Question

Crunch Fitness company started operating in Melbourne in January 2016. The company experienced significant growth and expansion since it had listed on the ASX with only 20 centres. By January 2019 they were running 300 fitness centres across Australia. Their cash flows had grown significantly over the four years of operation. Crunch Fitness company was led by senior management who had aggressive expansion strategy, relying heavily on borrowings from the banks. Moreover, the management focusing on short term targets and not considering long term impacts, encouraged high risk taking. The Board was also ignorant of the risk facing the company. The company went from a positive cash flow of $400 million from its operating activities in its 2018 full year accounts to a deficit of almost $150 million in the second half of 2019. In February 2020, its Board concluded the company had insufficient cash to repay nearly $1 billion of debts to creditors and appointed administrators to take control of the company. Few months later Crunch Fitness ceased its operations.

Discuss the aspects of corporate governance and board mechanisms that could have served to limit the likelihood of Crunch Fitness company failure.

Answer 1

Crunch Fitness company started in 2016 Melbourne with 20 centers. Now within a 3 year of the span, it spread its center up to 300 centers. Now the aggressive expansion invested lots of borrowed money. It enforced the company to a heavy debt regime. In this context within a span of a year from $400 million profit to a deficit of $150 million.

Now if we will analysis the reason for this downfall is the aggressive expansion of centers which push the company into heavy debt. If we will go with the corporate governance and broad mechanism to achieve the strategic goal, then we need to analyze in terms of control, policies, and guidelines. so The broad mechanism consists of different types a) internal mechanism b) external mechanism c) independent audit

Internal mechanism:

The controls come under internal mechanisms. These controls check on the progress and activities of the organization and take corrective actions when the business goes off track. the objective of this control is to maintain smooth operation with minimum risk.

External mechanism:

External control mechanisms are controlled by outsiders. It may be the government, regulators, trade unions, and financial institutions. The objectives of the external mechanism are adequate debt management and legal compliance. External mechanisms are often imposed on organizations by external stakeholders in the forms of regulation or union contracts.

Independent Audit:

An independent external audit of a corporation’s financial statements is part of the overall corporate governance structure. An audit of the company's financial statements may help both internal and external stakeholders at the same time. It determines the financial performance of the corporation.

So following these mechanisms may company can limit its likelihood to failure.