Corporate Governance Assignment: Case Analysis of Focus Logistics Pty Ltd

Question

Task: 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: expansion
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.

A family-run business should always focus on performance and not so much on conformance. We have to stop this madness”.

Jacob is confident that Focus’s legal counsel, Melissa Wright (Jacob’s childhood friend and a current law student), will concur with his views. Unfortunately, Melissa was unable to attend the meeting because she is on extended personal leave.

The company’s CFO, David Rose (Mrs Rose’s other son), has a different view. He said, “For what’s it’s worth, I can understand where the investors are coming from. However, we are no longer a “local” business. A lot has changed since Nan started this business on her kitchen table, and Uncle Sam was the only truck driver. Today, we have operations across Australia, employ more than 2,000 people – and I am not even counting the 3,000+ contractors we have on our books.

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”.

Mrs White concurs with David’s views. She said,
“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?”.

Towards the end of your meeting, Geena said,
“Honestly, we are just testing the waters with these private investors. We want an accurate company valuation and want to see what it like is 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”.

Requirements
You are required to write a report on corporate governance assignment to Focus’s board summarizing your views on corporate governance, sustainability and risk management practices. In your report, you must address the following three areas:

1. Discuss at least four good corporate governance practices and the importance of good governance for a large private company such as Focus Logistics that wants to transition into an ASX listed entity.

2. Summarize the significance, benefits and challenges of producing a sustainability report for Focus Logistics, especially for a business within the logistics industry.

3. Summarize the benefits and challenges of sound risk management practices for Focus Logistics. Within the answers to the above three questions, you should refer to:

1. The views of the four people you have recently met (Mrs White, Mrs Rose, David and Jacob).

2. Recent news releases relating to best practice corporate governance, sustainability and risk management practices.

Answer

Introduction
The current corporate governance assignment analyses the case of Focus Logistics Pty Ltd which is an age-old logistics company in Australia developed to help local businesses. The company wants to grow further and looking for investors. Mrs. White, the founder of the company and the current chair of the Board of Focus, has met with several investors. As a consultant, suggestions are provided to Focus based on these aspects that are described below.

Corporate Governance Practices for Focus Logistics to become an ASX Limited Company.
a. Lay a solid foundation for management and oversight (Principle 1 of Corporate Governance ASX)–The roles and responsibilities of the board members in Focus Logistics are not clearly stated. There are no relevant performance reviews in Focus which is quite clear from the fact that the majority of the management and executive positions are held by the family members, which needs to be incorporated in Focus. There needs to be a disclosure of evaluating the senior executives' performances in Focuslogistics. (Flammeret.al, 2019, pp. 1097-1122). Another element is the need to separate the roles of the board chair Jennifer White and the C.E.O., Geena Rose having distinct roles for each of them (Danoshana and Ravivathani 2019, pp. 62-67). However, in Focus, Mrs. White will soon retire from the board chair, and her daughter Geena Rose, the present C.E.O., prefers to nominate herself as the board chair and the C.E.O. position. All the board of directors needs to have a practical job description and an outline that will describe their duties and responsibilities in Focus which is entirely missing. Board will need to delegate some of its responsibilities to different committees, including the governance committee, audit committee, and so on, as needed, which is a must for Focus (Habbash 2019).

b. Promote ethical and responsible decision-making (Principle 3 of ASX Corporate Governance)–Focus Pty Ltd should establish an effective code of conduct organization-wide and disclose the exact practices needed to maintain confidentiality regarding the company's integrity. It should include the procedures necessary for considering the legal obligations and the reasonable expectation of Focus's stakeholders, along with the responsibility and accountability of the individual for reporting and investigating all forms of unethical practices (AlQadasi and Abidin 2018).The views of Jacob Rose, the company C.O.O. state that as long as Focus is not facing any issues regarding tax, the board's priority should be to maximize the shareholders' returns. He opts to pay some fine if caught in specific problems rather than wasting an additional amount in compliance. He firmly believes that the company's legal advisor can handle all other forms of legal compliance issues (Danoshana and Ravivathani). The board of Focus logistics needs to develop strong internal controls and monitor those followed by having an accurate and transparent system (Goel 2018, pp. 1-21).

