Question 1

Decadent David Ltd, an ASX 100 listed company, operates numerous department stores in all Australian capital cities specialising in up market and expensive retail products. The company weathered the impact of the COVID 19 virus quite well, and through disciplined management of the business including tight cost and inventory management and a management salary freeze, is expected to report a $100 million profit this year. The company's recent success through this period is largely attributed to its CEO, Ted Danson, who was appointed in 2018.

The David family owns about 30% of the company's shares. Various institutional investors hold about 40% of the shares with a dispersed group of retail investors owning the remaining shares. Ted Danson's wife, Mary, is a prominent member of the David family and personally owns 5% of the company's shares.

The CEO and the chief finance officer (CFO) are the only executive directors on Decadent David Ltd's 9-person board. Of the remaining non-executive directors, 4 are members of the David family and 3 are independent non-executive directors. The independents have significant accounting, finance and legal skills and are members of the company's audit committee. Sir Larry David, the most senior member of the David family and Rita's father, is the company's chairman. Apart from the CEO, none of the other directors have any previous experience in retailing. Apart from an audit committee, Decadent David Ltd's board has remuneration and nomination committees. Not long ago the board set up a separate 3-person risk management committee with Sir Larry David as chair and 2 of the independent directors. The board has recently been considering whether the company should expand its operations and set up stores in New Zealand, Indonesia and Singapore.

Soon after his appointment as CEO, rumours began spreading about Ted Danson sexually harassing several female managers directly responsible to him. As the company did not have a mechanism for reporting such complaints to the board, many of the harassed managers did not take the matter further. When one of them attempted to report the matter to the risk management committee, she was told not to pursue her complaint, as the chair of that committee was Danson's father-in-law and that Ted Danson, having got the company through the COVID period, with the company making a profit, was too valuable to the company.

A while ago Ted Danson has let it be known that due to the company's success he wants a significant pay rise or he will move to a bigger overseas retailer. When this news became public one of the harassed female managers took legal action against both Danson and Decadent David Ltd. As a result of this, Danson resigned as CEO.

Some institutional investors recently contacted the company's chairman and made it clear that Decadent David Ltd should improve its corporate governance practices. In particular, they were concerned that the board did not have a succession plan in place to replace Ted Danson and there was no obvious successor to Danson within the company. They also thought that the board was too closely associated with the David family and did not have adequate expertise to properly evaluate the proposed expansion plans to NZ and South East Asia. They also thought the company's risk management processes, especially those related to reporting harassment needed to be changed.

Sir Larry David, as chair, seeks your advice on whether the company should change its corporate governance practices in the circumstances (and if so what changes) to make it more attractive as an investment for institutional investors. Provide that advice.