Chartered Governance Institute Risk Management Case Study PDF 2024

Part Two – Chartered Governance Qualifying Programme Risk Management Case Study November 2024 This case study will be reproduced in the examination paper so that you can refer to it during the examination. You will not be allowed to take your own copy of the case study into the examination. © The...

Part Two – Chartered Governance Qualifying Programme Risk Management Case Study November 2024 This case study will be reproduced in the examination paper so that you can refer to it during the examination. You will not be allowed to take your own copy of the case study into the examination. © The Chartered Governance Institute 2024 Page 1 of 4 Background Furnished Family PLC (FFP), is a furniture manufacturer based in the South East of England. The company began as a family run business in 1965, producing high quality, handmade, stylish and modern furniture. From the beginning, the family wanted to include the communities within which it operated by employing apprentices with disadvantaged backgrounds, who had struggled financially or academically. These apprentices would be employed to undertake different roles in the organisation, from carpentry to sales and accountancy. From one manufacturing unit and one salesroom, the business grew across the UK to include three new production facilities and 15 showrooms by 2005. At that time, the organisation decided to became a publicly listed company on the UK Stock Exchange and expand further across the country. The stated business vision has been, and continues to be, “We are a family business with our community at our core, providing quality furniture for a lifetime of comfort”. As such, the company’s inherent appetite for taking risk has traditionally been averse regarding quality and investment in local communities, but its risk appetite was more open to expanding the business. The company steadily increased its footprint opening a further 15 production facilities, 57 showrooms and three administrative offices in the UK by 2020, while continuing to employ apprentices. At this time, FFP’s turnover was GBP 537million with a profit before tax of GBP 18million, which meant the organisation was one of the largest furniture businesses in the UK. FFP’s core segment continued to be the home furniture, with limited non-core offerings in small home entertainment and office furniture. The arrival of Covid-19 and issues in the supply chain during and following the pandemic had an impact on both the turnover of the company and its business model. Most of its facilities were forced to reduce production due to lockdowns and supply chain disruptions and some of the sales rooms and offices that closed during the pandemic did not reopen. This led to falling sales and cuts to the workforce, which has resulted in a significant loss in manufacturing and production knowledge and quality assurance and compliance expertise. In contrast, while the sales of quality furniture for the home declined, households were looking to renovate their properties to accommodate different living and work requirements, resulting in an increase in the online demand for home entertainment and office furniture items. To capitalise on the changes in demand and to improve the company’s declining turnover and profits, the Executive team, supported by the Chair and one of the non-executive directors (NED), forced through an aggressive expansion programme involving several company acquisitions starting in 2021. Critics of the acquisition campaign have been concerned by the radical change in direction of the organisation’s risk appetite, as some of the acquired companies were importers of furniture from overseas, rather than producers, often buying in furniture at a fraction of the cost of the traditional products that FFP based its reputation on. This, combined with the reduction in the quality assurance and compliance teams, meant that the quality of many of the new products was not up to the high standards set by the organisation. In addition, investment in the UK apprenticeship programme was severely affected Although sales of home entertainment and office furniture products had increased, customer returns of goods had also increased on the basis of low product quality. This led, in part, to the reduction in its core customer base and sales of its core products. The new strategy has increased FFP’s turnover to GBP 584million, but also reduced profit to GBP 12million. © The Chartered Governance Institute 2024 Page 2 of 4 Governance The former Chair of FFP’s Board was a third-generation family member. Despite the UK corporate governance requirement that the Chair of a listed company should not be in that role for longer than nine years, FFP’s Chair had been in this position for 11 years. At the end of 2023, the senior independent Non- Executive Director (iNED) resigned in protest over the ongoing expansion strategy and the perceived non- independence of the Chair. This led to other Board members and some investors also voicing their concerns, resulting in a change of the Chair in May 2024 and the resignation of another iNED who had been in post for 10 years. In addition, in July of the same