c. Recognize and manage risk (Principle 7 of ASX Corporate Governance). There has to be a sound system of risk oversight and management, although Mrs. White completely dismissed the investors' views regarding operational risk. The establishment of policies regards the administration and management of the material business risks while disclosing a summary of policies (Mutluet al. 2018, pp. 943-979). The board will need to instruct the management to design and implement risk management for managing all forms of risks and prepare a report on whether the identified risks are managed effectively. The board should receive all forms of assurance from the C.E.O. and C.F.O. The risk declarations provided follow the 295A sections of the Corporations Act that have their foundations of the risk management system. The statements and policies need to be following risk management, and the system should operate effectively with regards to all forms of material and financial risks associated with the company (Masud 2018, pp. 1-26). The strategies of the board and the risk management activities need aligning with the objectives of Focus Logistics (Masud et al., 2018).

d. Make timely and balanced disclosure (Principle 5 of ASX Corporate Governance)–An effective corporate governance practice should include timely and balanced disclosure concerning all material matters associated with the company (Bajra and Cadez 2018, pp. 152-166). There have to be specifically written policies designed in Focus Logistics for ensuring compliance with the ASX listing policies while ensuring accountability among the senior executives. The compliance and disclosure of those policies also needed to be provided. One of the best practices in this regard is having a system with adequate checks and balances (Koutoupis and Pappa 2018, pp. 91-99). According to the views of David Rose, the C.F.O. of the company, Focus has now turned into a huge corporation and has operations all across Australia and employs a vast number of employees and numerous contractors.

The importance of Good Governance for Focus Logistics that is willing to make the transition to an ASX limited entity:

Board members of Focus Logistics believe that corporate governance reports are just a waste of additional money. Jacob Rose, the company C.O.O, Jacob Rose is of the notion that corporate Governance slows down the board's decision-making process, making things complicated and a significant barrier towards innovation and creativity. Other benefits for effective Governance for Focus Logistics are also discussed.

Corporate Governance can be regarded as the cornerstone for any big business organization since this encompasses various norms and practices that Focus will depend upon for making formal business decisions and managing the business. Effective corporate Governance will ensure that all the board members in Focus will need to be meeting regularly while retaining control over the company while remaining clear with their respective responsibilities. It will also provide a practical risks management system within Focus (Abdullah et al. 2019, pp. 121 -135).

The primary concern of Focus is to increase its business further, and for this, Focus is looking for investors (Chatchawanchanchanakij et al. 2019, pp. 854 -864). But a majority of the investors are declining the proposal as Focus lacks practical sustainability, corporate Governance, and risk management practices. Employment of good corporate Governance helps businesses regulate and reduce all forms of risk factors along with reductions in the opportunities for corruption. Scandals and frauds happening within a business organization are more likely where the directors and senior management will not comply with any formal governance code.

Additionally, effective corporate Governance will ensure that all the senior-level executives of Focus regard their duties while encouraging them to remember them when making any decisions (Crifoet al. 2019, pp. 1127 -1146). An excellent example in this regard is that Focus does not have any form of sustainable practices. The company's carbon footprints are effectively high as the delivery trucks consume an enormous amount of diesel every year, accounting for environmental degradation. Incorporating an effective corporate governance system will ensure that Focus Logistics will protect its members and management. It will help ensure that the company retains all records in the company books while maintaining the statutory register. The maintenance of these registers will ensure that the board and management can be held responsible for their actions (Crifo et al., 2018). Shareholders will also not be able to make unnecessary contests against the activities of the board members of Focus, helping the company avoid critical lawsuits (Shahid and Abbas 2019, pp. 105839). The practice of good Governance will reflect a full disclosure from the business organization regarding its rules, policies, and operational activities, developing trust regarding the brand among the general mass, helping to manage their company reputation, and boosting company growth (Bajra and Cadez, 2018).

Summarizing the significance, benefits, and challenges of producing a sustainability report for Focus Logistics:
Today's business organizations like Focus Logistics are highly under the spotlight regarding the impact they are generating, affecting the communities. Higher transparency regards non-financial reporting is coming up with utmost importance, and regulatory bodies are demanding the same. Socially responsible investors and international organizations are also looking for sustainability disclosures. The company stakeholders are also looking for transparent information disclosure regarding environmental, social, and Governance problems both within and associated with the business process (Ai et al., 2018). The significance of sustainability reporting for Focus Logistics lies in this aspect. Sustainability reporting will allow private companies like Focus Logistics to affirm their company mission and pursued values along with measuring its economic, social, and environmental governance performances (Sinaga and Fachrurrozie 2017, pp. 347-358). It will facilitate the development of future business strategies in Focus Logistics while attracting investors for further company growth.

