Opinion: Abboud’s demise a warning to CEOs

Dick Smith, Nick AboudNick Abboud’s fall from grace at Dick Smith and the recent downfalls of other high-flying retail executives serve as a warning to CEOs focused more on perks and bonuses rather than business performance metrics.

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Nick Abboud’s fall from grace at Dick Smith and the downfalls of other executives in retail chains such as 7-Eleven, Kleenmaid and Sigma Pharmaceuticals serves as a warning to CEOs focused more on perks and bonuses rather than business performance metrics.

Abboud and Warren Wilmot, the former 7-Eleven CEO and a decorated retailer in the franchise sector, both denied they were aware of incendiary practices in their businesses.

Elmo de Alwis, CEO of the parent company of the Amcal and Guardian pharmacy chains, conceded he was across the trading performance of Sigma Pharmaceuticals and attempted to provide a rosier picture of its position to the company’s board, auditors and investors.

Brad Young, a director of the Queensland-based Kleenmaid appliances franchise chain, was not so contrite in facing prosecution on fraud and insolvent trading charges.

Young was sent to jail for his conduct, while de Alwis was convicted for his part in falsifying accounts and given a suspended 12 months sentence.

None of the four executives acted alone in the misdeeds that brought them undone, and one was arguably as much delusional as intentionally malevolent, while two others failed to recognise their responsibilities and to address damaging internal practices.

In the case of 7-Eleven, it was illegal practices.

Wilmot was one of the leading and most experienced executives in the franchising sector and was elected as chairman of the Franchising Council of Australia in July 2015.

He had led 7-Eleven through a strong period of growth that included the acquisition of almost 300 Mobil fuel sites in 2010 that established the franchise convenience store chain as one of the top 10 retailers in Australia by revenue.

When the underpayment of wages to foreign students on limited working visa permits was revealed in August 2015, Wilmot and his executive team claimed they knew nothing of the systematic and deliberate underpayments by franchisees.

The wages scandal consumed Willmot, several other senior executives, and even Russell Withers, the well-respected chairman, founder and major shareholder in the private company.

It was inconceivable that 7-Eleven head office staff did not know of the rorting, and Wilmot’s departure followed confirmation that the chain was effectively turning a blind eye to breaches of industrial relations awards.

Warren Wilmot

Warren Wilmot

For all his outstanding work, Wilmot’s career was damaged by either his failure to interrogate his charges on the performance of the system and the financial data submitted by franchisees that indicated discrepancies in expense schedules.

Notwithstanding that the underpaid staff were employed by franchisees, 7-Eleven had a duty of care to those staff and a responsibility to protect the brand in the interests of franchisees who were doing the right thing.

Of course, it also emerged last year that much of the wage rorting might have been attributable to an unsustainable business model and indeed 7-Eleven moved to change its gross profit distribution formula after the wages scandal broke.

Willmot, who now has a business consultancy and no doubt much positive and useful knowledge and experience to share with other businesses, should have been aware the business model, the 7-Eleven franchise system itself, was in jeopardy, and as a CEO he should have acted to fix it.

In any event, the plea that he was unaware of the wages rorting by franchisees was not viable, irrespective of any contributing factors, including even a blind faith in the executive team beneath him to address operational issues.

Willmot’s forced departure from 7-Eleven was no cause for rejoicing by anyone, but it serves as a clear warning that no CEO can take their eyes off the ball or be complacent in today’s fiercely competitive and volatile marketplace.

Retail is detail they say, and checking the detail is the role of the CEO.

de Alwis was another clever and successful business executive who had led his company, Sigma Pharmaceuticals, through a period of growth and a string of acquisitions.

The problem for de Alwis was that the integration of some of those businesses and their performance were below expectations and were likely to incur the disdain of financial analysts and the wrath of shareholders.

As a public company, Sigma Pharmaceuticals’ performance is under the full glare of scrutiny by the investment community.

