On January 5th 2009, Waterford Wedgwood went into receivership after talks with a potential investor ran out of time. [1] Some of its Irish subsidiaries (See Exhibit 1 for list of Waterford Wedgwood's subsidiaries) went into receivership, administrators were appointed to some of its UK subsidiaries and its shares were suspended from the Irish Stock Exchange [2] . In total, nine of its UK and Irish subsidiaries were closed down [3] .
Sir Anthony O'Reilly, Non-executive chairman of Waterford Wedgwood plc, issued a statement on behalf of the board saying "We are consoled only by the fact that everything that could have been done, by management and by the board, to preserve the group, was done," [4]
Straight after the announcement of receivership, Anthony O'Reilly, his wife Lady O'Reilly, former chief executive Redmond O'Donoghue and Patrick Molloy all resigned as directors of the company. The company's debt stood at approximately €400 million (see Exhibits 2a & 2b for key financials from 2004-2008).
Much of Waterford Wedgwood's ultimate demise was attributed to reasons such as the economic downturn [5] . However, it was discovered that throughout the 90s and 00s, Waterford's owners had practiced poor corporate governance through a combination of failing to include payments to board members in their remuneration reports [6] , having close family ties and little independence amongst its board members.
In order to progress in the future, what recommendations can me made to the owner of Waterford Wedgwood in order to practice better corporate governance? What could O'Reilly have done differently in order to avoid such poor corporate governance?
Background
The Wedgwood brand was established by Josiah Wedgwood, an Englishman from Staffordshire, in 1759. [7]
In his early twenties, Josiah Wedgwood started working with Thomas Wieldon, a well renowned English pottery maker at the time. Through this, Wedgwood learned a broad variety of pottery techniques. [8] Soon after the companies' establishment, he achieved early success in 1763 when he manufactured a tea and coffee service for Queen Charlotte, (who was wife of George III). As a result, she gave him permission to use the title, "Potter to Her Majesty", and call his new cream ware Queen's Ware. This gave Wedgwood's brand an enormous boost. [9]
Wedgwood's first major commercial success was when he created black basalt, a fine black porcelain. [10] He also later invented the pyrometer, a device for measuring heat in kilns. [11]
Before he died in 1795, Mr. Wedgwood passed his company on to his sons. Many of Mr. Wedgwood's descendants were involved directly in the running of the company and the fortunes of Wedgwood soared through most of the 19th and 20th century [12] .
In the early 1980s, Waterford Glass Company began to face many challenges; although the market for fine lead crystal tripled from 1979 to 1983, Waterford's sales grew by merely 20%, and its market share decreased to 25%. In 1986, they acquired Josiah Wedgwood and Sons Ltd. in the hopes of finding retail and distribution synergies [13] . In October 1986 Waterford Glass paid $363 million for Wedgwood China to form Waterford Wedgwood Holdings PLC [14] . Waterford itself has a long and illustrious history dating back to 1783. However, the company's name was changed to Waterford Wedgwood plc in the late 1990s. At the time Redmond O'Donoghue, Waterford Wedgwood's group chief executive, said the acquisition would "increase the volume through our factories without substantially increasing production costs" [15] .
Post-Merger
A recession in the late 1980s and early 1990s brought Waterford's premium crystal market's growth to a halt. From 1989 to 1992, sales in the premium market in the United States (then the world's largest market) dropped by 25%, while sales of second-tier crystal increased by 50%, reflecting customers being more price conscious. At the same time, employment costs for Waterford Wedgwood had increased dramatically: Waterford's labour expenses grew three times faster than inflation in the late 1980s. From 1987 to 1990, Waterford Crystal alone lost more than £60 million, and total corporate debt had increased to £150 million. [16]
In early 1990, the struggling company underwent financial restructuring. O'Reilly headed an investment group, Fitzwilton, US Merchant Bank Morgan Stanley and together, they invested £80 million for a 29.9% stake in the tableware firm's equity [17] . At that time, the Morgan Stanley group took a 14.5% stake as part of a 5 year investment plan. The deal valued Waterford Wedgwood at £230 million, which was less than it had paid for Wedgwood alone just three years earlier. [18]
The company's troubles were deeper than O'Reilly had initially anticipated. Waterford Crystal made an operating loss of $8.9 million, while Wedgwood had an operating profit of $31.3 million [19] .