The success of Focus Logistics is also dependent on its capacity to generate value, keeping in mind the present context of the inclusion of sustainability factors in business. It will also be associated with the company's use of natural resources and energy consumption to avoid the negative impacts, including carbon footprints and carbon emissions. A sustainability report will focus on all these while helping Focus Logistics develop sustainable business policies that are of utmost importance to stay safe from all forms of legal compliances related to environmental degradation (Gazzola et al., 2017).Focus logistics wishes to grow and develop its business further, which means the company will have to manage the growing demands of huge clients and stakeholders who are conscious of sustainability avoids all forms of negative impacts on society, emerge a responsible company to do business with (Gazola 2017, pp. 355-376).

There are several benefits for Focus Logistics regards to the development of sustainability reports. It will reflect the company's transparency regarding the environmental, social, and economic impacts, demonstrating the business's credibility while assuring the stakeholders and investors that the company is severe. The sustainability reporting will reflect the cost savings opportunities for the business and the clients (Domingues et al., 2017, pp. 292-301). Further, this will be a significant benefit for Focus Logistics for improving the confidence of both stakeholders and investors. A credible sustainability data report will help Focus Logistics achieve sustainability certifications of utmost importance in the logistics business, helping to gain the investors' confidence (Indrianingsih and Agustina, pp. 116-122). Although the significant Focus on the board regards a family business like Focus Logistics is to improve the company performance and double the shareholders' returns. Still, it should also be remembered that the lack of sustainability reports is a significant factor for investors backing out to invest in Focus Logistics.

The major challenge that Focus Logistics can face regarding sustainability reports' production is a lack of transparency. Focus can report high local community engagements through token programs concerning all its operations, as mentioned in the case where Jacob says that the company should not worry about compliance issues that often are not audited. And even if an audit is performed, they can escape by some amount of fine. These programs are often not effective where the external auditors will only certify the number but not the effectiveness of the sustainability programs (Rezaeeet al., 2017, pp. 40-45). Another major challenge that remains strong is the misaligned internal requirements of the company. For a logistics business like Focus, it is dependent on trucks for transferring the products. These trucks consume a considerable amount of diesel fuel, which means severe natural resources and environmental pollution from the smoke emitted (Sunaryo et al., 2018, pp. 196-205).

Summarizing the benefits and challenges of sound risk management practices for Focus Logistics:
Sound effective risk management practices will help Focus Logistics forecast potential issues while motivating the business to take a quick look at all the business processes deciding what can go wrong. Hence focus on highly proactive forecasting on the potential business issues and risks. It will help identify the failed business processes early, saving additional loss for Focus (Ahmad, 2018). Additionally, the management can also decide whether investing additional money in a failed business process again will be worth it or not. Risk management will prepare Focus from all kinds of shocks while avoiding catastrophic events, along with effective planning for the risks that often cannot be avoided.

Board members of Focus might find it difficult to identify the risk factors that are outside the area of their expertise (Lechner and Gatzert, pp. 867-887). An effective risk management plan will provide a better insight to the board members providing them both resources and advisory services to plan for effective risk mitigation. Shareholders and regulators often visualize litigation risk as one of the major business liabilities. The risk management plan in Focus will reduce the ligation risks making the business more attractive for investment. The ongoing risk management activity in Focus logistic helps collect several information regarding the business processes, which helps improve the quality of the business, improving the business's financial status(Adelekeet.al 2018, pp. 115-124).

However, there can be several challenges associated with risk management practices in Focus Logistics. There can be a failure in the application of appropriate risk management practice. For example, Focus applies certain risk management practices that will only predict the financial loss that Focus might incur. However, the method might not inform the company regarding the distribution of the economic loss occurring, which means the success of the risk management practice can be considered void (Ahmed 2018, pp.325). The risk portfolio cannot be measured effectively, creating further issues for the business. Risk managers in Focus might make mistakes regarding accessing the probability of the risk factors in the company, followed by the practice of an inaccurate risk distribution procedure (Rezaeeet al., 2017). Risk management practices often do not consider all risks associated with the business. Also, this can become costly for Focus to consider regards to the aspect that board members of Focus Logistics are least interested in investing additional money in fancy business elements like risk management (Ai et al. 2018, pp. 513-543). Further, risk management practices can also be imperfect sometimes since making a future forecasting is quite a difficult task that is often not accurate.

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