Cassowary Creek Confectionary Ltd.

* Cassowary Creek Confectionary (CCC) Ltd is an artificial company created for the purpose of this case study.

History The company takes its name from a region in the Victorian countryside. The original homestead stood near a creek which in the past provided its source of water, so vital for the agricultural economy that pervaded the region. Its life began as a sheep station in the late 1880s, but after many generations the emphasis of the business had also changed. Many bouts of drought and famine over the decades made the owners and homesteaders re-look at their focus and emphasis on their business. Their approach had been very entrepreneurial and tinged with insight. They changed their emphasis from merely sheep, to beef cattle, to cattle raised for milk production. That has kept them in good business for some while. But the climate was very unpredictable in this country. Fires and drought became more frequent and troublesome. Loss of livestock was considerable, which resulted in huge losses. In the late 1970s, as was the trend at the time, they sectioned off some of their land and converted them into high-value crop production: like vines, and grape production. They even tried other types of stone fruit production. Finally, after some other attempts, they tried their hands at growing nuts. That proved to be quite profitable for a time. The market for nuts was competitive as many growers followed suit. They looked around for ideas for product diversification and finally hit upon the idea of combining nuts and fruit with chocolate. That is how the company began. That was their beginning as a confectionary company.

About the company Cassowary Creek Confectionary is one of the largest confectionary manufacturing company operating in Australia. It is a family firm listed in the Australian Securities Exchange since year 2006. It prides itself on being an Australian owned and run company. It makes and sells chocolates and other chocolate-related confectionary. Some of the chocolates are handmade and are artisanal in nature. Its head office is in Melbourne. It has retail stores in the larger cities locally (e.g., Sydney, Brisbane, Melbourne) and internationally (e.g., London, Paris, New York, Busan, Toronto, Shanghai, Hong Kong, Singapore). It is looking at a foray into Tokyo too, maybe sometime in the near future.

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Its factory is based on the outskirts of Melbourne where land is not at such a premium and is also close to many distribution centres. The unemployment rates in these outskirts are high and the local government is very supportive of business activities that can support the local economy. The company employs many people from the surrounding communities and area and that has been its focus right from the beginning. It likes to support the local community and the economy. The past year has been particularly hard with shutdowns and lockdowns due to the COVID- 19 pandemic. Sales and production have seen significant decreases. Finding a way forward has been the corporate directors' main focus but what to do to turn around strategically is not always clear and easy. Despite the competition and the ever-changing conditions, the company is still strongly committed to and making it a priority to achieving the following: Ethical and sustainability certification. Using only certified cocoa sources. Refusal to engage with any company that enforces any form of slavery - be it forced or otherwise, child or trafficked labour. A point worthy of note is the fact that the company now operates solely in Australia, despite the fact their products are sold worldwide. Senior Management and Executive Directors There are currently six senior members (Executive Directors) in their Board of Directors. Exhibit 2 shows directors and executives who hold shares of the company. The six Executive Directors of the Board are as follows: Chief Executive Officer (CEO) Douglas McCubbin is the current CEO of the company. He is a direct descendant of the family which started the homestead at Cassowary Creek in the late 1880s. While a direct descendant of the McCubbin family retains control of the business they are able to keep the name Cassowary Creek. Doug earned an engineering degree and started working with the family business as soon as he completed his degree. He worked tirelessly within the business assuming a number of different positions, until he rose to become CEO when he took over from his father. He sets very challenging targets for the company with emphasis on increasing sales through growth, product diversification and market penetration. Chief Legal Advisor Daniela McCubbin (nee De Mattini) is the Chief Legal Advisor for the company. She is the wife of Douglas McCubbin and they met at University while she was undertaking her law degree. Daniela initially worked in a law firm specialising in Corporate law after graduation, but took some time off to raise their children. After the children were of school age, she was invited to join the firm as a legal advisor. This she did part-time until such time when the

