INTRODUCTION

Corporate Governance is the framework of rules and practices by which a board of directors
ensures accountability, fairness, and transparency in a company's relationship with its all
stakeholders (financiers, customers, management, employees, government, and the community).
Corporate governance isnt just one structure though, but instead it consists of the various duties,
obligations, and rights that control and direct a corporation. The point of this governance is to
properly distribute the responsibilities that those who participate in the corporation have, such as
the managers, stakeholders, creditors, regulators, and of course those in the board of directors. In
addition to informing these people of their responsibilities, the corporate governance also
informs people of their rights within the company.
To properly understand and utilize corporate governance it is important to understand and follow
its most important principles. These principles help establish the roles and responsibilities of the
key members of the corporation. The general principles of all forms of corporate governance are
generally related to the shareholders, board members, and stakeholders. In addition to this,
corporate governance also places a strong emphasis on the behavior of the corporation and how
much the corporation discloses to the public.
The whole report reflects the irregularities found in Royal Ahold as their corporate governance
was pretty inefficient. In November 2005, Ahold NV (Ahold), the Dutch retail giant with
several operating companies in US and Europe reached a worldwide settlement worth US$ 1.1
billion with shareholders who had purchased its stock between July 30, 1999 and February 23,
2003. The compensation was intended to settle the class-action suit which Aholds
shareholders had filed against it after serious accounting irregularities were unearthed at US
Foodservice, its subsidiary in the US. Ahold derived more than 60 percent of its revenues
through its subsidiaries in the US. To the shock of investors, Ahold announced on February
24th 2003 that it had overstated profits by almost 1 billion euros for the period between
January 2000 and September 2002.
Compared to the compensation demands that WorldCom Inc. and Enron Corp. faced, the US$
1.1 billion settlement was seen as small. The settlement was welcomed by Aholds management.
The VEB shareholders lobby also was happy with the deal. The shareholders lobby (VEB)
Corporate Governance Failure of Royal Ahold

Page 1

which acted as the mediator was compensated with 2.5 million to cover its expenses.
Investors also expressed their optimism over the deal. Ahold considered the settlement as the
last significant civil case it would have to face because of the accounting scandal. However,
Ahold was still under investigation by U.S. Department of Justice (DoJ).
The financial scandal caused serious trouble for Ahold. For the year 2002, Ahold showed losses
of around 1.2 billion. The period following the scandal, the company faced a severe cashcrunch and was close to bankruptcy. In 2003, it was rescued by an emergency credit line
offered by its banks. Some of Ahold's ex-employees including the vice-president of US
Foodservice were facing criminal charges. Many members of the management who had
occupied responsible positions were forced to resign in the months after the fraud came to light.
The company vowed to comply strictly with the revised Dutch Corporate Governance Code
which came into effect on January 01, 2004. In 2004, the new management embarked on an
ambitious revival program christened Road to Recovery. Corporate Governance was to be
an integral part of the three-year program.

1.1 OBJECTIVE

OF THE STUDY

The objectives of the study are presented below:

i. To understand details about Royal Ahold and its corporate

governance structure.
ii. To provide a chronological analysis of the fall of the
organization.
iii. To recognize the corporate governance issues risen from
the irregularities found.

1.2 METHODOLOGY
This report has been done by the information gathered from different sources. This report has
only informative data. No numerical data or charts are used but only for some special purposes.
Secondary data such as annual reports, websites etc. have been used. Information presented in
this report is fully observational. Information has been presented in the form of sequence of its
nature.
Corporate Governance Failure of Royal Ahold

Page 2

1.3 SOURCES

OF DATA

All the data used in here are collected from secondary sources. Data from different websites has
been used in trying to finish the report successfully. Some journals have also been used in this
regard. So in particular the sources are:

i. Websites
ii. News Articles
iii. Related Journals
iv Annual Report

1.4 LIMITATION
The main limitation of the report is that no particular concrete study has been made on this
concerned area in the previous times to follow. This study has been done through analyzing
different data and there might be some flaws as analyzing has its own disadvantage. Moreover
the information those have acquired are not that much comfortable to work on and the time got
to finish the report was not long enough. So there is no saying that the report has full perfection.

