Assessment 1(c): Discussion/ Case Analysis

Module 5_ Stewardship and Human Resources

After reading the case study below, answer the following questions in your initial post:

1. Given the situation that faced the company, do you think the board had an appropriate structure and membership?

2. What changes, if any, would you recommend?

Case study: Southern Cross Healthcare

Philip Scott, who trained as a psychiatric nurse, took over Southern Cross, a small provider of care homes in 2000. Within four years, he had built it, largely through acquisition, into the largest provider of care for the elderly in the UK. His business model relied on sale and leaseback of the homes to generate funds for expansion. In other words, properties were sold and then leased back to Southern Cross for an agreed rent.

In 2004, Blackstone, a US-based private equity firm, bought Southern Cross for £162 million. Its business model recognized that the UK population was ageing, and that vulnerable old people would need housing and care. Moreover, much of the fee income for such protected accommodation would come from the taxpayer, through state support for the elderly provided by local authorities.

This fee income was expected to be guaranteed and to rise with inflation, while economies of scale would reduce running costs. This was a relatively risky model, assuming growing demand and state-supported income that would reflect cost rises. In 2005, Blackstone acquired NHP, a large nursing home group, merged its operations with Southern Cross, and sold most of its homes, leasing them back to Southern Cross.

In 2006, Blackstone floated Southern Cross on the London Stock Exchange into a bull market. Some 60% of its voting shares are held by institutional investors. Financial institutions and advisers took substantial fees from the flotation. Four of the Blackstone nominee directors cashed in their shares, allegedly making over £35 million. The Blackstone holding was gradually sold producing around £1 billion.

Philip Scott, who resigned from the board in 2008, made over £10 million. In 2010, Southern Cross operated over 750 care homes, with more than 38,000 beds and 44,000 staff, offering residential care homes for the elderly who could no longer care for themselves at home, and nursing care homes with additional levels of medical care for thoseneeding it.

Southern Cross runs into trouble

However, by 2010, Southern Cross was struggling with its cash flow, facing rising rents, rapidly increasing energy and food costs, and reducing fee income as councils reacted to lower government grants and cut their expenditure on care for the aged. With less revenue,the quality of some homes declined, and occupancy levels fell.

In December 2010, the possibility of a takeover was rumoured (Investors Chronicle). The UK government became involved when seven age-concerned organizations complained publicly that increasing pressure on public finances was pushing an already overburdened care system to breaking point. An uncertain future and potential hardship facing 31,000 vulnerable, elderly residents of Southern Cross homes would not be well received by voters. As can be seen from the summary results below, the company was facing real challenges as it entered 2011.

Stephen Schwarzman, chairman of Blackstone, defended Blackstone’s original financial strategy, claiming that the crisis at Southern Cross was a reflection of the global financial crisis and not his business model. Philip Scott accused the current directors of scaremongering and said they were partly responsible for the decline.

The board in 2011:The board had six members, four men and two women, whose profiles follow.

Ray Miles, 66, non-executive director and chairman, who has spent most of his career in the shipping industry, became a non-executive director of the company in June 2006 and served as the senior independent director until he was appointed chairman on 1 January 2008.

Jamie Buchan, 51, chief executive, was appointed as an executive director of the company on 1 January 2009. Between 2002 and May 2008, Mr Buchan, backed by a Malaysian private fund, led the successful turnaround and subsequent sale of the ExCeL Exhibition and Conference Centre in London.

David Smith, director of finance and support services, joined Southern Cross as group finance manager in 2006, was appointed group financial controller in 2008 and director of finance and support services in September 2010 (replacing Richard Midmer). A chartered accountant, he previously spent ten years with accountants Price waterhouse Coopers.

Christopher Fisher, 57, senior independent non-executive director, who spent most of his career at Lazard, the investment bank, joined the board in June 2006 and became the senior independent non-executive director in January 2008. He is a partner in Penfida, a firm providing independent financial advice to pension fund trustees, and is also president of the Council of Reading University and a trustee of the Imperial War Museum.

Baroness Morgan of Huyton, 51, became a non-executive director of the company in June 2006.He became a non-executive director of the company in June 2006. A former teacher, Baroness Morgan worked as a senior aide to the British Prime Minister from 1997 to 2005. In 2001, she was made a peer and served as a Minister in the Cabinet Office. From 2001 to 2005, she was Director of Government Relations, Downing Street, working closely with the Prime Minister.

Nancy Hollendoner, 54, joined the board as non-executive director in January 2008 and is a senior adviser on the healthcare market to Hawkpoint Partners Limited. She previously worked as an equities analyst specializing in the healthcare market and was employed by UBS Investment Bank between 1996 and 2002. (See the 2010 annual

By mid-2011, Southern Cross had run out of cash and the residents of its homes seemed vulnerable. In May of that year, Southern Cross was locked in negotiations with its landlords, demanding a cut of 30% in current rents and looking for longer-term solutions. In June 2011, it announced 3,000 staff redundancies. By July, failure seemed inevitable, the stock market suspended its shares, and the company tried to return the care homes to their landlords. It was then faced with the prospect of having to pay over half a million pounds to its top executives under contractual ‘golden parachute’ terms, unless they voluntarily waived those rights.

Tricker, Bob. (2012). Corporate governance: Principles, policies and practices Oxford U, UK. Oxford University Press. Kindle Edition.

(For more information about the company, see www.schealthcare.co.uk)

(For comments on 2010 financial results, see http://investors.schealthcare.co.uk/uploads/resultspresentation2010.pdf)

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