Foolishly, de Alwis and his chief financial officer, Mark Smith, tried to buy time on improved performance for the company, making adjustments to the company’s accounts, which in turn indicated that profitability was better than was actually the case.

de Alwis and Smith admitted they had provided false reports to the company’s board and to investors and their admissions allowed them to escape imprisonment, although not a $25,000 fine each.

The financial ramifications for the pair are likely to be much greater going forward, with Sigma Pharmaceuticals taking legal action to recoup some of the $59 million in losses the company claims it incurred as a result of the actions of de Alwis and Smith.

The actions of de Alwis and Smith also cost investors a considerable sum, with the share price and dividend returns only six years later showing some recovery.

rsz_stuart_machin_1

Stuart Machin

No excuses for CEOs

There should be no need to warn CEO’s not to try to gild the lily by overstating the sales or profit performance of a business, particularly a public company, yet de Alwis is not the only one who is guilty of that indiscretion.

Stuart Machin, who was one of the key executives in the reinvigoration of Coles supermarkets, also blotted an impressive resume when it was revealed that the Target discount department stores chain had overstated its profits through a supplier rebate scheme not dissimilar to Dick Smith’s scheme.

As with Willmot and Abboud, Machin claimed to know nothing about the profit rigging exercise at Target where he had been appointed to revive the struggling business.

Machin may well not have known about the supplier rebate scheme, but ignorance is not a sound defence for corporate CEOs, who must have a full knowledge and understanding of the business practices, policies and supplier relationships as well as the financial implications of them.

Machin resigned and Target operations have been effectively merged with Kmart under MD, Guy Russo.

Young was sent to jail over fraud and insolvent trading offences, but his case, and that of de Alwis, for that matter, shows how slow surveillance and policing of corporate misbehaviour takes.

The case against de Alwis took six years before the Australian Securities and Investments Commission won judgement in the courts.

Young was found guilty of offences between 2007 and 2009, with the court only determining his case this year, many years after Kleenmaid collapsed owing close to $100 million.

The Young case is also interesting in that there was no action by the Australian Competition and Consumer Commission, which was responsible for the franchising code of conduct in respect of the promotion of franchise sales event when Kleenmaid was on the verge of collapse.

Abboud’s demise

Attempting a less traumatic fall from grace than de Alwis and Young, Abboud is currently doing his best to avoid prosecution by ASIC following the spectacular collapse of Dick Smith.

Former directors of the company have volunteered that he was out of his depth in the CEO role at Dick Smith, despite 19 years with Myer that included a role in the abandoned Megamart electrical stores and earlier career experience with Chandlers, a brand that sunk with the Billy Guyatts collapse.

Abboud lost millions of dollars in shares and options in Dick Smith, but stands to lose much more as Ferrier Hodgson, as the administrators of the failed electronics chain, seek to claw back millions of dollars for creditors.

Abboud gave evidence on the final day of the civil proceedings before the New South Wales Supreme Court and pleaded ignorance of the rebate issues – and even of the financial strife that engulfed Dick Smith in its final months.

His testimony was laughable, and either confirmed incompetence or a Pontius Pilate attempt to wash his hands of the mismanagement of inventory and debt in a bid to fend off prosecution from ASIC.

Abboud’s reputation is in tatters and his credibility is beyond all redemption.

Abboud told the Supreme Court he did not recall that Dick Smith was having trouble paying suppliers in December 2014 or the company’s bankers seeking a meeting to discuss their concerns about spiralling debt, 12 months before the eventual collapse of the business.

The impending disaster at Dick Smith did not deter Abboud from rosy forecasts to analysts and investors, even weeks before distress sales in the second half of calendar 2015.

Abboud had apparently seen no danger in mounting piles of unsaleable stock or suppliers complaining about payments for goods while claiming not to know anything about the use of rebates to prop up trading figures and obscure the real picture of a company lurching towards its inevitable January 2016 collapse.

For CEOs, ignorance is not a defence and a lack of recall on crucial operational issues is not an escape hatch.

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