WAR AT THE HELM OF ELICORE

A CASE ANALYSIS BY LUGUE, MACALINDOL, RANISES AND ZAMORA

CORE PROBLEM
The problem in this case is the relationship of

Paul Simon, CEO to the companys board of

directors.*

ABOUT ELICORE CORPORATION

It is a global manufacturer of ventilation and cooling

equipment
Part of UKs top 25 companies
Quarterly double-digit growth for five years
5 non- executive board members with various
experiences
3 executive board members

Dale Banking Executive since 2001

Rosentil Accounting experience
Others Board experience

ABOUT HEATH
Elicores Chairman of the Board since January 2001
Educated person with international working

experience
Unaggressive leader/ quiet leader

ABOUT SIMON
CEO of Elicore since 1993
Worked in domestic corporations
Pushy executive
Led the double-digit increase in revenue and profits

of the company

FROM BAD TO WORSE

January 20, 2002 Heath had a talk with his

predecessor and the retired chairman advised

Heath that he should just let Simon run the show.
February 3, 2002 Heath and Simon once again
clashed in the Board meeting because of Simons
way of rejecting the proposal of Dale, a board
member and banking executive.

February 28, 2002 Another heated debate

between Heath and Simon has happened. Heath

suggested of ways to improve corporate
governance and increasing transparency. His
suggestions were to form committees with external
board members, formal evaluation of the
performance of the entire board and a more
detailed reporting. These suggestions were
opposed by the CEO.

Heath consulted the companys biggest

shareholders who held more than 40% of the

stocks and agreed with his proposal.
April 17, 2002 There were rumours that Elicore
was facing a takeover bid by its larger rival and
that Simon is intended to become the CEO of the
merged company.

 May 26, 2002 Heath has met two board members and

discussed the way of leadership of the CEO and the new

design of corporate governance.
July 4, 2002 Heath discovered that the earnings of the
company had been calculated differently. It is different in a
way that it was not in line with Elicores accounting policy.
Heath discovered that if it were calculated traditionally,
double-digit growth would not be obtained by the company.

Silver proposed to call the auditor for their

professional opinion. The auditor came up

with a proposal that gave a double-digit
growth rate and more in line with Elicores
traditional accounting practices.

Heath informed Rosentil. Rosentil threatened to

resign if the accounting tricks continue Heath told

him he would propose improvement in CG that
would increase their proactive involvement.
Rosentil gave his blessing to the accounting
changes proposed by the auditor.

DISCUSS THE OECD PRINCIPLE ON THE RESPONSIBILITY OF THE BOARD.

HOW DID THE BOARD FARE AGAINST THE PRINCIPLE AND WHAT AREAS
NEED TO BE IMPROVED. WHY?

THE CORPORATE GOVERNANCE FRAMEWORK

SHOULD ENSURE THE STRATEGIC GUIDANCE OF THE
COMPANY, THE EFFECTIVE MONITORING
MANAGEMENT BY THE BOARD, AND THE BOARDS
ACCOUNTABILITY TO THE COMPANY AND THE
SHAREHOLDERS.

Principles
Board members should
act on a fully informed
basis, in good faith, with
due diligence and care,
and in the best interest
of the company and the
shareholders.
Where board decisions may
affect different shareholders
group differently, the board
should treat all shareholders
fairly.

needs to be
improved/acceptable

Why?

Their duty of care towards

their shareholders was not
upheld as Simon produced a
double digit growth rate
Acceptable but needs to be
with an accounting rule that
improved
is not in line with Elicores
tradition. Although
corrected, It may mislead
the shareholders

Needs to be improved

The board should apply

high ethical standards. It
should take into account
the interest of stakeholders.

Needs to be improved

When Simon made that

rule, he was only looking
out for the image of the
company. The shareholders
could have been misled
with the reports if it were
not changed by the others.

Principles
The board should fulfill
certain key functions,
including:
Reviewing and guiding
corporate strategy, major
plans of action, risk policy,
annual budgets and
business plans; setting
performance objectives;
monitoring implementation
and corporate performance;
and overseeing major
capital expenditures,
acquisitions and divestitures

needs to be
improved/acceptable

Needs to be improved
(audit committee and
risk management
system)

Monitoring the effectiveness

of the companys
governance practices and
Needs to be improved
making changes as needed.

Why?

No risk policy has been

established ever since its
growth started.

no self-assessment for the

Board and CEO and others.

Principles
Selecting, compensating,
monitoring and, when
necessary, replacing key
executives and overseeing
succession planning.

Aligning key executive and

board remuneration with
the longer term interests of
the company and its
shareholders.

needs to be
improved/acceptable

Why?

acceptable

Simon is a competent CEO

that needs attitude
management

needs to be improved
> establishment of
committees

aligning remuneration with

their performance is not
possible since no evaluation
has been made

Principles

needs to be
improved/acceptable

Why?