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children went off to University and when she had more time on her hands to devote fully to the business as it grew. Chief Financial Officer (CFO) Alexander Chao is the Chief Financial Officer at the company. Alexander studied Commerce at University and graduated with Honours. Immediately after graduation, he got a job with one of the Big 4 accounting firms and started as an Auditor. He also further qualified as a Chartered Accountant with the Institute in Australia. The long hours and the many late nights at work made him rethink his goals and ambitions as his immediate family grew. He left the Accounting firm to take up a position as a Financial Controller at Coles Myer Group. This was his last job before he joined the company as CFO. Director of Logistics and Production Christopher Lanaghan is the "go to" person when it comes to Logistics and Production. He has had many years' service with the company. He carries with him a wealth of knowledge and experience pertinent to the company. The loss of his services would be a serious setback for the company as he carries in his head the history, the setbacks, and the problems the company has been through. He knows all parts of the operations of the company particularly with regards to manufacturing and production. Christopher has an engineering degree. Like the CEO has worked his way up the ladder in the organisation. His engineering qualification has helped him all through all the different aspects and phases of the manufacturing and production processes. He is adept with his hands and has been instrumental in solving many complex problems in the manufacturing process in the past. He is to all intents and purposes indispensable within the organisation. His leaving would leave a "big gap" in the running of the business. Director of Marketing Eugenie McCubbin is the only daughter of Douglas and Daniela. She is in her late twenties. She works with the company as Director of Marketing. Eugenie has a Bachelors degree in Marketing and a Masters in Marketing. After graduation, she worked in various positions in sales with companies like L'Oreal, Proctor and Gamble (P&G) and her last job was with David Jones. Prior to joining the company, she embarked on a Masters degree to increase her working knowledge with marketing, particularly with the various online platforms that are fast becoming essential in marketing products. She has been with the company for the past 5 years and has really enjoyed the challenge of the work there. Director of Product Development Charles McCubbin is the eldest child of Douglas and Daniela. He joined the family business soon after his Commerce degree. He enjoyed his time in the marketing department to begin with, but found his niche in product development. He has been involved and even headed a few teams that were responsible for the product ranges the company deals with at the current moment. He sees himself there and in that role for a few more years to come.

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Non-Executive Directors The company has appointed two non-executive directors. Brian Williamson holds a degree in Information Technology. He spent about eight years in the industry as an Information Systems Director. Brian was appointed given his tech experience and outside perspective that can provide strategic monitoring and advice on the company's penetration into e- commerce. Theresa Ly Nguyen was appointed based on her product and marketing experience. Theresa worked in a large retail company Proctor and Gamble (P&G) for nearly twenty years, which were famous for the large range of retail products they manufactured, marketed and sold. In Australia, the Australian Securities Exchange (ASX) Governance Council guidelines recommended that a majority of the board should be independent directors. Any company that fails to comply must disclose this fact in its annual report under the "if not why not" approach. As Cassowary Creek Confectionary does not intend to recruit more non-executive or independent directors, it has disclosed and justified the non-compliance of this rule in its annual report: "The board as a whole is constituted in such a way that it can effectively govern the company and can reasonably be expected to act in the interests of public shareholders. We believe that the sum of the parts- the experience, diversity, skills, and effectiveness of the board and total group facilitates better value creation than the recruitment of independent directors purely based on regulatory definition".

Duties of the Board The Board of Directors at the company are charged with the task of deciding the strategic direction which the company is going to take to achieve the overriding goals and objectives. As can be seen from above, there are six executive and two non-executive directors. At first glance, the number of directors appears a little cumbersome, but challenging and insightful decisions need to be made and they at times have to be timely but not at the expense of completeness - good and thorough alternative(s) formulation, analysis and selection. The CEO feels he has assembled such a group of people. Now is the time to see the group in action.

The Board Meeting We now see the Board of Directors in action, and here are some of the highlights of their discussions. They now need to consider what their options are in light of COVID-19, and what to do post COVID-19. They are looking for a way forward, so options for further business are being considered very seriously. Some of the discussions could be a little heated and tense at times. All of them understand the nature of what is at stake - their future, and the company's future profitability. They know ethics and sustainability are central and core to their beliefs, but the ways to achieve them are a myriad and varied

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indeed. They know they have to thrash out their ideas carefully and thoughtfully. They also know they need allies on the Board to get certain ideas across and accepted. Managerial and organisational culture was going to be an issue to contend with, so the way to navigate had to be managed insightfully and knowledgably.

