FIN 005 UCL Corporate Governance the ESG Issue & Institutional Investors Discussion

question 1: When directors leave a company after failing to meet their targets, they may receive large pay-offs which are termed __________goodbyes

chose 2 of 3 questions to answer

question 2: Boohoo clothing company

The discovery of poor working conditions in Boohoo’s Leicester supply chain has been branded “one of the worst environmental, social and corporate governance (ESG) scandals in modern UK history”, by one of the city’s MPs. Liz Kendall, the MP for Leicester West, today called on Boohoo’s executive chairman Mahmud Kamani and chief executive John Lyttle to step down and slammed major shareholders for their response to the scandal.

Boohoo yesterday appointed Trainline finance Chief Shaun McCabe as an independent non-executive director as part of its “agenda for change”, after it pledged to tackle the problems in its Leicester supply chain. However Kendall said the move “will not solve fundamental governance weaknesses where boards are still in the power of an all-powerful founder chairman”. She said the reaction from shareholders Jupiter Fund Management, Fidelity Investments, Invesco and Blackrock to the situation “has so far been extremely disappointing”.

Kendall said she told the firms that she “did not think that those who had turned a blind eye to these problems over many years were the right people to take the company forward”. The MP praised the actions of Standard Life Aberdeen, which divested most of its shares in the company following the revelations.

An independent review, conducted by Alison Levitt QC and published in September, found that allegations of low pay and poor working conditions at Boohoo’s Leicester supplier “not merely well-founded but substantially true”.

Questions

1. Is the ESG issue of the supplier the responsibility of Boohoo? ( 2 sentences)
2. What do you think is the issue regarding the structure of the board. Provide two ways to improve the structure? (4 sentences)
3. The MP Liz Kendall mentioned that ‘the reaction from shareholders Jupiter Fund Management, Fidelity Investments, Invesco and Blackrock to the situation “has so far been extremely disappointing”’ – what did she mean by this statement and what is expected of these institutional investors? (4 sentences)

question 3: Volkswagen’s supervisory board

German company Volkswagen, Europe’s largest carmaker, had a supervisory board. In 2005, institutional investors demanded that the chairman of the supervisory board Herr. Piëch, resign because of alleged conflicts of interest. They claimed that H. Piëch and his family held significant shares in Porsche, who held a near 20% stake in Volkswagen.

German’s voluntary corporate governance code states that conflicts of interest should result in the termination of a supervisory board members’ mandate. H. Piëch claimed that the conflict would be managed by him leaving the room whenever any Porches related matter was discussed. Some American institutional investors called this ‘naïve’. H. Piëch was strongly supported by the ten employee representatives on the 20-strong board.

1. Explain the ‘conflict of interest’ in the context of the chairman, Herr Piëch. (4 sentences)
2. Many boards require directors, who declare a conflict of interest, to leave the room when the relevant issue is discussed. What is your opinion of this practice? Is it ‘naive’ as some investors in this case claimed? (2 sentences)
3. Given that H. Piëch was strongly supported by all ten employee representatives on the supervisory board, do the shareholder representatives on that board have grounds for complaint? How may the shareholders voice be better heard on the board ? (4 sentences)

question 4: Abco PLC – a FTSE 100 firm

Abco’s board which manufactures bicycles consists of the following board members:

Crossin B. – Chairman, Independent NED, Male

Dexter K. – CEO, Executive Director, Male

Dobman C. – CFO, Executive Director, Male

Whitmore W. – Independent NED, Male

Doster K. – Executive Director, Male

Bracken T. – Executive Director, Male

1. Discuss 2 issues with respect to the structure of the board that does not follow UK corporate governance guidelines. Briefly explain the guidance and its significance. (6 sentences )
2. Discuss the ‘comply and explain’ concept in relation to the issues discussed above. Provide a benefit of this approach for companies (4 sentences)