Corporate Governance Failure of Royal Ahold

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BACKGROUND OF ROYAL AHOLD

The origins of Ahold can be traced back to 1887, when 22 year-old Albert Heijn (Heijn) took
over his father's small grocery store in Zaandam, Holland. Due to Heijn's untiring efforts, the
store, which was named after him, became popular for its high quality, reasonably priced
products and services. Soon Heijn opened a second store in Alkmaar, also in Holland. By 1897,
Heijn increased the store count to 23. These were located in different parts of Holland including
The Hague and Amsterdam. In 1911, the first Albert Heijn branded products was introduced
(cookies baked by Heijn himself). In 1948, Albert Heijn was listed on the Amsterdam stock
exchange. Albert Heijn opened its first self-service supermarket chain in 1955. In 1973, to take
the growth story forward, the Heijn family established Ahold as a parent company with Albert
Heijn as the main subsidiary. In the same year, Ahold entered into specialty retailing with Alberto
(a liquor chain) and Etos (a health and beauty care chain).

2.1 AHOLDS ACQUISITIONS

Albert Heijn made its first acquisition in 1951 when it acquired the Netherlands-based Van
Amerongen store chain. In 1977, Ahold entered the US market by acquiring the BI-LO
supermarket chain (which had stores in Georgia, North & South Carolina). This was followed by
the acquisition of Giant food stores (based in Carlisle, Pennsylvania) in 1981 and Finast (based
in Ohio) in 1988. With these acquisitions, Ahold strengthened its position in the US.
The 1990s was a period of rapid expansion. In 1991, Ahold opened a wholly-owned supermarket
chain called Mana in the Czech Republic (later renamed Albert). In 1992, Ahold entered into a
joint venture with the Portuguese chain Jernimo Martins to form Jernimo Martins Retail
(JMR). The company also continued expanding in the US by acquiring Tops Markets (based in
New York) in 1991, Red Food Stores 55 supermarkets (based in Tennessee and Georgia) in
1994, Mayfair (based in New York) in 1995, and Stop & Shop (based in New England) in 1996.
In 1996, Ahold entered several other countries including Thailand, Malaysia, China, Brazil,
Spain, Poland, and Singapore, through partnerships. Taking advantage of newly liberalized
regimes, the company stepped up its expansion in emerging markets in the late 1990s. In 1998,
Corporate Governance Failure of Royal Ahold

Page 4

Ahold entered into a joint venture with Velox Retail Holdings (Velox). The joint venture took
majority stake in the Disco supermarket chain in Argentina and the Santa Isabel chain in Chile,
Peru, and Paraguay. In 1999, the company partnered with La Fragua a leading retailer in
Central America with a good presence in Guatemala, El Salvador, and Honduras. In 2000, Ahold
entered into a joint venture with the Scandinavia-based ICA Group. In March 2000, Ahold
acquired US Foodservice. It also acquired around 150 supermarkets in Spain (Refer Exhibit I for
Aholds Acquisitions during 1991-2001).
Aholds Acquisitions (1991-2001)
Month
and
Year
February 1991

Tops Markets

September
1992

Jeronimo Martins
Retail (JMR)

February 1994

(Joint venture with

EstabelecimentosJer
oni mo Martins &
Filho)
Red Food Stores

US

100%

August 1995

Mayfair

US

100%

March 1996

Stop & Shop

US

100%

November
1996
May 1998

Bompreco

Brazil

50%

Giant- Landover

US

100%

December 1998

Disco
(Joint venture with
Velox Retail
Holdings)
ICA
(Joint venture with
ICA Forbundet/
Canica) #
Paiz Ahold

December 1999

December 1999

Company

Country
US
Portugal

Argentina

Norway/S
we
den
Guatemala

% of
Acquisiti
on
100%
49%

34%

50%

Value
332.6
7
N.
A

116.0
8
N.
A
2,307.8
2
215.5
5
2436.6
2
506.7
1
180
0

50%

(Joint venture
with CSU)
March 2000

US FoodService

US

100%

May 2000

Bompreco

Brazil

50%

September
2000
December 2000

Superdiplo

Spain

97.64%

PYA/Monarch*

US

100%

Corporate Governance Failure of Royal Ahold

3,776.0
4
240.1
8
1,250.0
0
1843.4
9
Page 5

November
2001
December 2001

Alliant Exchange

US

100%

Brunos supermarkets

US

100%

2,467.5
2
556.9
0

According to many analysts, Ahold was a loose union of disparate entities. The
companies which came under the Ahold fold adopted different practices. The management and
employees of these companies took pride in their history and unique identity. Ahold allowed
them to operate in the manner that suited them. Several analysts felt that Aholds lack of control
of its subsidiaries was the primary reason for the occurrence of the accounting scandals.