Production Eugenia began the meeting by stating that "The cost of doing business in Australia has increased and is becoming more expensive. Much of this can be attributed to the high cost of labour and the cost of rental. This has been further exacerbated by the pandemic and the lockdown which caused us to shutdown". She added further "We should cease running the local factory and relocate our production to somewhere overseas where it will be cheaper". Douglas immediately responded "But the company's products are iconic to Australia, a home brand. It carries our national pride with it and furthermore 76% of our company's sales comes from Australian consumers. We must be seen to support locally made products". This sentiment was echoed by both Daniela and Christopher and they were quite vehement in their opinions. "That may be the case, but we have to do something to battle the stiff competition we are facing in the industry" stated Charles. This opinion was also shared by Brian and Theresa who echoed similar sentiments and concerns, thereby backing Eugenie and Charles. Charles went on to emphasise "If we are to maintain our local production, we will see our production costs increasing as it has been in recent years". "This may mean that in the long term we may not be able to sustain and continue production in Australia" continued Charles, "This is something we must give serious consideration to". Brian then chimed into the discussion "We need to do something if we are not prepared to transfer the increasing costs to our customers. We can hardly decrease the size of the chocolate bars, can we?" That statement seemed rather harsh and a little sarcastic, but it was done to make a point in this discussion. Alexander then shifted the focus away by asking Eugenie "Where are you considering relocating the production to?". Eugenie replied "what about Vietnam?". Brian, Theresa and Charles were supportive of the suggestion. Even Christopher could see the logic of such a move but stated he had some reservations in certain aspects of the production process in Vietnam. Theresa reiterated her support for the suggested relocation. "I have been to Vietnam a number of times with the family and have seen the improvements made in the country. But, my main concern would be I do not know how easy it would be for us to obtain a license to operate in Vietnam. Everything there takes so much more time to process, what with the excessive red tape inherent there". Charles who has friends doing business in Vietnam stated, "As long as the company is prepared to pay an amount as "unofficial charges" to government officials, a business

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registration license or permit may be easily obtained. It's the cost of doing business there". Charles further added "Such payments would help to grease the palms of officials who are in a strong position to help us bypass excessive regulations and speed up the transaction processes. This has been seen as a common business practice tantamount to being a social norm in the country". "If needs be, we could even invite a few Vietnamese officials with strong connections to business and Government on an all-expenses paid trip to Australia. The trip would have to be a little luxurious to show our commitment to relocation. We would have to wait until they can safely travel to Australia. I have been told that offering political donations could also be a way to maximise our likelihood of success, that is if we are really serious about the plan" continued Charles. The CEO Douglas agreed to revisit the suggestion after full and comprehensive aims and plans were set up. "Charles you can get Eugenie to assist you with the plan and we shall review it in the next meeting" stated Douglas. "So, let's move onto other agenda items" says Douglas, "Let us now hear from the CFO".

EBITDAC "Thanks Douglas" said Alexander. "As we know business was badly affected last year by COVID-19 and our results reflect it. So, what I am proposing is the provision of an additional measure of earnings. This measure has been used both in the USA and Europe. This figure will represent earnings before interest, tax depreciation, amortisation and COVID (EBITDAC). We use this figure in press releases and conference calls to highlight what our performance might have been had it not been for the impact of COVID. A German company Schenck Process LLC, a measuring and process technology company was the first company to add back 5.4 million Euros to its earnings to present an alternative view of the company's financial health without the effect of COVID". Alexander continued in this light and went on to state "Several US companies have also jumped on this bandwagon to follow suit. So I believe we are well within our rights and reason to manage our investors' and stakeholders' perception, to restore their confidence by providing this alternative measure. Based on my estimate, we are able to add back A$86 million to our earnings if there was no pandemic". His further rationale for using the measure is that "EBITDAC reflects the company's true position, as I believe the pandemic is only transitory and should end by mid-2021. It is my firm belief that EBITDAC provides more relevant and faithfully represented information to assist with critical decision making, such as we are considering here and now. I am convinced we are doing the right thing and hope you are all in agreement". Everyone seemed to be in full agreement with the CFO.

