Focus Logistics Pty Ltd (Focus) has engaged you as an independent consultant, and they are seeking your advice on several corporate governance, sustainability and risk management issues. You have just returned from a board meeting with Jennifer White (company’s founder and the current Chair), Geena Rose (CEO), Jacob Rose (COO) and David Rose (CFO). You have gathered the following information about this company:
History:
Mrs White established Focus Logistics in 1965 in Horsham, Victoria, providing state-wide logistics services to local businesses. The community supported Focus because of Mrs White’s slogan “Go Local”. The company grew steadily for the next 30 years and expanded its operations into VIC, NSW, and TAS. Mrs White retired from day-to-day operations in 1997 and assumed the role of board’s Chair. Mrs White’s daughter Geena took on the company reins and, since then, has completely transformed the business. Focus now has 19% of the total market share and is Australia’s fifth-largest private logistics company. Focus has grown from 28 customers in 1970 to 650 customers in 1997 to more than 11,000 customers today (including a few ASX listed companies).
Current plans:
Now, Focus needs additional capital to fund its expansion plans, and Mrs Rose has met with several potential investors and private equity groups over the last six months. The senior management team has prepared a very impressive prospectus highlighting all of Focus’s recent achievements and a business forecast for the next ten years. However, these investors are concerned that Focus doesn’t have the proper operation and governance structure to justify the additional funding and expansion plans.
Investor concerns:
They have criticised that even though Focus is a large company, the business is still run like a family-owned business with limited oversight over management and a lack of operational controls and reporting. In addition, the various management positions, especially the executive positions, are held by family members and close friends. Therefore there seems to be a lack of appropriate performance reviews and necessary succession planning. The investors also highlighted that Focus doesn’t have any board committees.
The board unanimously agrees that since they own most of the company, there is no need to spend any money on non-value adding reporting like a sustainability report. The board acknowledges that the company might benefit from some regular reporting and performance reviews. Still, it is concerned about its impact on the family members – after all, trust and patience are the most important traits of a family-run business. Plus, it is the boards view that there is a reason why such reporting is optional and not mandatory at all. Mrs Rose has already notified these investors that Mrs White will soon retire from the board, and Mrs Rose will nominate herself as the next Chair. She believes that the board will benefit immensely if the Chair and the CEO is the same person – that’s because this person will have a lot of knowledge about the company’s operations and, therefore, will be able to question and oversee the management more meticulously.
The potential investors are also apprehensive about the lack of sustainability reporting by this company. Focus’s carbon footprint is enormous – their B-Double trucks alone consume almost a million litres of diesel a year. It is anyone’s guess how much fuel the company consumes in total because, along with its own fleet of trucks, the company also has hundreds of sub-contractors. Mrs Rose is aware that all national banks oppose supporting a business that does not have a sustainability plan and target.
The last primary concern of these investors is the lack of risk management initiatives at Focus. Recently, Focus has taken on a lot of debt (by using their Victorian fleet as security), and therefore the board must constantly monitor Focus’s exposure to financial risk. The investors acknowledge that even though Focus’s operations were not affected by COVID-19 (because the business is classified as an essential service), Focus needs to prioritise operational risk management and urgently draft a business continuity plan.
Board/Management opinions:
Mrs White completely dismissed the investor’s views on operational risk. She stated, “Trucks are the backbone of Australia and will continue to work round-the-clock – as they have done for the last 55 years. I cannot think of a simpler business – buy a truck, get someone to drive it, and a few days later – the customer settles the account. Involving lawyers and consultants in expensive suits will make matters unnecessarily complicated”.
The company’s COO, Jacob Rose (Mrs Rose’s 26-year old son), is genuinely concerned about what these potential investors are demanding. He stated, “Corporate governance always slows down the board’s decision-making process and makes running a company unnecessarily complicated, hindering innovation and creativity. For example, I want to add autonomous vehicles to our fleet, and I am confident that a formal governance structure will delay such adaptation.
As long as we aren’t in trouble with the tax office and the corporate watchdog, the board’s only priority should always be on maximising shareholder returns. Therefore, we shouldn’t be worried about the compliance issues, which are unlikely to get audited. And even if we do get audited, it is better to pay a small fine instead of investing thousands, possibly millions, of dollars in meaningless and endless compliance and “tick-the-box” exercises.
I believe there was a recent ruling whereby businesses like ours have a lot more responsibility of looking after our employees, especially our sub-contractors. When Melissa is back, I’m sure she will be able to shed some light on this. Plus, we should endeavour to go beyond the mandatory requirements. Wouldn’t it be great if our peers recognise us as the pioneers in corporate governance and sustainability practices? After all, we consume a crazy amount of fuel every year, and with climate change being a pressing political topic the last thing we want is to be boycotted.
These investors will own 12% of our company and probably get a seat at the board table. So, we have to be careful about making any throwaway comments. We might be a private company, but the business media and journalists are very well aware of our operations and ownership structure. It is impossible to hide when you are this big. In the world of social media and Twitter, information travels much faster than we can imagine”. “I want to continue looking after our loyal customers and faithful employees who have supported us all these years. We already do a lot for the community, and it would be great to consolidate all the information about our various programs in one easily accessible location. But I am not sure about preparing these fancy reports which no one is ever going to read. Surely, we can put our money to better use?”.
“Honestly, we are just testing the waters with these private investors. We want an accurate company valuation and want to see what’s it like to work with a private equity group. Even though we will go ahead with this equity sale, Focus’s ultimate goal is to be an ASX listed company by the end of next year”.
