Connect Group: Internal control failings identified by the Board

FTSE SmallCap Connect Group has recently gone through a shake-up of its executive team following trading and operational concerns, internal control failings, and a fall in share price. In light of these concerns, shareholders will need to be satisfied with the actions being taken by the Board and the turn-around strategy set out by management.

In a trading update issued in June 2018, the logistics business announced it had materially reduced its expectations for full-year profit before tax and cut its full-year dividend. Following the update, Connect’s share price fell by around 50%. In the update, Connect Group also announced CEO Mark Cashmore would step down from the Board and CFO David Bauernfeind would leave the business with immediate effect. Tony Grace was appointed as interim CFO, Grace has since been appointed on a permanent basis, and Jozef Opdeweegh was appointed as the new CEO in September.

During the year the Board identified weaknesses in its internal control processes. The weaknesses included, data integrity and extrapolation errors in the implementation of a ‘procure to pay’ system; deficient financial forecasting process controls resulting in various trade updates being released to the market; and a failure to implement, in a timely manner, certain agreed actions in relation to amongst others, IT system security and inventory management arising from historical internal audit reports and external auditor observations. As a result, the Audit Committee has reinforced its focus on the Group’s risk management framework and internal control processes and management have been charged with implementing the required improvements.

Last year the remuneration committee added a financial underpin to the annual bonus and legacy Economic Profit Plan (EPP). Accordingly, while the personal objectives which account for 30% of the bonus were partially met the committee determined that no bonus should be payable following the failure to meet the financial underpin. In addition, no payment was made under the EPP for the year and the committee has used its discretion to close the plan early. The committee also considers it unlikely that outstanding LTIP awards will achieve the required performance conditions that were set before the deterioration in company performance, reflecting this the LTIP for FY2016-18 did not vest. A new remuneration policy will be put to shareholders at the 2020 AGM.

Governance Issues at AGMs