Essay: Corporate Governance For Principles And Policies - A Case Study On Dick Smith Holdings.

History of Ownership

Discuss about the Corporate Governance for Principles and Policies.

Dick Smith Holdings, a well-known electronic retailer was represented a positive prospects of the business in August 2015. However, the press of the company was announced the administration that the share price had fallen 80% and in January 2016 (Dicksmith.com.au 2016). Subsequently, the market researchers identified that the company was fall short in revenue optimization due to disappointing sales figure and generation of the cash in the second quarter of 2015-16. Dick Smith Holdings was eventually collapsed after several small investors collectively lost millions of dollars. Since 2016, a halt in trading was requested and on 5^th January 2016, the company was placed into administration by its creditors.

In this assignment, the actual facts regarding the financial conditions of Dick Smith Holdings will be evaluated. However, the main objective is to provide a brief summary of the ownership history of the Dick Smith Holdings brand by addressing ethical dilemmas facing by Anchorage Capital Partners in respect of the floatation of the business and the directors and senior executives of Dick Smith Holdings in respect of the providing reports and accounts of the company.

Dick Smith Holdings Limited was acquired from the Woolworths in November 2012. As young electronics technicians with his passion for everything with wires, Dick Smith had started his commercial journey with the investment of $610 in 1968, by focusing towards installing and servicing car radios. During the expansion phase, the company had grown to 20 stores in the year of 1980 (Dicksmith.com.au 2016). However, 60 percent of the company’s working share had sold to Woolworths Limited in this journey. Later, Dick sold their balance to Woolworths within the close span of time and thus, Woolworths took full ownership of Dick Smith Holdings Limited after paying the total of AU$25million. Historically, Dick Smith, thus, was owned by him and his wife until 1982 and later Woolworths took its ownership control from the founder of the company. In the year 2012, Woolworths has given its ownership by selling their shares to Anchorage Capital Partners against receiving AU$20 millions from the acquirer, who later floated its shares on the “Australian Security Exchange” in the year of 2013 (Dicksmith.com.au 2016). After the successfully inclusion on the ASX in December 2013, the newly transformed, Dick Smith Holdings Limited, was subsequently sold down their ownership in September 2014 for handling the financial debacle (Dicksmith.com.au 2016). However, the company would like to retain their stake of 20 percent with Anchorage Capital Partners for the future period. In May 2016, online retailer Kogan.com acquired the brand name, intellectual property and its online business in New Zealand and Australia of Dick Smith and began taking over its operations.

Ethical Considerations faced Anchorage Capital Partners

During the disappointing sales record and cash generation, the investors of Dick Smith Holdings Limited lost millions of dollars because of the company financial debacle. Though this financial results was unexpected because the listed shares of the company on the ASX previously disclosed a healthy position of the company in the market (Dicksmith.com.au 2016). After that collapse, several market participants along with the founder owner of the business were criticized that Anchorage Capital Partners misrepresented the true value and financial condition of the firm at the time listing of the business on the ASX in 2013 (Tricker 2015). Since then, Anchorage Capital Partners has been facing ethical allegation from Dick Smith Holdings Limited. In other words, Anchorage Capital Partners was criticized for “private equity heist” as the collective responses from Dick Smith and other investors of the company.

Woolworths sold Dick Smith Holdings Limited to Anchorage Capital Partners for $94m in 2012, and this private equity firm floated the business just 15 months later the moment five times that amount (Keating 2016). During the restructure of the business, Anchorage, the company was marking down the assets of Dick Smith including the considerable of inventory, later selling that at a discount and posting attractive earnings figures (Harford, Mansi and Maxwell 2012). After such misstated figure published through the ASX, Dick Smith had been generated more interests from the shareholders of the company.  

As flotation is the vital process of changing a private company into a public company by issuing shares an soliciting the public to purchase them, Anchorage Capital Partners was bound to provide the true value in front of investors (Krambia-Kapardis 2016). After that floatation, thus, Anchorage Capital Partners needs to be considered the detail about bought and sold of the assets which made routinely made public. Before the starting of the floatation process, Anchorage should have been ethically considered the current financial position and corresponding abilities during the purchasing ownership of the business from Woolworths against the payment for ownership for $20 millions (Nelson, Proell and Randel 2016). However, the company made $500 million after listing of the stock with the help of Anchorage Capital Partners after the time gap of just fifteen months represented a “greedy”, “dishonest” and “immoral” sides off the business.