Corporate Governance Failure of Royal Ahold

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CORPORATE GOVERNANCE
In this section, Aholds corporate governance structure is analyzed and identified what went
wrong. Organization for Economic Cooperation and Developments (OECD) Principles of
Corporate Governance (1999) is used as benchmark by which other international codes are
compared. Shareholder rights, the role of supervisory boards (and non-executive directors in
unitary systems), and disclosure and transparency are important aspects of the OECD code.

3.1 OWNERSHIP

AND CONTROL STRUCTURE

The role of shareholders in Ahold depends on the ownership structure, i.e. ownership distribution
and legal constructions that limit shareholder influence. Beginning in 1948 with the family
through 2001 with professional management, the family and management adopted all the
defenses available to Dutch companies to obtain and maintain complete control of Ahold:
founder/priority shares, preferred shares with the option to dilute 100% in case of a hostile
takeover, the structured regime, binding nominations and certificates. These defenses negate the
ability of shareholders to monitor management on a day to day basis by depriving shareholders
of their voting rights and the ability of the market for corporate control to discipline management
via a takeover. The legal structures and takeover defenses introduced under the Heijn family and
later capitalized upon by van der Hoeven to maintain control of Ahold damaged the disciplining
power of the market for corporate control, prevented blockholder monitoring by denying
institutional shareholders their voting rights and transferred decision rights from shareholders to
the supervisory board.
Ahold was a privately held family company owned by Albert Heijn from its start in 1887 until
1948. After World War II, the firm faced two problems, i.e. family succession and accessing
needed capital for expansion, which were both solved by an initial public offering. . In the public
offering, the two sons received founder shares, also referred to as priority shares. Through the
1960s and 1970s, there were frequent equity offerings which the family did not participate in.
While this reduced the familys ownership, the family maintained control of Ahold via the
founder shares. In 1972 Ahold organized under the structured regime. This regime weakened
the powers of shareholders. Under this regime the supervisory board takes over the following
powers from shareholders: the establishment and approval of the annual accounts, the election of
Corporate Governance Failure of Royal Ahold

Page 7

the management board, and the election of the supervisory board itself (called cooptation).

3.2 MANAGEMENT

BOARD

Prior to 1987 the management board consisted primarily of Ab Heijn, CEO, and his younger
brother Gerrit Jan Heijn. Given the firms growth, the lack of a long-term family heir and the
need for professional management, the Heijn brothers expanded the board to seven members by
1987. The transition to professional management was accelerated by the kidnapping and murder
of Gerrit Jan Heijn in late 1987 and early 1988. Gerrit Jan was expected to succeed Ab and keep
the firm under family control for another three years. Ab wanted to continue as the CEO when he
reached mandatory retirement in 1989, but this plan was voted down by the other members of the
management board. Ab Heijn retired in 1989 and moved to the supervisory board. There were
two management board members who were candidates for the CEO position. Cees van der
Hoeven was the companys CFO with 15 years experience with Royal Dutch/Shell. His
opponent, Pierre Everaert was an engineer with international experience at Goodyear and
Gnrale Biscuit before joining Ahold. Cees van der Hoeven won the vote for CEO within the
management board. However, members of the supervisory board and Ab Heijn preferred and
appointed Pierre Everaert as CEO in September 1989. In December 1992, Everaert announced
his departure to Philips, the large Dutch consumer electronics firm. Choufoer, chairman of
Aholds supervisory board, agreed that van der Hoeven would not only become the new CEO but
also retain his CFO position. With Everearts resignation, van der Hoeven became both CEO and
CFO. This is a breakdown in controls. By 1998 van der Hoeven had surrounded him with
managers who were loyal to him. Van Dun had retired. There were three additions, one insider
and two from the outside. Over the four year period, 1998 to 2002, there was a 50% turnover in
the management board. The new board members were the manager of acquired subsidiaries.
They promoted loyalty because these managers were promoted to the board of a much larger
firm in a very uncertain situation. It is common for managers to lose their jobs when taken over.
Further, these board members monitored the subsidiaries they previously managed. Though
consistent with Aholds strategy of keeping acquired management, it represents poor internal
control over management. The management board was not effective for two reasons. First, all
members owed their positions to van der Hoeven. After a period of high turnover, the board
consisted of people internally promoted from subsidiaries or staff functions. The second
Corporate Governance Failure of Royal Ahold

Page 8

characteristic is van der Hoevens personality. The combination of van der Hoevens power in the
management board, his successes in the 1990s and his personality had a major impact on Aholds
strategies.

