ABC Learning and Corporate Chain Management - Essay Example

Institution : xxxxxxxxxxx Title : xxxxxxxxxxx Tutor : xxxxxxxxxxx Course : xxxxxxxxxxx @2013 Introduction Childcare centres serve as centres that offer early childhood preschool education for children under the age of 5 years. It is actually recognized by the Australian government and has attracted overwhelming positive response from the parents. ABC learning, which is a child care organization, falls under the corporate chain long day care providers and served as the largest chain operator in Australia. It was registered as a corporate chain day care centre in 2001, which saw to its steady growth and later downfall in 2008. This paper seeks to evaluate ABC Learning and how its downfall can be related to some missing core principles in its corporate chain management. Background of ABC Learning ABC Learning was established in 1988. By the year 1996, it had approximately 18 centres, and was viewed as the largest childcare providers (Rush and Downie 2006). It expanded from 18 centres to 43 centres, which operated as small corporate houses. In 2001, ABC Learning then enlisted in the Australian Stock Exchange, started operating as a corporate chain child care providers. The years following saw ABC Learning making major acquisitions. In 2001 ABC Learning acquired Future One group. In 2005, ABC entered and acquired learning care group in the United States of America. The group controlled 460 centres (Rush & Downie 2006). By then, ABC Learning had 697 centres throughout Australia and New Zealand. ABC Learning then purchased Peppercorn Management Group, which was also on the Australian Stock Exchange. In 2006, it acquired Kids Campus, which by then posed as its competitor. In the same year, it also acquired Busy Bees Group limited, a UK based company, thus increasing their market share in the UK. The size of the chain grew bigger and by 2008 ABC Learning had 1037 childcare centres (Cohen 2006). In 2008, ABC Learning started facing major problems, some which actually crept up without the notice of the management. There was a quality failure on the part of corporate chains with their interests being profit, and the underlying aim of establishing a child care centre ignored. Community based long day care centres did tend to offer better services but the small centres felt like they were being trampled by the corporate chains. A quality survey carried out by The Australian Institute showed that as much as Australian long day care centres did tend to offer high quality of care, when details were looked into, corporate chains offered lowest quality of care as compared to community based centres. This was in terms of child to staff ratio (Rush & Downie 2006). The dramatic expansion of the company also posed a point of criticism. Major concern was the fact that by acquisition, ABC Learning was actually monopolizing the child care environment, that is, 1 in 5 child care centres was operated by ABC Learning. 2008 was the year the company started experiencing financial problems. With much criticism from the public, investigations were launched regarding the inability of the company to offer crucial services. The shares dropped in concurrence with the suits that faced the company. It is believed that the company used much of its finances to defend itself against the suits facing it. These therefore contributed to the downfall of ABC Learning. Corporate Governance and ASX CGC GUIDELINES In general, corporate governance is defined as a system of governance of a company. It illustrates the relationship between the management of a company, the company’s board of directors, the stakeholders and the shareholders of a company. Corporate governance is basically a set of rules that build up to a framework of how one exercises authority in a company with a clear definition of roles of management, board of governors, stakeholders and shareholders. It not only puts in mind individuals with direct interests in a company but also considers those who have indirect interests (ASK Corporate Governance Council 2003). It encompasses coming up with a set of objectives that are achieved for a company’s future, how to recognize and point out risks that are involved as well as how one can analyze and ensure optimal performance is realized for the company (ASK Corporate Governance Council 2007). ASX CGC Guidelines on the other hand are outline of practices that the council came up with in order to enhance the corporate governance practices in Australia. The guidelines are set to benchmark recommendations so as to ensure a level platform of governance in companies in the country. The proposed guidelines provide means to which different stakeholders work together for the interest of the company. In 2002 the ASX convened the ASX CGC whose sole goal is to come up with recommendations that ensure the corporate governance in the companies is as per the international standards (ASK Corporate Governance Council 2007). The corporate governance proposed 8 principles which are termed as the principles of good governance and are discussed below. Principle 1: To lay solid foundations for management and oversight This basically goes to the main objective of corporate governance. Each member with a direct or indirect interest in a company has their role laid out. All companies are required to come up with functions that are specifically designated for the board of directors of the company, and those that are delegated to the senior executives. All these functions are required to be made public to avoid controversy. Principle 2: To structure the board to ensure added value The board of a company should be composed