In result, Anchorage Capital Partners has still been facing the ethical dilemmas because this private equity group has pulled off one of the great heists of all the time by turning Dick Smith from a $20m to $520m.  This has raised an ethical dilemma. According to Nelson, Proell and Randel (2016), the inventory write down is the most vital step in the short term. This private equity company does not considered those inventory which Dick Smith would about to sell. Furthermore, Anchorage did not write down the value of the inventory because it represents loss which would show up in the statement of financial of Dick Smith. It would definitely make it hard to float the business. Thus it was an intentional and unethical business practice followed by Anchorage made for only floating purpose.  On the other side, Dick Smith’s collapse was happened in sudden consequences, made responsible Anchorage because they misrepresented the true value and prospects of the firm when it listed the business on the ASX in 2013 (Dicksmith.com.au 2016). Additionally, several numbers of times the ownership has been changed which indicates that the company does not have the sustainable corporate governance. This has also raised an ethical concern.

Ethical Considerations faced DSH directors and Senior Executives

The director and senior executives of DSH was criticized about “how the company could go from reporting record profits in August to calling in administrators in the first days in January, and represented the huge profit Anchorage made buying and selling the business August 2012         and December 2013” (Lau 2016). Furthermore, the representatives were also being criticized because there were several historical facts about the business had been overlooked. The biggest unethical dilemma exists regarding the information given to the ASX while listing in 2013. According to the “Australian Stock Market” guidelines provided to all the listing members that information, honest disclosures and high standards of integrity must be shared with the authority to get the fundamental information to shareholders.

Unfortunately, the senior management people did not mention this kind of confidential financial information to the “Australian Shareholder Board” and breach ethical integrity and accountability. In fact they disclosed their healthy financial position in the annual report of 2015 (Dicksmith.com.au 2016). Furthermore, the responsible authority of the company failed to lay solid foundations for the committee for providing an effective risk management framework and corporate governance. Thus ethical considerations regarding the adequacy of the corporate reporting process was missing. Thus, they failed to safeguard integrity in corporate reporting. For instance, the collapse of DSH was responsible for the closing of 3300 jobs which can be considered as the unethical behavior of the company. According to Keating (2016), roles and responsibilities of the senior management, towards the shareholders and other stakeholders were not followed any ethical perspectives.   

The directors and senior executives, on the other hand, failed create values for the fund investors after entering into the private equity ownerships. During that time, the authorities of DSH failed to sustain their improvement, in either or both operating efficiencies and the generation of revenue. The potential value of private equity and venture capital largely impacts on the national economies because it has the capability to reduce agency costs. However, it depends on certain market conditions and the senior managerial authorities was paid little attentions and proved their incompetent management or lack of focus on value creation. The main problem rose due to separation of ownership and control. The DSH management never took their ownership control since the year of 1982 and the company faced criticism to function in the acquisition market, either trade buyer or the public stock market. This is the reason the senior executives and directors failed to capture value by the private equity firm, Anchorage Capital Partners and thus, contribute to the national economy by reducing the agency costs. By representing the overstated financial conditions in the global security platform (ASX), the managerial authorities of DSH failed on the ground of ethics and had shown a lack of contribution in realizing the actual value creation.

Conclusion

After discussing all the ethical facts and approaches taken by the companies throughout the years, this can be easily concluded that Dick Smith’s collapse was not anticipated by the investors. The management of the company did not even follow managerial ethics because of the rare risk management programs followed by the organization. Furthermore, the management represented their books of accounts to ensure the adequate return to business which leads untrusting relationship with the shareholders.

References:

Adams, M.A., 2016. Contemporary case studies in corporate governance failures. Governance Directions, 68(6), p.335.

Chen, V., Ramsay, I. and Welsh, M.A., 2016. Corporate law reform in Australia: An analysis of the influence of ownership structures and corporate failure. Australian Business Law Review, 44(1), pp.18-34.

Dicksmith.com.au. (2016). [online] Available at: https://www.dicksmith.com.au [Accessed 2 Sep. 2016].

Harford, J., Mansi, S.A. and Maxwell, W.F., 2012. Corporate governance and firm cash holdings in the US. In Corporate Governance (pp. 107-138). Springer Berlin Heidelberg.

Keating, E. 2016. The timeline of Dick Smith: From humble beginnings to $520 million float and voluntary administration. Retrieved April 4, 2016, from Smart Coompany: https://www.smartcompany.com.au/finance/64510-the-timeline-of-dick-smith-from-a-home-garage-business-to-million-float-and-now-voluntary-administration/

Krambia-Kapardis, M., 2016. Corporate Fraud and Corruption: A Holistic Approach to Preventing Financial Crises. Springer.

Lau, A., 2016. ASA stands up for shareholders. Equity, 30(4), p.10.

Nelson, M.W., Proell, C.A. and Randel, A.E., 2016. Team-Oriented Leadership and Auditors' Willingness to Raise Audit Issues. The Accounting Review.

Safari, M., Cooper, B.J. and Dellaportas, S., 2016. The influence of remuneration structures on financial reporting quality: evidence from Australia. Australian Accounting Review, 26(1), pp.66-75.

Tricker, B., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.