3.3 SUPERVISORY

BOARD

The supervisory board failed to adapt to a professionally managed firm with a dispersed
ownership structure. The OECD structure and responsibilities for supervisory boards imply that
the problems documented for Ahold are primarily the boards responsibility. Supervisory board
members must be independent, capable and devote sufficient time to the firm. In the case of
Ahold after 2001 key decision rights of shareholders is transferred to the supervisory board.
Aholds supervisory board was not independent due to the presence of former managers and
supervisors with conflicting interests with other stakeholders. Moreover, many board members
were overcommitted. Independence from the management board is limited when former
managers become supervisors. Starting in 1993, supervisory board members were recruited from
the management of acquired firms. Several board members had ties with institutions related to
Ahold, which lead to conflicts of interest with these stakeholders.

3.4 GATEKEEPERS

IN THE FINANCIAL MARKETS

This section addresses the role of the traditional gatekeepers in the financial markets, the final
component of corporate governance that we consider. Aholds influence is prominent in its
relationship with its house bank and with analysts.
House bank
Ahold used ABN-Amro as its main bank. Before ABN and Amro merged in 1990 to form ABNAmro, Ahold had the most loans with Amro and the second most loans with ABN. Nelissen, past
CEO of ABN-Amro and supervisory board member, was on Aholds supervisory board. Meurs,
Aholds new CFO, was a former employee of ABN-Amro. In 1997, van der Hoeven was
appointed to the supervisory board of ABN-Amro and in 2001 to its audit committee. Among
Meurs, Nelissen and van der Hoeven, strong personal relations were present at the highest levels.
ABN-Amros 2002 annual report disclosed that van der Hoeven had a personal loan of 5.088
million euro with this bank. More importantly, ABN-Amro frequently participated in the bridge
financing of Aholds acquisitions and the debt and equity offers ultimately used to finance those
Corporate Governance Failure of Royal Ahold

Page 9

acquisitions. The multiple relations between ABN-Amro and Ahold indicate strong bilateral
relationships. ABN-Amro benefited from these relations because of lending and the underwriting
fees.
Analysts
Ahold set up an extensive investor relations program in an attempt to encourage investors to buy
Aholds stock and analysts to follow the company. Financial analysts have the analytical skills to
critically evaluate Aholds strategies and provide more objective information to market
participants. Analysts were generally optimistic about Ahold until October 2002, when on
average analysts downgraded Ahold. This downgrade was before the fraud and matched Aholds
abandonment of its 15% growth target and its first losses in 30 years. The most pessimistic
recommendations came from HSBC. In one report HSBC questioned the strategy of Ahold by
unmasking five myths: accelerated earnings growth, a very solid company, the best supermarket
on the globe, strong exposure to fast growing emerging markets, and a shareholder friendly
company (HSBC James Capel, July 1, 1997). Not surprisingly, the most positive
recommendations came from ABN-Amro. This is in line with the multiple relations the bank had
with Ahold.
Auditors
The forensic audit of PriceWaterhouseCoopers documented lax internal controls and poor
financial and accounting practices on the part of Ahold in the US. A total of 275 out of 470
accounting irregularities could be related to weak internal controls. In implementing its growth
strategy in the US, Ahold ignored one of the basic tenants of control in a decentralized
organization with performance based compensation, strict internal, financial and accounting
controls across the organization. The forensic audit also showed that throughout Ahold there was
a lack of knowledge about Dutch GAAP and US GAAP and consequently the disciplining role of
US GAAP on managements activities. Deloitte & Touche, Aholds auditor detected the problems
at US Food Service at an early stage. Deloitte conducted a due diligence investigation at the time
of the acquisition of US Food Service, 2000. Deloitte reported that the system used to record
vendor allowances at US Food Service was very opaque (Smit, 2004, p.261). Deloitte also
uncovered the scale of Aholds accounting irregularities as part of its 2002 year-end audit.
Moreover, Deloitte & Touche was not informed about the conflicting comfort letters; they were
only shown the side letters that stating Ahold had full control over the joint ventures.
Corporate Governance Failure of Royal Ahold

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THE SCANDALS
On February 24, 2003, Ahold announced that its earnings for 2002 financial year would not be
as high as previously estimated. It also declared that its 2000 and 2001 financial statements
did not reflect its true financial status and would have to be restated. Aholds auditors Deloitte
& Touche (D&T) detected accounting irregularities at various operating companies in Europe
and Latin America.