In 1991, in a second wave of senior executive changes in 6 months, Donald Brennan, Managing Director of Morgan Stanley, replaced Kilroy as chairman. [20] Morgan Stanley and Fitzwilton PLC (Mr O'Reilly's investment group) already had 5 people on the Waterford Wedgwood board - Mr. O'Reilly also served as deputy chairman of Waterford Wedgewood at this time [21] .
Brand Extensions
The company trimmed some of its labour costs and introduced the "Marquis by Waterford" line [22] , which retailed at about 30% less than conventional Waterford. Marquis was manufactured in Germany and Slovenia, where wages averaged 10% less than in Ireland. Company executives avoided the issue of to reaching 'down-market' by appealing to more modern, youthful, continental tastes. From 1992 to 1993, sales of Marquis increased by 24%. [23]
The company was inundated by confrontations with its workforce, facing issues such as strikes and shutdown. Although Waterford Wedgwood's share price dropped to 12p in 1992, the company recorded its first operating profit (IR £500,000) since 1987, with sales 4.5% higher than in 1991. In 1993 profits increased again, to IR £10million and Waterford Wedgwood's share price grew to 60p (see Exhibit 3 for share price performance from 1995-2009). The turnaround was credited to O'Reilly, who advanced from deputy chairman to chairman in 1994. [24]
In June 1994, Chryss O'Reilly, wife of Tony O'Reilly was appointed a non-executive director of Waterford Wedgwood UK, the British subsidiary of the group.
Following the success of the lower-priced "Marquis by Waterford" line, the company, in 1995 introduced a new line called "Embassy", which was positioned in the mid-priced segment. This was also Wedgwood's first porcelain line. Also in 1995 Wedgwood introduced a new, bestselling line called Cornucopia, a fine bone china pattern.
Since the 1990 restructuring, the group has steadily recovered from heavy losses. In the year to the end of March 1995, profits doubles to £22.6 million and the group paid a dividend for the first time since 1988 [25]
Acquisitions:
Waterford Wedgwood's improved financial condition made the idea of acquisitions attractive. The first came in 1995 when Stuart & Sons Ltd. was acquired. [26] Stuart & Sons was a U.K. maker of premium crystal. [27]
In Febrary 1996, Mr. Redmond O'Donoghue was appointed chief executive of Waterford Crystal.
In February 1997, Waterford Wedgwood formed an alliance with Rosenthal A.G., [28] a maker of premium porcelain china, tableware, and art. [29] Wedgwood gained approximately 25% of Rosenthal shares [30] . Ottmar Kusel, chief executive of Rosenthal, was appointed to the board of Waterford Wedgwood as a non-executive director [2] 8. By the end of 1997 the company had gained majority control of Rosenthal after increasing its stake to 61.5%. In 1998 Waterford Wedgwood further increased its stake in Rosenthal to 84.6%. [31]
In June 1999 Waterford Wedgwood expanded its line of luxury goods through the acquisition of All-Clad Metalcrafters Inc., a U.S. premium cookware maker for $110 million. Anthony O'Reilly referred to the All-Clad acquisition as "a tremendous forward-thinking step for Waterford Wedgwood,". O'Reilly continued to say that the acquisition "further increases our presence in the United States… we have just moved closer to being the luxury living leader." [32]
Waterford Wedgwood also achieved organic growth by introducing new product lines in the late 1990s. Particularly successful were cooperative ventures with leading fashion designers--such as Versace, Bulgari [33] , John Rocha [34] , and Jaspar Conran [35] , who helped design ceramics and crystal lines bearing their own names.
In November 1999 Waterford Wedgwood purchased a 15% stake in British rival Royal Doulton for IR £11.1 million, which was called a 'strategic investment'. [36] Finishing the 20th century in style, Waterford Wedgwood designed the Waterford Crystal New Year's Eve Ball, which was used to mark the beginning of the new millennium in New York's Times Square. [37]
As the 21st century approached, Waterford Wedgwood was on a clear upward trajectory. Revenues for 1999 increased by 20.4% over the prior year. [38] In the early 21st century, Waterford Wedgwood was likely to continue to plot its successful course of organic and purchased growth, with the acquisitions likely to lean toward further diversification, similar to the All-Clad purchase [39] .