Ensuring a formal and

transparent board
nomination and election
process.

acceptable

Nomination is done in the

AGM

needs to be improved
>establishment of ethics

usually results into a

shouting match between
Simon and Heath

Monitoring and managing

potential conflicts of
interest of management,
board members and
shareholders, including
misuse of corporate assets
and abuse in related party
transactions.

Principles
Ensuring the integrity of the
corporations accounting and
financial reporting systems,
including the independent audit,
and that appropriate systems of
control are in place, in particular,
systems for risk management,
financial and operational control,
and compliance with the law and
relevant standards.

Overseeing the process

of disclosure and
communications.

needs to be
improved/acceptable

Why?

acceptable

although Simon used an

accounting rule that did not
go well with Elicores
tradition, Heath, Rosentil
and Silver managed it and
retain the double digit
growth rate and the
integrity of the reports.

acceptable

multiple board meetings to

review information before
the AGM

Principles
Boards should consider
assigning a sufficient
number of non-executive
board members capable of
exercising independent
judgment to tasks where
there is a potential for
conflict of interest.
When committees of the
board are established, their
mandate, composition and
working procedures should
be well defined and
disclosed by the board.

needs to be
improved/acceptable

Acceptable but needs to be

improved
> establishment of
committees

Needs to be improved
>mandates and duties
should be clearly defined

Why?
existence of independent
directors and also sufficient
in number but not objective
as Simon is being favored
by the two other
independent director that
has close ties with the
previous chairman.

Simon comes across as

arrogant and disobedient
toward the Board. Simon
and Heaths role seems to
overlap

Principles

needs to be
improved/acceptable

Board members should

Acceptable but needs to be
be able to commit
improved
themselves effectively to .>performance evaluation
their responsibilities.

In order to fulfill their

responsibilities, board
members should have
access to accurate,
relevant and timely
information

Acceptable practice

Why?
no problem towards
commitment but
performance evaluation of
the board is appropriate to
meet the need of the
company

Regular report at Board

meeting

HOW DID ELICORE FARE AGAINST THE

PRINCIPLE OF DISCLOSURE AND
TRANSPARENCY? JUSTIFY YOUR ANSWER.

HOW DID ELICORE FARE AGAINST THE PRINCIPLE OF

DISCLOSURE AND TRANSPARENCY?

6/13 SUBPRINCIPLES WERE COMPLIED WITH

DISCLOSURE AND TRANSPARENCY

The corporate governance framework
should ensure that timely and accurate
disclosure is made on all material matters
regarding the corporation, including the
financial situation, performance,
ownership, and governance of the
company.

needs to be
improved/acceptable

Why?

Remuneration policy for

member of the board and key
executives, and information
about board members,
including their qualification, the
selection process, other
company directorships ad
whether they are regarded as
independent by the board.

Needs to be improved

no remuneration committee
to communicate

Related party transactions

Needs to be improved

did not disclose the rumor

of possible merger

Needs to be improved

same with 5, he risk that

there may be a change in
the governance of the
company

Principles

Foreseeable risk factors

Principles
Issues regarding
employees and other
stakeholders
Information should be
prepared and disclosed in
accordance with high
quality standards of
accounting and financial
and non-financial disclosure.

needs to be
improved/acceptable

Why?

Needs to be improved

same with 5 and 6

Needs to be improved

No comparability if the
accounting is changed

The corporate governance

framework should be
complemented by an
effective approach that
addresses and promotes the
provision of analysis or
advice by analysts, brokers,
rating agencies and others,
that is relevant to decisions
by investors, free from
material conflicts of interest
that might compromise the
integrity of their analysis or
advice.

Needs to be improved

There is no provision of
analysis or advice by
analysts, brokers, rating
agencies and others, that is
relevant to decisions by
investors, free from material
conflicts of interest that
might compromise the
integrity of their analysis or
advice.

YOU ARE THE CONSULTANT HIRED BY ELICORE. WHAT

RECOMMENDATIONS WOULD YOU MAKE TO
STRENGTHEN CG AT ELICORE.

RECOMMENDATIONS TO STRENGTHEN CG
Board : Monitor and review the financial reports and

operational status of the company

Annual performance evaluation for executive and nonexecutive board members
Recommend the strict compliance of OECDs principle on
the Responsibility of the Board
mutual and transparent understanding of the division of duties

and cooperation between the management and board

IF YOU WERE HEATH, WHAT WILL

YOU DO?

IF WE WERE HEATH, WE WOULD..

1st Option: Continue the proposal for the

improvement of corporate governance

Performance evaluation

2nd Option: Ask Simon for resignation

THANK YOU FOR

LISTENING!