. The corporation was founded in 1968 by Dick Smith and his wife. The company was first founded as car radio installation service which later evolved into Dick Smith Holdings Limited. The initial capital invested in the corporation was AU$610 in 1968, and later the husband and wife sold the company to Woolworths Limited for a total of AU$25 million (Han, 2016a). This acquisition was made in 1982 in which 100 percent of the shares of Dick Smith was acquired by Woolworths. The company was rebranded as Dick Smith Electronic Powerhouse in 1996, and it started to expand its operations in different countries. Dick Smith Technology saw a rise in its brand value because it quickly becomes customers’ favourite place to shop for customer electronics products.
In 2012, the ownership of Dick Smith changed against from Woolworths to another Australia based company called Anchorage Capital Partners by paying AU$20 million. However, the return for Woolworths from the liquidation of the assets of Dick Smith was worth over AU$110 million. After acquiring the shares of Dick Smith, Anchorage Capital Partners floated those shares in the stock market during 2013. Anchorage holds 20 percent of the shares in the company before its floatation until September 2014 (Chung, 2016). Later in 2015, the capitalisation of Dick Smith fall over 80 percent in the market, and the company was restrained from trading on the Australian Stock Exchange (ASX). The brand name, online services and intellectual property rights of the company were brought by Kogan.com, and the rest of the assets were liquidated.
Dick Smith Holdings Limited was founded in 1968 and it mainly served in different locations of Australia and New Zealand and its headquarters was situated in Chullora, Australia. The ownership of the company shifted between RH and PA Smith, Woolworths and Anchorage Partners. In 2015, the company had around 3,300 employees for managing its operations in Australia and New Zealand (King and Liew, 2016). The company was liquidated in 2016, and its brand value is acquired by Kogan.com.
Nature of work
Dick Smith Holdings Limited operated in retail industry by selling consumer electronic products to customers. The nature of work of company was to provide various consumer electronics goods, electronic project kits and hobbyist electronic components to its customers (Smart Company, 2016).
Areas of company sensitivity
The key sensitive areas for the company was increasing competition in the Australian retailing market in which new companies were entering and expanding their operations which affected the customer base of Dick Smith (Lau, 2016). The corporation was facing challenges from e-commerce websites who were using the online market to reach a wider audience without facing substantial operating expenses. The corporate governance areas of the company were weak because the management of the company did not maintain transparency in its operations, and they avoided ensuring that the interests of stakeholder of the company are achieved from its operations.
Type of competition
One of the key reasons for failure of Dick Smith was that it did not compete with its competitors that lead to its failure. After gaining massive growth in consumer electronics market, the company stopped innovating, and it relied on old and traditional ways to conduct its operations. As the market changed, the demand of customers changed as well, and they avoided purchasing from Dick Smith and preferred the products and services of its customers. The competitors of Dick Smith include Harvey Norman, Kogan.com, JB Hi-Fi, Tandy Electronics, and many others (ASIC, 2016). Therefore, Dick Smith faced fierce competition from its competitors which resulted in creating challenges for companies and reducing its customer base.
Acknowledge in company’s annual report
As per the annual report of Dick Smith, the Board of Directors of the company was committed to achieving the heightened standard of corporate governance while conducting the business of the company. The company followed the ASX principles and recommendations in order to ensure that they implement a stakeholder approach while conduct its operations to meet the interest of its stakeholders and discharge its social responsibilities (ASX, 2015). It is acknowledged in the annual report of the company, and its board has laid a solution for management and oversight of the operations of the company. To achieve this objective, the company disclosed the roles and responsibilities of its board and management, and they complied with the listing requirements issued by ASX. The structure of the company was focused to add value because it has implemented a nomination committee for hiring of its board members. Another key principle highlighted in the annual report of Dick Smith was that the entity and its management act ethically and responsibly while taking business decisions (Smart Company, 2016). The company was focused on safeguarding the integrity of corporate reporting. This is a key factor because false reporting was one of the key reasons which resulted in the fall of Dick Smith.
The company provided that it has an audit committee to ensure that its operations are independent and focused on achieving the interest of the company and its stakeholders (Kent and Zunker, 2013). The company also pledged in its annual report that it would make timely and balanced disclosures and respect the right of security holders. Moreover, the company provided that it will recognise and manage risk relating to the business to ensure that the interests of the stakeholders are not affected in a negative manner (ASX, 2015). The company also provided that it will remunerate fairly and responsibly to its employees. These were the key corporate governance policies implemented by the management of Dick Smith in order to ensure that its operations are conducted in an ethical manner. Based on these policies, it can be seen that the board of Dick Smith has implemented effective corporate governance policies for its stakeholders. However, the board still failed to comply with these policies due to which the company had to shut down its operations.
