Corporate Governance at Ahold
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Case Code: CGOV005 Case Length: 14 Pages Period: 2000 - 2005 Pub Date: 2006 Teaching Note: Not Available |
Price: Rs.400 Organization: Ahold NV Industry: Retail Countries: Holland, USA Themes: - |
Abstract Case Intro 1 Case Intro 2 Excerpts
"This (granting of an inquiry) is a huge victory for the shareholders. Until yesterday Ahold was hoping that our request for an inquiry would not be granted. The pressure that Ahold has been exerting on the VEB - from placing the VEB's activities on the shareholder agenda to placing display ads asking us to call a halt to these activities - has yielded no result. The Court too shares the view that the background to the biggest stock exchange fraud in Dutch history cannot stay under wraps."
- Peter Paul de Vries, Director, VEB in 2005.
"We learned that as a company you can lose your reputation overnight, but it takes some time to rebuild it and restore trust."
- Anders C. Moberg, CEO and President, Ahold in 2004.
"Ahold has put in place a series of measures that will give the company the ability to more closely monitor the financial activities of its operating companies.
- Peter Wakkie, Chief corporate governance counsel, Ahold in 2004.
Introduction
In November 2005, Ahold NV (Ahold), the Dutch retail giant with several operating companies in US and Europe, (Refer Table I for Ahold's operating companies) reached a worldwide settlement worth US$ 1.1 billion with shareholders who had purchased its stock between July 30, 1999 and February 23, 2003. The compensation was intended to settle the class-action suit which Ahold's shareholders had filed against it after serious accounting irregularities were unearthed at US Foodservice, its subsidiary in the US. Ahold derived more than 60 percent of its revenues through its subsidiaries in the US.
To the shock of investors, Ahold announced on February 24th 2003 that it had overstated profits by almost 1 billion euros for the period between January 2000 and September 2002. Compared to the compensation demands that WorldCom Inc. and Enron Corp. faced, the US$ 1.1 billion settlement was seen as small. The settlement was welcomed by Ahold's management. Peter Wakkie (Wakkie), executive board member and chief corporate governance counsel, Ahold observed that the settlement was fair to all parties concerned, including the company itself. He said, "It is a substantial compensation for shareholders of between US $1 and US$ 1.30 per share. This is not so high that it will bring Ahold into problems." The VEB shareholders lobby also was happy with the deal.
Peter Paul de Vries, Director, VEB said, "It's a very quick solution and leaves behind a black chapter at Ahold. They can focus on the future." The shareholders' lobby (VEB) which acted as the mediator was compensated with € 2.5 million to cover its expenses. Investors also expressed their optimism over the deal. One investor commented, "The damage is not too big and can easily be paid out of Ahold's cash pile." Ahold considered the settlement as the last significant civil case it would have to face because of the accounting scandal. However, Ahold was still under investigation by U.S. Department of Justice (DoJ). The financial scandal caused serious trouble for Ahold. For the year 2002, Ahold showed losses of around € 1.2 billion. The period following the scandal, the company faced a severe cash crunch and was close to bankruptcy. In 2003, it was rescued by an emergency credit line offered by its banks.
Some of Ahold's ex-employees including the vice-president of US Foodservice were facing criminal charges. Many members of the management who had occupied responsible positions were forced to resign in the months after the fraud came to light. The company vowed to comply strictly with the revised Dutch Corporate Governance Code which came into effect on January 01, 2004. In 2004, the new management embarked on an ambitious revival program christened "Road to Recovery". Corporate Governance was to be an integral part of the three-year program.
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