of individuals who serve the interests of the company. The individuals should be effective in carrying out a company’s objective. Recommendations enlisted include the idea that the members of the board should be independent. In addition, the chair of the board and the chief executive officer should not be the same. The evaluation of the performance of the board, committees and directors should be disclosed. Principle 3: To promote ethical and responsible decision making in the company The company’s decision should pass both an ethical and responsible bar. This is to ensure that their integrity is not compromised. It also entails them having an established code of conduct reflecting their ethical standards and their legal obligations taken up. Another recommendation is that the company should disclose the total number of employees in the company, the gender diversity or composition. Principle 4: To safeguard integrity in the company’s financial reporting A structure that analyzes, verifies and safeguards the integrity of the company should be set up. An audit team is recommended. The structure should be independent to ensure credibility of the company. The audit team should consist of at least three members, whose chair is independent, consisting of non-executive directors and majority independent directors. Principle 5: To make timely and balanced disclosure about decisions Companies should come up with timely and balanced disclosure for matters that are of grace concern to the company. Recommendations are that the company should ensure compliance with ASX requirements and ensure accountability to the highest echelon of the company. Principle 6: Respect rights of shareholders Shareholders are of grave importance to the company and a proper means of communication to the shareholders is essential in effective governance. Swift communication means, such as electronic means, are recommended to avoid delays. Principle 7: Recognize and manage risk: Risk is inevitable when ambitious in the direction a company is to take. Therefore it is a sound practice to encourage management to foresee the risk by designing an internal control system. This ensures an effective management system. Principle 8: Renumerate fairly and responsibly A fare amount of renumeration is essential for good service by the employees of a company. The amount should be sufficient and should match up to the performance that has been displayed. A renumeration committee is recommended and should consist of independent directors, with an independent chair and composed of at least five members. A clear distinction between direct and non-direct renumeration packages should also be established. Corporate Governance Principle missing in corporate governance of ABC Learning The small corporate houses that operated independently ended when ABC Learning went on acquisition spree, thus implying that the company registered as a corporate chain. However, over time the company did not sustain its growth. It is believed that by the year 2008, the company started to collapse. The company started collapsing since it lacked some core corporate governance principles. The missing corporate governance principles were principle 3 and principle 4. To focus on the 3rd principle, promoting ethical and responsible decision making, ABC Learning resolved to an unrealistic ambition of growth. It ignored its basic business principles during its time of growth, which is a bad business practice. ABC Learning was entirely about quality child care services, however, when it went corporate, the whole idea became about profits. To expand aggressively, and still make a lot of profits implied reducing on personnel hiring. This ended up hindering the quality of the care as the child staff ration dropped to 5:1. A couple of accidents occurred due to that, which did reflect responsible decision making of a company. The integrity of the company was compromised as they also trampled on the smaller companies that did not want to sell. This did reflect a bit of their unethical practices as well. With reference to the 4th principle, safeguarding the company’s integrity in financial reporting, the accounts of the company was highly flawed and the fact that even the board or the audit team did not point this out reflected the flaw of the integrity of the company. To discuss the cash flow of ABC Learning; in 2004, the net profits were 21.4 whilst the operating cost was 19.9, the two were at par. In 2006, net profits were at 81.1 whilst the operating cost was 89.1. According to Koch (2010a) these net profits were above board. When the company released its half year report in 2007, its net profits were 37.1 and the operating cost was a negative 11.8 but when the full year report was released in 2007 the net profits were 143.1 and operating costs 206.9, figures which are quite questionable. In terms of acquisitions, there was the issue of several companies that were acquired which posed as competitors. The company sold shares to raise money to buy the centers and in turn paid for the acquisitions in terms of capital or company shares. Value of the assets to be bought however did not match up to the amount the company did pay to the amount paid by ABC Learning for the centers. For instance, when ABC Learning acquired Busy Bees ltd, the market value of the company was $58.5 million and the amount they purchased it for was $870 million (Koch, 2010a). The liabilities in this case were more than assets acquired but this did not reflect on the company’s balance sheet. The argument made is the amount paid was not the historical value but the fear value, which is the current market price. This was a value so high