However,

the

eye

of

the

storm

was

the

scandal

at

US

Foodservice. Altogether, the accounting irregularities at Aholds various operating companies

amounted to around US$ 1 billion.
4.1 US FOODSERVICE
US Foodservice was a service company which distributed food. Its clientele included
hotels, restaurants, cafeterias, health care facilities, schools, etc. The company was
headquartered in Columbia, Maryland, and had more than 100 distribution centers spread
across the US. The Ahold group acquired US Foodservice in 2000. US Foodservice came to
become the epicenter of the scandal that shook Ahold.
The scandal involved US Foodservice executives colluding with employees at Sara Lee
Corporation (Sara Lee), ConAgra and some other companies to mislead auditors. US
Foodservice was given rebates by companies like Sara Lee for selling certain amounts of
its products. Taking advantage of lax controls, the accused employees at US Foodservice
overstated the rebates and took bonuses from the company. Their fraud created the
appearance that they had met their budgets and allowed them to line their own pockets with
unearned bonuses. Executives of Sara Lee and other supplier companies, who seemed to have
been hand in glove with the accused officials of US Foodservice, misled D&T regarding the
value of the rebates. To cover up their scheme, the defendants needed false confirmations
from suppliers to defeat the audit process. It is disappointing that the defendants so
successfully corrupted the audit and confirmation process. US Foodservice included the
overstated rebates in its annual accounts which led to inflated earnings. Initially, Ahold issued
a press statement which put the overstatement at US$ 400 million, but finally, the number was
Corporate Governance Failure of Royal Ahold

Page 11

significantly higher at US$ 850 million. The overstatements caused Ahold to restate its results
for the years 2000, 2001 and the first three quarters of 2002.

CAUSES OF FAILURE OF CORPORATE

GOVERNANCE OF ROYAL AHOLD:
The rise and fall of Royal Ahold is an important event in corporate governance and accounting.
Royal Ahold was one of the major success stories in the 1990s and is one of the major failures,
suffering a complete meltdown, in 2003. The ensuing period found a firm in complete disarray: a
failed strategy, an accounting scandal, the firing of professional management, and litigation
filings from all parts of the world. Shareholders lost most of their returns generated since 1989.
Ahold shattered the illusion that corporate governance and accounting were U.S. problems;
Ahold became Europes Enron. It caused Dutch and European policymakers to rethink their
approach to corporate governance and accounting policy. We investigate the strategy, accounting
transparency and corporate governance of Ahold; elements which jointly drive the firms
performance over this period of time. In general, the corporate governance, accounting
transparency, strategy and firm performance relationships are complex. The reasons that lead to
Aholds downfall are discussed below:

5.1 GLOBAL

EXPANSION AND ITS DIFFICULTIES

Ahold was largely unsuccessful in its global expansion with the exception of the U.S. We begin
by analyzing Aholds growth strategy through acquisitions and its consequences. As their firm
value was high, they were serial acquirers of companies, and had been successful prior to 1998.
High equity values due to initially successful growth via acquisition put pressure on management
to maintain growth levels as well as giving management more discretion to make poor
acquisitions that value growth over shareholder value. They go on to speculate that their result is
also consistent with the inability to sustain the firms strategy of growth through acquisition or
the strategy is not going to be as profitable as expected. However, they provide no explanation
for what made the firms strategy initially successful, what precipitated the change and why the
change was unsuccessful.

Corporate Governance Failure of Royal Ahold

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5.2 POOR

ACQUISITIONS

In August 2000, Ahold acquired the U.S. based food distributor PYA Monarch and in November
2002 Alliant Exchange. The market did not react favorably to the implementation of Aholds new
growth strategy. Stock prices declined by 3.1% and 4.5% on the news of the US Food Service
and PYA Monarch acquisition, respectively. The market also had a difficult time figuring out the
implications of the financing. Over 11.6 billion of debt and equity were issued over a two year
period, 2000 to 2001. Ahold provides an explanation for the ultimate failure of its growth
strategy via acquisitions and the substantial losses incurred by its shareholders.

