MegaMart plc is a medium sized retailer of fashion goods with some 200 outlets spread throughout the UK. A publicly quoted company on the London Stock Market, it has pursued a growth strategy based on the aggressive acquisition of a number of smaller retail group. This growth has gone down well with shareholders, but a significant slowdown in retail sales has resulted in falling profits, as a consequence, its share price. MegaMart had been the creation of Rex Lord, a high profile entrepreneur. His dominance of the company was secured through his role as both Chairman and Chief Executive of the company. His control of his board of directors was almost total and his style of management such that his decision were rarely challenged at board level. He felt no need for any non-executive directors drawn from outside the company to be on the board. Shareholders were already asking questions on his exuberant lifestyle and lavish entertainment, at company expenses, which regularly made the headlines in the popular press. Rex's high profile personal life also was regularly exposed to public scrutiny and media attention.
As a result of the downturn in the company's fortunes some of his acquisition have been looked at more closely and there are, as yet, unsubstantiated claims that MegaMart's share price had been maintained through premature disclosure of proposed acquisition and evidence of insider trading. Rex had amassed a personal fortune through the acquisitions, share options and above average performance related bonuses, which had on occasion been questioned at the Shareholder's Annual General Meeting. His idiosyncratic and arrogant style of management had been associated with a reluctance to accept criticism from any quarter and to pay little attention to communicating with shareholders.
Recently, there has been concern expressed in the financial press that the auditors appointed by MegaMart, some twenty years ago, were also providing consultancy services on his acquisition strategy and on methods used to finance the deals.
Required
(a) Explain the nature of the agency problem that exists in MegaMart,
- What the agency is?
- Who is agent? Who is principle?
- What kind of duty agent own to principle?
- What problem of agency in the case?
(b) Assess the extent to which MegaMart's corporate governance arrangements and situation fail to constitute governance best practice.
- Take the problem first then what it should be?
- Quote case study (report)