Kmart - Forced Towards Bankruptcy?

<< Previous

Excerpts

For those following Kmart’s business closely, perhaps the bankruptcy would not have come as a surprise. Analysts and industry observers who knew of Kmart’s problems had often commented that the company would do well if it reorganized itself under Chapter 11. In fact, the SEC had received anonymous letters implicating Kmart executives of various illegal practices, two weeks before the company filed for bankruptcy.

The stewardship review questioned the very appointment of Schwartz at Kmart. Though he had prior experience in the retail business (having worked at Wal-Mart), his career was full of failures. The three previous companies he had worked at (the Arkansas real estate firm MPG Enterprises Inc., the Hechinger home improvement retail chain in Maryland, and New York-based Big V Supermarkets) had all gone bankrupt. Schwartz even owed $ 1 million to Wal-Mart. Reportedly, the Kmart board did not know ‘all’ about Schwartz and hence he was made the President and Chief Operating Officer from Executive Vice President (Store Operations) within six months of joining.......

The stewardship review also revealed many other unethical and illegal activities. Two former Kmart executives, Anthony D’Onofrio (D’Onofrio, Supply Chain Chief) and David Montoya (Montoya, Senior Vice-President) had resorted to many illegal practices during their tenure. It was found that D’Onofrio was a partner and co-founder of a consulting firm Inled LLC that had filed a claim of $1.4 million against Kmart. The nature of services rendered by Inled to Kmart and D’Onofrio’s role in the relationship between the companies was viewed with suspicion.....

During Conaway and Schwartz’s regime, employees were hired in defiance of the usual rules and procedures. It was reported that applicants for managerial posts did not fill the routine application forms, background checks were not done, and even interviews were not conducted. Also, the contract terms for the new employees (which offered very high pay packages) were decided upon arbitrarily by a few former executives, without any help from the human resources department.....

In January 2002, an anonymous group claimed that there were improprieties in Kmart’s accounting books. Following this, the company began investigations in this area. These investigations revealed that for the first three quarters of 2001, losses amounting to $ 554 million had been concealed. Kmart executives flouted accounting rules regarding vendor allowances and accounted for these allowances in those periods when they should not have been accounted for. As a result, the deficits in the books could be reduced to the extent of the allowances falsely taken into account. In May 2002, Kmart had to restate its earnings to factor in a loss of $ 554 million.......

In January 2003, the much criticized board of Kmart stepped down and a new board was brought in under the leadership of company President, Julian Day (Day). Adamson was made the non-executive Chairman till the end of the bankruptcy proceedings (Refer Exhibit II for a look at the composition of Kmart’s board before and after the bankruptcy). Kmart took a number of steps to set things right. It sold off one of the jets acquired during Conaway’s tenure and planned to sell more. Also, it barred all company personnel from using corporate jets for personal travel. ......

After almost a year of arranging funds, streamlining operations, organizing store closures and laying off employees, Kmart filed its plan of reorganization with the bankruptcy court in January 2003. As per the plan, ESL Investments (ESL) and Third Avenue Value Fund were to be the two main investors after the company emerged from bankruptcy (scheduled for April 2003). Kmart’s five-year business plan forecasted profits by 2004 and sales of $ 30.2 billion by 2007. ......

Exhibit I: Kmart – Key Financials
Exhibit II: Kmart – Board Composition
Exhibit III: Allegations against Conaway (Made By Anonymous Kmart Employees)

	Enter your search terms Submit search form

---

Business Ethics and Corporate Governance Textbook Text Book - Rs. 500 Textbooks Collection	Business Ethics and Corporate Governance Workbook Work Book - Rs. 500 Workbooks Collection	Case Studies in Business Ethics - Vol. I Case Study Volumes Collection