Adele Ferguson, 05 October 2015
When 7-Eleven announced the “resignation” of the chairman, chief executive and another senior executive amid a massive wage fraud scandal, it should have sent chills down the spines of corporate Australia.
Since the scandal broke just over a month ago, it has had a profound impact on the reputation of the brand, the board and senior executives.
It prompted the former competition tsar Allan Fels, head of a panel reviewing the wage fraud claims, to say, “This should be a strong warning to all boards and CEOs of the consequences of non-compliance with the law by their business.”
What happened at 7-Eleven reads like a breakdown of corporate governance and a crisis of complacency.
The fallout should give directors who are on more than three big boards pause to consider whether they are spreading themselves too thinly. For directors who have sat on the same board for more than a decade, the question should be asked if they are still independent.
For the rest of corporate Australia, it should be a wake-up call to make sure their house is in order. The world is changing and the community is becoming less tolerant of non-compliance to the law.
In the case of billionaire Russ Withers, who jointly owns the 7-Eleven empire with his sister Bev Barlow, the fallout cost him a seat on the highly coveted Australian Olympic Committee. “Continuing claims about 7-Eleven and its business cannot be allowed to pollute the AOC’s work,” he said in a statement.
Michael Smith, who sat on the 7-Eleven board for 16 years, including the strategy committee and audit and risk committees, stepped aside as chairman of the high-profile Australian Institute of Company Directors.
Warren Wilmot stood down as chairman of the Franchise Council of Australia and on September 30, resigned as chief executive of 7-Eleven.
Smith, who became deputy chairman of 7-Eleven last year and is now chairman of 7-Eleven, says he was shocked by what he learned from the joint Four Corners and Fairfax Media investigation, which included systemic wage fraud and falsification of payroll records within the group’s 620-strong franchise network. He said the board had no idea of the extent of the problems.
Smith is not a novice director. As chairman of the peak body for directors, he knows chapter and verse the role of directors, corporate governance, risks and compliance.
If Smith says he didn’t know, what happened at 7-Eleven should become a case study for all boards of how a company can have top-tier auditors, advisers and other compliance structures in place yet miss something so blatant that senior executives and junior staff constantly joked about it in the office.
Withers told a Senate hearing late last month, “It would be easy for us to say that this is the responsibility of the offending franchisees.” But “the reality is whatever the extent of the problem, this has happened on our watch and we want to make it right”.
It did happen under head office’s watch and the company has a moral, ethical and corporate responsibility to put it right. There are now 85 stores up for sale, compared with less than 50 before the scandal broke. Some of the big banks have stopped lending to franchisees and, because franchisees must pay legal wages, many are struggling financially due to the 57:43 per cent profit split.
Fair Work raided the company three times in the past six years and found chronic problems with underpayment of wages. The board should have been aware of each raid.
Indeed, The Australian Financial Review can reveal that a legal case in the Supreme Court of Victoria in 2011 was discussed by some directors. The case, relating to employee Mohamed Thodi, who was grossly underpaid by the franchisee, resulted in the judge saying “7-Eleven management admitted to the court that non compliance with workplace laws was relatively common amongst 7-Eleven franchises”.
Documents show the board was aware of a third raid by Fair Work in 2014. “This horrible experience has been progressively revealing itself over time. It began as we saw it as a normal business problem. Your stories ran which were shocking, and I think as we progressively got into it we saw we had a very big problem, and it is both in terms of our franchisees and in our model,” Smith said in an interview.
It is a stunning revelation and one that all chief executives and boards should think about. If there is even a suspicion of misconduct, they should pull out all stops to get to the bottom of it or they too could face a reputation-shredding experience.
In the case of 7-Eleven, the evidence was there if the board had asked the right questions. The raids date back to 2009, yet a Senate hearing was told that until a few years ago, the payroll system allowed franchisees to pay whatever rate they liked, even if it was below the legal minimum. Its internal audits should have been another clue.
They could also have asked why compliance audits of the stores, known as retail reviews, underplayed the importance of payroll records.
The company started doing retail reviews in 2011. It wasn’t until January 2014 that there was a separate “tag” on payroll. Before that, it was embedded in operational risk and allocated three questions worth 60 out of 3310 points. The latest version of the review in January 2015 has five questions dedicated to payroll, which is now worth 100 out of 3380 points.
To put it into perspective, these reviews underweighted the importance of payroll to the point where a store that was given a score of zero for payroll compliance lost 2 per cent of its score. Put simply, the condition of the Slurpee machine or cleanliness of the store was considered far more important.
A recent, 120-page senior management report dedicated a few lines to payroll under the risk section: “A detailed update on the status of the Fair Work Ombudsman’s franchisee payroll compliance audit has been presented in the June board papers, together with proposed enhancements to current internal control systems. Operations will advise the business of any significant developments in this area.”
It seems like a case of don’t mention the war.
Smith could have resigned. Instead he has chosen to take the hot seat, and try to fix the problem and rebuild his status. “As incredible as this might seem, I’d like to think I’m a careful, competent director who has taken a lot of care in this business with a high-quality board and high-quality advisers,” he said. “If I was on the outside, I’d find that incredible to believe and I don’t expect people to believe differently.” He has a lot to prove.
Extracted in full from the Australian Financial Review.