5.3 ACCOUNTING

TRANSPARENCY AND

AHOLDS

COLLAPSE

We next address accounting transparency. Ahold was cross-listed on the New York Stock
Exchange (NYSE) since 1993. Cross-listed firms on the NYSE have greater analyst coverage,
increased forecast accuracy and higher valuations relative to firms that are not cross-listed. Such
firms use their cross-listing to raise capital in their home country. However, these studies fail to
consider a companys investor relations initiative, which can include cross-listing in the U.S.,
and how a company can exploit the advantages of cross-listing. Aholds investor relations
program made Ahold a best in class company and its CEO the best manager. With its
successful investor relations, Ahold capitalized on the characteristics associated with crosslisting to support its strategy. However, such success is a two-edged sword; it effectively
maintained the companys stock price but also placed management under substantial pressure to
maintain the growth implied by the stock price.

5.4 UNDERSTANDING

DIFFERENCES BETWEEN

DUTCH

AND

US GAAP

At the annual report Ahold reconciliated its financial statements with US GAAP. According to
US GAAP Aholds net earnings over 2001 were only 119.8 million which was almost one
billion Euros less than its fit under Dutch GAAP. It appeared that Ahold gained 137 million on
the sale and leaseback of real estate property. According to US GAAP, such capital gains should
be deferred over the years that these revenues were earned, but according to Dutch GAAP such
profits were fully recognized at once. However the biggest difference in net earnings was
Corporate Governance Failure of Royal Ahold

Page 13

explained by the dramatic write off of the good will in Aholds subsidiary Disco. Starting 2001,
goodwill under US GAAP was not amortized but tested for impairment. The impairment test
required Ahold to assess the fair value of its goodwill at the end of every year, and any
impairment loss must be written-off immediately. The internal and external auditors concluded
that Aholds assets were over-estimated by 728 million, of which three quarters came from
Disco. Investors were beginning to lose their confidence in the reliability of Aholds figures.

5.5 ACCOUNTING MANIPULATIONS

AND

FRAUD

The divergence between Dutch and US GAAP lowered the confidence of investors in Aholds
future, even though the firm had not violated accounting principles. In 2002 and 2003, the firm
faced three serious issues:
Hidden contractual obligations,
Manipulation through the consolidation of joint ventures and
Fraud with vendor rebates.
In February 24, 2003, the Ahold-empire suffered a complete meltdown. On that day Ahold
announced that it had overstated earnings by $500 million as a result of an accounting fraud at its
subsidiary US Foodservice. In addition, several of Aholds joint ventures should not have been
fully consolidated in its financial statements. Finally, fraudulent transactions were discovered at
Aholds Latin American subsidiary Disco, the Peirano family. Ahold was required to buy the
familys stake in the joint venture at an inflated price if the Peirano family could not pay its
debts. The abnormal return on this news was -13%.

5.6 POOR

FINANCIAL AND ACCOUNTING PRACTICES

A total of 275 out of 470 accounting irregularities could be related to weak internal controls. In
implementing its growth strategy in the US, Ahold ignored one of the basic tenants of control in
a decentralized organization with performance based compensation, strict internal, financial and
accounting controls across the organization. The forensic audit also showed that throughout
Ahold there was a lack of knowledge about Dutch GAAP and US GAAP and consequently the
disciplining role of US GAAP on managements activities. Deloitte & Touche, Aholds auditor
detected the problems at US Food Service at an early stage. Deloitte reported that the system
Corporate Governance Failure of Royal Ahold

Page 14

used to record vendor allowances at US Food Service was very opaque.

5.7 WEAK

INTERNAL CONTROL

For Ahold, it was managements successful investor relations program that maintained the
companys stock price and placed substantial pressure on management to sustain its growth
objective. While its initial strategy was successful, Ahold was required to alter its strategy due to
the unfavorable anti-trust ruling in the US and the increased international competition in the
retail grocery segment of its business. Poor corporate governance that means absence of internal
as well as external oversight of managements strategy and implementation was a significant
factor in Aholds collapse.