2000-2009:
Corporate Strategy
Following the acquisition of the Wedgwood brand in 1986, it appears Waterford has been hampered by the debt associated with it. This legacy of bad debt followed Waterford Wedgwood throughout the 1990's and into the 21st century. The accumulation of this debt began to take full affect throughout the period of 2000-2009, mainly due to the changes in economic markets, in particular following September 11th.
The value of the Euro against the Dollar during this period fell, making exports to the US more expensive. As on January 1st 2000, the Dollar was 1.0131 against the Euro [40] . Nine years later on January 1st 2009, the Dollar was 1.3244 against the Euro. Following that, the rise in pre-tax losses made the situation for Waterford Wedgwood very bleak.
During the period 2002 to 2007, the pre-tax losses began to stack up (Table). From 2002, the value of £33.8m to the figure of over £180m in a little over five years told the story (FAME). Being so dependant on both the American market and Japanese market, in particular for ceramics, left Waterford Wedgwood exposed to the full effects of a global economic downturn. Any derived profits during this time were built on the back of continued cost cutting, but there was a failure when it came to addressing the main and underlying problems.
Restructuring/Relocation
The results of all this was to aggressively cuts costs; and that meant jobs had to go. Relocating their manufacturing was seen as an ideal method of reducing costs. But the speed at which this was done was slow and in turn this created more expense as the length of time dragged on [41] .
Restructuring and relocating to the Far East and Eastern Europe became even more important. The first steps of which were taken in 2003; to relocate some of the manufacturing processes to Indonesia [42] .
In 2008, following reported losses of €241m, some 500 jobs in the Waterford Wedgwood plant in Kilbarry were under threat. This restructuring was not isolated to Ireland. With plants in England, some 250 jobs were also cut in Stoke-on-Trent [43] . With lower labour costs and manufacturing costs, this was a logical step for a loss making manufacturing business. From August 2008 to January 2009, 1089 people lost their jobs both in the UK and in Ireland [44] . By the end of 2009, approximately 2000 people lost their jobs [45] .
The relocation of manufacturing processes to the Far East had another affect on the Waterford Wedgwood brand. Waterford Wedgwood was known globally for its' high level of craftsmanship by being produced in either Waterford or Stoke-on-Trent. Following its relocation to Indonesia, sales began to fall due to their reluctance to buy products from Waterford Wedgwood with a "Made in Indonesia" stamp on its products [46] . In the same article, Thomas R Wedgwood is quoted as saying "all of the (investment) was going to the U.S." This in turn damaged the brand in Japan and China where the Waterford Wedgwood along with other European tableware was seen in very high regard.
Acquisitions
Amid a climate of tough economic conditions, Waterford Wedgwood took the decision to acquire Royal Doulton for £39m in 2006. This strategy may be seen as strange, especially when one understands that Royal Doulton themselves were not in a good economic position either. As stated in The Sunday Business Post:
"A shareholder stood up at the 2006 annual general meeting and asked the chairman how one loss-making company could buy another loss-making company and somehow expect to make money out of it. [47] "
This acquisition was intended to maximize its' production capabilities. This may have contributed to a level of over-stocking. Following the sale of the company in 2009, Declan Fearon from Tipperary Crystal bought the remaining stock from Waterford Wedgwood in an effort to stop "cheap crystal" from flooding the market. As Declan said: "They are crushing the stuff at the moment. [48] "
The strategy of continued expansion even with the levels of debt Waterford Wedgwood already had seemed to be misguided. The eventual high levels of unsold stock inventory could have had far reaching consequences for other firms in the same industry. Tipperary Crystal took advantage of the collapse of Waterford Wedgwood by gaining some of their customers, with work being agreed for some US golf tournaments.
Pensions
Pensions appear to be the biggest disaster which beset the employees of Waterford Wedgwood, particularly in Ireland. The revelation concerning the insolvency of the Waterford Wedgwood pension scheme exposed the lack of protection in Ireland concerning Irish workers and protection of their pension.
The deficit of a reported €100 million has to question the role of the board of Waterford Wedgwood and the government which allowed not only the deficit to mount but also not step in when it became apparent of its' insolvency [49] . Some experts believe that the Irish government had a legal obligation to help plug the pension hole or at the very least comply with European Law to protect employees' pensions [50] .