year, the Chief Executive Officer (CEO) suddenly left the company due to ill-health, temporarily replaced by the Chief Financial Officer (CFO) until the permanent replacement could be found. The current composition of FFP’s Board is: Five iNEDs  Chair of the Board (appointed May 2024) – Phil Howells  Senior iNED and new Chair of the Nominations Committee (appointed from within the Board – original appointment May 2021) – Ed Warde  Chair of the Remuneration Committee (appointed March 2019) – Yvette Fabregas  Chair of the Audit Committee (appointed February 2024) – Revash Singh  Chair of the Risk and Sustainability Committee (appointed December 2023) – Samual Lukuku  Chair of the Employee Engagement Committee (appointed September 2018) – Eleanor Davies Two Executive Directors:  CEO (appointed September 2024) – Hugo Lee  CFO – Etta Ruffel The role of the Head of Risk Management is currently vacant as the previous Head of Risk Management left the company following concerns he raised with the Chair relating to the acquisitions and changes in the organisation’s appetite for risk, which were largely ignored. Board meetings take place every two months, preceded, and informed by Board Committee and ExCo meetings. You, as the Company Secretary, have been with the company for two months, joining from a rival organisation. You have been in the furniture industry for nearly 20 years, working as a company secretary in a variety of organisations of different sizes, so you have an extensive experience and knowledge in matters of corporate governance and risk management. © The Chartered Governance Institute 2024 Page 3 of 4 Risk The challenge from some investors about the tenure of the Chair led to questions about the risk section of FFP’s annual report and its accuracy in relation to the risks the organisation faced and its risk appetite. As the organisation is preparing its next annual report and accounts, Samual and Revash have requested an external review of FFP’s risk management, including the risk section of its annual report. The review found weaknesses in the governance of risk management and the extent to which the process was embedded in the organisation, most notably at the strategic level. This review revealed that the principal risks and their associated controls had not changed from the 2023 and 2024 annual reports and that the information that had been suggested for inclusion in the next report had very few amendments. In addition, the Board’s responses to events were seen to be primarily reactive, with little attempt to improve resilience or to act proactively to anticipate future risk in light of current and emerging events. In her short period as interim CEO Etta halted the acquisition programme and this decision was endorsed and continued by Hugo. The findings of the external review were raised at the last Board meeting where the strategic direction of the company was discussed. It was agreed that in order to preserve its vision, changes were needed in both the FFP’s historic and new product offerings. Ed, Yvette and Eleanor were fully supportive of this new focus, having previously admitted to Phil that they had felt bullied by the previous members of the Board, and unable to challenge the decisions made to expand the company’s footprint. In fact, the former Chair had accused them of not considering the best interests of the company and its long-term success. Eleanor was particularly concerned about the recent acquisitions as they had affected FFP’s apprenticeship programme, the company’s commitment to the communities in which they operated, and, therefore, the overall reputation of the organisation. However, she admitted to you after the meeting that she felt she did not have sufficient knowledge of risk management and related requirements of corporate governance to challenge the decisions being made. At the same time, Samuel noted that although he had been recruited to the Board due to his knowledge in integrating the acquired companies, his expertise was around US-based companies, and he was still struggling with some aspects of corporate governance from a UK perspective. Finally, it was confirmed in the report that changes in the quality of furniture had been a key part of the reduction in profits and customer satisfaction. It noted that the loss of key members of the quality assurance and compliance teams meant that the compliance management framework was not operating effectively and that there were gaps in assurance being provided to the Board. Although assurance has been provided by Internal Audit, this was often not based on the actual risks being faced by the organisation, and the assurance from the operational and compliance teams seems to have been largely ignored, especially in relation to the quality of the imported furniture. You have been asked by Phil and Hugo to arrange a full day Board session to discuss FFP’s response to the findings of the external review and the strategic direction of the organisation. The scenarios included here are entirely fictional. Any resemblance of the information in the scenarios to real persons or organisations, actual or perceived, is purely coincidental. © The Chartered Governance Institute 2024 Page 4 of 4