since monopolization of the market ensured that ABC Learning set the market prices anyway. Investors were attracted to ABC Learning majorly because of the figures it presented on the annual financial reports. The revenues were less than the expenses. This entailed that there was too much money borrowed against the price of the shares. ABC Learning did sell the shares to raise money to buy the centers, but to investors, it posed as a company with future promise. Their balance sheet also didn’t reflect what was really going on in the company’s account. The company’s profits grew so fast with the acquisitions being made. Yet most of the company’s assets were intangible (Kruger, 2009). How the missing principles led to downfall of ABC Learning In 2008, ABC Learning had gone in too much debt that it sold 60% of the company million dollars in order to recover the debt (Koch, 2010b). The reasons for the downfall of the company crept up on the management without them realizing over the years. This can be attributed to three main reasons, which are valuation, accounting irregularities, growth ambition (Koch, 2010b). ABC learning made a couple of acquisitions as they were expanding. This meant that their assets were growing as well. In acquiring a property, the company had to pay for the licenses of operating the childcare as well as the goodwill for the property which they were purchasing. Taking for instance the acquisition of Busy Bees Ltd., the license value of the property was set at a value of $58.5million, but ABC Learning paid $870million for the property during purchase. The company just seemingly paid too much for the license and the centers that they did acquire. The valuation figures of the acquisitions seemed to be inflated. Accounting irregularities was made evident when the audit team came into play. If one focuses on the cash flow statement, it reached a point where on taking a keen look at the figures they did not make sense. On release of the half year statement in 2007, the company’s net profits were $37.1million while the operating costs were on a negative 11.8, but on the release of the full year report the figures had changed to a degree that seemed not possible. The net profits were $143.1million and the operating costs were $206.9 million (Koch 2010b). When looking at their balance sheet, which shows their financial position, at an instance, the company recorded liabilities that were more than the assets they acquired but the balance sheet did not reflect this truth. The company’s liquidity indicated the funds that were available for liability and the current ration of the company dropped to 26.9cents by 2008 to imply that the company had gone into debts. The company issued shares to raise money when they went on an acquisition spree which was $428million to $2.2billion in 2007 and this could not be repaid. Their debt to equity ratio in 2006 was 25.5% which went to 114% in 2008 a clear indication of the debts the company was in as the solvency of a company was an indication of profits generated to pay debts (Koch 2010b). The company’s income statement was also another point that brought out the company’s accounting irregularities. Their revenues and their expenses did not tally and even the company’s income statement recorded revenue that had not earned. For instance, there was $1billion on the income statement that was indicated to have been used for leases and licenses to an anonymous developer and was recorded as an investment activity but the same amount is noted to have been returned back from revenue activity (Koch 2010b). The company had a growth ambition which was normal for a company. The only fault ABC Learning made was to stop focusing on their core business activities and was just interested in its profits. Expanding the centers meant that the staff needed to grow to ensure that the child to staff ratio was at par but actually only 51% of the profits the company made was used for wages. The company wanted to grow profits and not spend it on paying it’s workers and due to this a couple of accidents happened that ended up having the company faced with law suits which they used their capital to defend themselves against and ended up broke. (Rush & Downie 2006). Conclusion ABC Learning was a company that started out well financially when the CEO, Eddy Groves was managing small corporate houses. The ambition drove the company to the ground as to run the company required a huge commitment of the CEO which was almost impossible. The company sold 60% of the company value to reduce debts and at the same time the shares fell down to $1.53 in 2008 which translated to $280million loss. This was simply attributed to lack of sound corporate governance. References ASK Corporate Governance Council 2007, “Corporate Governance Principles and Recommendations with 2010 Amendments” 2nd Edition ASK Corporate Governance Council 2003, Corporate governance in Australia. < http://www.asxgroup.com.au/media/principles-and-recommendations-march-2003.pdf > Cohen M 2006, “ABC Learning Centres Ltd” Gale Directory of Company Histories Viewed on 15th September 2013 Koch D 2010a, “Cash Flow Statement” http://www.youtube.com/watch?v=DIIrFV1p78Y Viewed on 13th September 2013 Koch D 2010b, “Lessons Learnt” http://www.youtube.com/watch?v=a4rcGpRXD9I Viewed on 13th September 2013 Kruger C 2009, “Lessons to be learnt from ABC Learning's collapse” viewed on September 15th 2013, from < http://www.smh.com.au/business/lessons-to-be-learnt-from-abc-learnings-collapse-20090101-78f8.html#ixzz2elFV1xxI> Rush E & Downie C 2006, “ABC Learning Centres, A case study of Australia’s largest child care corporation” Discussion Paper no. 87 Read More