While in England, the Wedgwood employees were better protected due to the British Government backed payment protection scheme for support. Under the scheme, employees could receive up to 90% of their pension entitlements and only up to a capped level. This scheme was not in place in Ireland and the Irish employees; some of which lost everything lost out to their entitlements.
It remains unclear as to how such a deficit of the pension scheme occurred. The corporate strategy of Waterford Wedgwood relating to the pension scheme is difficult to track where the money went and who authorized its' use. But the fact still remains that there was a deficit of a reported €100 million when the company finally went into receivership in January 2009.
Corporate Governance Issues:
Even though Waterford Wedgwood's demise and ultimate collapse has been largely attributed to the economic downturn, [51] it had also carried out many acts of poor corporate governance along the way.
Waterford Wedgwood address the issue of corporate governance by saying that "the board is committed to maintaining the highest standards of corporate governance and supports the principles of Corporate Governance advocated by the code [52] "
Directors' Remuneration Issue
However, contrary to this above statement, the Waterford Wedgwood board has been caught engaging in acts which would be perceived as poor corporate governance. For example, in 2005 Waterford Wedgwood were accused of running a "coach and horses" through stock exchange guidelines at the expense of both institutional and small shareholders by breaking major provisions of the Combined Code of the Irish and British stock exchanges. Kevin McGoran had been on board since 1990 and he had received a fee of €22,000 for serving on the board and another €67,000, both for which were not explained by the remuneration report. Along with this, a pension payment of €336,000 was made to former group chief executive O'Donoghue which also was also not explained in the remuneration report. Furthermore, no explanations were given for the size of pension contributions to John Foley, CEO of Waterford Crystal, who received a pension of €205,000, which at the time was equivalent to 61% of his salary. [53]
Family ties/lack of independence of the board
There are also significant corporate governance issues relating to the fact that many members of the board had family connections to the chairman, Anthony O'Reilly. Peter Goulandris, deputy chairman at the company has family links to O'Reilly. His sister Chryss, who is the wife of O'Reilly, is on the board. Goulandris himself had been on the board since 1996.
Chryss O'Reilly has been on the board since 1995. Alan Brett, research manager for Manifest Limited, a UK brand and marketing communications consultancy says that in this case "Marriage to the chairman, significant shareholding and tenure raise significant issues under the code" [54] .
In addition, former chief executive Redmond O'Donoghue had been on board since 1985 and The Combined Code states that a former executive should not serve on the board within five years. [55]
The audit committee consisted of Kevin McGoran, Patrick Molloy and Redmond O'Donoghue, which were all regarded as non-executive Directors. Patrick Molloy joined the Group as a Director since 2002. He was a Chairman of The Blackrock clinic and Enterprise Ireland at the same time. Molloy retired as a Group Chief Executive of Bank of Ireland in 1998 and as Chairman of CRH plc in May 2007. [56]
As of July 2007, the substantial shareholder of Waterford Wedgwood was Birchfield Holdings ltd, a company owned by Sir Antony O'Reilly and Peter Goulandris. [57]
In summary, Waterford Wedgwood's nomination and remuneration committees were not separated and consisted of non-executive directors Sir Anthony O'Reilly, Peter John Goulandris and Kevin McGoran. The members' nomination and remuneration committees had close family ties and were significant shareholders in Waterford Wedgwood.
This poor corporate governance is also reflected in the fact that the fall of Waterford Wedgwood has been blamed on bad management. Sir Arthur Bryan, former chairman between of Waterford Wedgwood between 1968 and 1986 said that the board had failed to adapt to consumers changing tastes as a result of poor leadership and that the "board made a botch of it" [58] .
Waterford Wedgwood's entry into receivership was largely pointed at as result of the economic downturn [59] . However, when these acts of poor corporate governance began to emerge during these years, it appeared that may be Waterford may have better avoided such a conclusion.
In order to progress in the future, what recommendations can me made to the owner of Waterford Wedgwood in order to practice better corporate governance? What could O'Reilly have done differently in order to avoid such poor corporate governance?
"Although the Combined Code suggests that non-executive Directors who serve for more than nine years should be subject to annual re-election, the Group considers that its policy of appointment for three years remains appropriate" Annual Report 2007, pg2