Issue and changes
The issue raised in the case of Dick Smith is the failure of the management of the company to sustain its operations to ensure that the company continued to run its operations in an effective manner. Some major issued which lead to the failure of the company includes failure to manage cash flow, debtors and inventories of the corporation (Murphy, 2016). The management of Dick Smith leads did not invest the capital of the company into innovative approaches to ensure that it is able to provide appropriate competition to its competitors. The debtors of the company were increasing which also limited the cash flow in the corporation. The inventories of Dick Smith were not properly managed by the executives of the company which resulted in higher operating costs that reduced the profit of the company.
In 2015, most of the inventories of the company were written off drastically. Another key issue relating to failure of corporate governance policies was highlighted in this scenario. Although the board of the company provided in its annual report that they prioritise the independence of disclosures, however, the last audited financial statement of the company before writing off its assets has no adverse findings. The management issued the annual report three months before, yet they did not include any information about failure to manage its inventories. The CEO of Dick Smith Holdings Limited at the time, Nick Abboud, and its board members failed to address the major factor that the company did not have enough resources to manage the operating expenses of the corporation (Han, 2016b). Another key factor which raised eyebrows in the corporate governance structure of Dick Smith was the payment to Macquarie Bank. The bank was an unsecured creditor of the company, and its debt was paid post-June 2015 period which was one year before the liquidation of the corporation.
Change and consequences
The decision to pay the unsecured creditor brings the CEO, Nick Abboud, and the chairman, Robert Murray, of Dick Smith in the limelight. This decision indicated that there is lack of independent internal control in the company and its board is not effective. Questions were also raised in the audit partner of the company Deloitte regarding whether the audit conducted by the corporation is independent or not. After this decision, the stock of the company dropped rapidly which adversely affected the interest of shareholders of Dick Smith (NZHerald, 2016). To address this issue, administrators were appointed in January 2016. Therefore, the key issues raised in this case is relating to failure of the internet control of the company to take effective business decisions which fall short in various ways even after implementing corporate governance policies. The executives also took a biased decision which caused by scattered financial and legal functions in the corporation. The communication system of the company was wrong as well.
Potential factors affecting the organisation
There were various factors which were adversely affecting Dick Smith at the time. Questions were raised on the leadership abilities of the executives and board members of the company. The failure of the company to comply with corporate governance policies shows the negative impact on its brand reputation. The substantial decrease in the stock price of the company was an indication of the potential negative impact on the company and its stakeholders. The lack of effective communication and compliance with corporate governance policies resulted in adversely affecting the company and biases was shown in the company as well (Knapp, 2016). The shareholder of the company suffered negative implications of the decisions taken by the management because their money was lost as the share price of the company plummeted. Increased competition from new and existing competition and changes in customer preference also affected the operations of Dick Smith.
Analysis of risk
The key risk faced by Dick Smith was failure of the internet control of the company. The internal control of the company was in the hands of corrupt officers who were focused on increasing the profits of the company rather than conducting its operations in an ethical manner (Berger, Imbierowicz and Rauch, 2016). The communication channels of the company were not effective because the executives did not provide relevant information to the shareholders regarding the fact that managing its inventories are increasing the operating expenses of the firm. The management hides this fact from the shareholders to ensure that they did not remove their money from the corporation. The risk relating to competitors also affected the business of the company because it reduced the customer base of Dick Smith (Stafford, 2016). Online retailers were able to reach a wider audience and offer a wide range of products to them without investing in physical assets such as store location, assets and others. The unethical actions of the board and management of the company also increased the risk of the sustainability of the corporation.
Recommendations and Conclusion
In conclusion, the case of Dick Smith Holdings Limited is a good example to understand the failure of corporate governance policies of a company which resulted in the collapse of the enterprise. The competition faced by the corporation increased due to growth in the number of competitors and change in the preference of customers. The internal control system of the company failed to comply with corporate governance principles which enable the executives and the board to conduct their operations in an ethical manner. The management of the company was not able to properly manage the cash flow resources of the company and its inventories. The CEO and chairman of the company decided to pay off the debt of an unsecured creditor when the corporation did not have the resources to manage its operations. Due to lack of compliance with effective corporate governance policies, the company has collapsed. Following recommendations could have assisted the company in managing its operations which would have avoided the collapse of the company.
- The corporation should have adopted a Corporate Social Responsibility (CSR) framework in order to perform its operations. The model should be focused on evaluating the needs of stakeholders in order to ensure that their needs are prioritised by the board and executives rather than increasing the profitability of the firm.
- The corporation should have established an audit committee which focused on checking the actions of the board and the management to ensure that they comply with the principles and recommendations issued by ASX.
- The company should have adopted a risk assessment approach in which the management should have evaluated the risk of paying off the debt of the unsecured creditor before taking the decision. The risk assessment approach would have assisted the board and the management to ensure that they were providing correct information to the stakeholders and avoid taking any actions which could result in collapse of the enterprise.
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