Luke Graves (Luke) is the long-serving Chief Executive Officer (CEO) of Hornbill plc, a UK listed company. He had a meeting with the newly-appointed Chairman of the company, Ross Plank (Ross), who is married to Luke's si

CS Professional · Multidisciplinary Case Studies · PYQS · June 2019
Luke Graves (Luke) is the long-serving Chief Executive Officer (CEO) of Hornbill plc, a UK listed company. He had a meeting with the newly-appointed Chairman of the company, Ross Plank (Ross), who is married to Luke's sister. A number of different items were on the agenda for discussion. Luke said that he had recently had a meeting with two institutional shareholders in the company, who together held 5% of the equity shares. He had also discussed the company's performance over the past few months with them and they had been pleased by the profit forecasts that he had given them. The company's results would be announced to the stock market within the next two weeks. Luke added that he had also discussed the company's main business strategies with these shareholders and had informed them that he intended to establish a strategy committee within the company, consisting of the executive directors and other senior executives. Luke and Ross later on discussed the retirement and re-election of Board of Directors at the next annual general marketing of the company. Luke said there was an issue with John, one of the directors, who would be retiring by rotation. John had been an independent non-executive director for almost nine years. He was very experienced and had contributed enormously while attending meetings of the Board. He was considered to be too valuable to lose from the Board, but there was now a problem with his independent status. Luke felt that he was still as independent now as he was when he first joined the Board. Luke also informed Ross that he had arranged for additional training for two Board directors: one of the non-executive directors and also the marketing director. On the basis of above-mentioned facts, what weaknesses are discernible in the corporate governance practices of the company?

Answer & Explanation:

On the basis of the facts of the case, following weaknesses in corporate governance are evident in Hornbill plc: The newly-appointed Chairman Ross Plank is brother-in-law of the CEO Luke and therefore has a close family connection with an existing board member. The Chairman cannot, therefore, be considered independent on appointment. The fact that the Chairman is non-independent and the relationship of Chairman and CEO should be disclosed in the annual report of the company. Luke, the CEO has disclosed price sensitive information i.e. the company's performance over the past few months and profit forecasts with the institutional shareholders before they have been announced to the stock market. Thus, Luke has violated stock market regulations by giving financial information to the shareholders that has not been made publicly available. If the institutional shareholders trade shares in the company before the announcement of the annual results, they would be liable for insider trading. Therefore, the institutional shareholders must be informed that they are insiders and should not deal in shares of the company until the information becomes public knowledge. The board should also discuss and consider the breach of rules and discourse of price sensitive information by Luke. The objective of establishing Strategy Committee comprising of executive directors and senior executives is also not clear. It is the responsibility of the board of directors to decide business strategy, and the executive management should implement those strategies decided by the board. Here, it is not clear what Luke means by establishing a strategy committee, but it should not be for the purpose of deciding strategies. It is also observed that, the CEO is taking on too many roles outside his proper area of responsibilities and there is a risk that the board of the company will be dominated by a single individual. This risk is increased because of the family connection between the CEO and the Chairman.

Topics: Corporate Governance

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