Dividends

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The Board Meeting continued with the agenda item on Dividends. The CEO played the following video just before he makes an announcement of his decision to dividend:

https://www.9news.com.au/national/westpac-results-bank-cuts-dividend-after-profit- slumps/520b4ab9-295f-4372-a275-1216bf39f461 "The market is tough. However, the company should keep the dividend payout similar to last year in terms of the timing, amounts and types. This will send a strong and positive signal to the market. Market signalling is important in and to our business." The CEO announced. The CEO added, "Many of the investors in our company are Australian retirees who have in the past and will continue to live off a steady stream of share income (dividends)." The Board members appeared to be very happy and almost ecstatic with this announcement. They obviously welcomed it.

Payment to Suppliers The CFO chimed in with another financial item which he is concerned with. "The company has been experiencing cash flow constraints during the course of the COVID epidemic, so I feel that we need to prioritise payments to large suppliers over those for the smaller suppliers. This I believe will help to maintain the relationship and favourable terms offered by these large suppliers". Added the CFO "This will also be in keeping with the decision to distribute dividends to investors, and we can only do this by delaying the payments to all small business suppliers who we deem as less powerful and threatening", continued the CFO, "We are very fortunate that the company operates in Australia only so far. If we were in the UK, we could face fines for late payments to small businesses." The CFO then proceeded to present a list of required payments to suppliers. You can view the Accounts Payable schedule as at 31 December 2020, in Exhibit 2.

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The meeting of the Board concluded on that note. Further considerations of what to do next in the strategic move forward will be on the agenda for the next Board meeting. Many decisions will need to be made with the focus on two very important issues: that of being ethical and sustainable, and whether to expand overseas and the financial implications and consequences of both.

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Exhibit 1 Australia - Chocolate market The Australian Chocolate market stood at $2.9 billion, and is projected to surpass $4.3 billion by 2023. This has been achieved primarily by growing chocolate consumption and rising demand for niche products such as organic chocolate products. Moreover, the industry has recently witnessed an increasing focus of chocolate manufacturers on offering innovative products, like Cadbury Dairy Milk with Oreo in mint and strawberry flavours. This is expected to positively influence the country's chocolate market in the coming years. Rising number of health-conscious consumers, increasing demand for premium chocolates, and the rapid expansion of e-commerce are some of the factors that would fuel growth in Australia chocolate market during the forecast period (2019 - 2023). Other major players operating in Australia are: Mondelz Australia Pty. Ltd. Mars Australia Pty. Ltd. Lindt and Sprngli (Australia) Pty. Ltd Nestl Australia Ltd. Ferraro Australia Ltd. Aldi Stores Supermarkets Pty. Ltd. Darrell Lea Confectionary Co. Pty. Ltd. Haigh Pty. Ltd. JH Whittaker and Sons (Australia) Ltd.

Market by distribution channel: independent grocery stores, supermarkets, convenience

stores and non-store retailing

Source: TecSciResearch (Dec, 2018). Consumer goods and retail. Accessed on 16 Jan,2021

from https://www.techsciresearch.com

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Exhibit 2 Share Distribution in the Company The following executives and directors hold shares of the company: CEO: 25% CFO: 3% Chief Legal Adviser: 10% Director of Logistics and Production: 8% Director of Marketing: 8% Director of Product Development: 8%

Some Selected Financial Statistics: Net income over the last few years: $450 - $550m Net income for the past year (affected by COVID-19): $233m

Accounts Payable Schedule as at 31 December 2020: Supplier Annual turnover of the supplier

Outstanding amount to the supplier

Term Overdue in days A $3b $14m n/90 - B $150m $8m n/30 - C $1.2m $53,000 n/30 43 D $1.5m $200,000 n/14 40 E $5m $110,000 n/14 - F $2.35m $54,240 n/21 60 G $1m $120,000 n/7 36 H $0.8m $12,300 n/7 - I $6.23m $75,000 n/7 - J $4m $71,800 n/14 - K $9.5m $58,900 n/14 22 L $4.45m $400,000 n/21 - M $700m $2m n/60 - N $8.9m $1.5m n/30 - O $2b $23m n/60 8

Questions:

Question 1 Explain whether the proposed payment of 'unofficial charges' to the Vietnamese officials by the Cassowary board constitutes corporate bribery. Discuss one possible implication of such practice for each of the following stakeholders: i) employees, ii) shareholders iii) local community in Vietnam.