5.8 LIMITATION

OF

SUPERVISORY BOARD:

The supervisory board failed to adapt to a professionally managed firm with a dispersed
ownership structure. The OECD structure and responsibilities for supervisory boards imply that
the problems documented for Ahold are primarily the boards responsibility. Supervisory board
members must be independent, capable and devote sufficient time to the firm. Aholds
supervisory board was not independent due to the presence of former managers and supervisors
with conflicting interests with other stakeholders. Moreover, many board members were
overcommitted. Independence from the management board is limited when former managers
become supervisors. Starting in 1993, supervisory board members were recruited from the
management of acquired firms. The board members were generally qualified based on
experience and background. Several politicians served on Aholds board. Several board members
had ties with institutions related to Ahold, which lead to conflicts of interest with these
stakeholders.

5.9 DISPERSED

OWNERSHIP STRUCTURE

The transition to professional management in 1989 left Ahold with dispersed shareholders but no
major blockholder. When professional management raised capital from institutional investors,
management denied them their voting rights by exploiting regulations that allow Dutch
companies to issue non-voting certificates rather than voting shares. Thus, blockholders were not
able to supplant the role of the family as a monitor of professional management. With a dispersed
Corporate Governance Failure of Royal Ahold

Page 15

ownership structure and weak minority rights, management was unconstrained. The surprising
aspect of the Ahold saga is that it is unclear why the family and professional management should
have done anything differently or that we would have expected them to do anything differently.

5.10 POOR MANAGEMENT

With the dominant tradition of the management board and the supervisory boards over
commitments and conflicts of interest, the supervisory board failed in its transition to a
professionally managed firm with dispersed ownership. CEO then had control of the
management board, the incentive compensation system and the firm. Since management held
very little of the companys stock, the incentive compensation plans with their emphasis on
earnings growth aggravated the other shortcomings and provided a direct motivation for
management valuing growth over shareholder value.

Corporate Governance Failure of Royal Ahold

Page 16

CONSEQUENCES
6.1 STOCK

PRICE IMPACT

The Ahold stock dropped dramatically in response to the press release made on February 24 of
2003, concerning overstated profits. In order to get a better picture of the stock development
during this time of crisis, an overview of the stock price with various significant events over the
course of 2003 is given below.

By looking at Figure 1, one can see the enormous impact that the overstated earnings had on
Aholds stock price (indicated in the figure by event B). In response to the release of the Q1 and
Q2 figures (event C and D), the stock price did not change much, even though consolidated sales
dropped over 10 per cent compared to the previous year. When Ahold announced a shareholder
meeting to explain why the publication of the 2002 annual report was taking so long (event E),
investors responded positively. Finally, one more interesting observation to be made looking at
the historic stock price, is that after publication of the Q3 figures the stock price suffered
somewhat. Ahold had just regained some trust with its shareholders, when they had to rectify
their Q3 figures that same day, due to currency exchange translation errors. This naturally did not
Corporate Governance Failure of Royal Ahold

Page 17

go down very well, especially after just having released the audited annual report of 2002.

6.2 MARKET

CAPITALIZATION IMPACT

Now that have taken a look at the stock price development in the previous paragraph, it is
interesting to see the impact on the market capitalization (or market cap) before, during and after
the accounting scandal was made public. The market capitalization is the total market value of a
company, expressed in a currency, of all the company's common outstanding shares. This
measurement is used by the investment community to determine a companys size. Also it allows
comparison of one companys market cap to another. The NYSE Euronext stock exchange for
instance uses a three-tier categorization, of small cap, medium cap and large cap.
Market capitalization is calculated by multiplying the amount of common stocks outstanding
with the current stock price. In the case of Ahold, three calculations of market cap were made to
demonstrate the impact of the accounting scandal, and are shown below. The number of
outstanding stock was taken from its 2002 annual report and represents slightly over 1 billion
stocks.

Day before scandal announcement - Friday 21st of February 2003

Day of scandal announcement - Monday 24th of February 2003

Market cap of 1,024,465,000 * 12,42 = 12,723,855,300

Market cap of 1,024,465,000 * 5,62 = 5,757,493,300

Day of lowest stock price after scandal announcement - Thursday 13th of March

Market cap of 1,024,465,000 * 3,40 = 3,483,181,000

The NYSE Euronext classifies a company in the large cap compartment if it has a market cap of
1 billion euros or more (=1 000 000 000+). Therefore comparing these values between
February 21st and March 13th, one can see that due to the scandal, Ahold is close to being
classified from a large cap company to a medium cap company. In other words; the scandal had a
dramatic effect on Aholds total market value.

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6.3 PRICE

TO

SALES

RATION IMPACT

After having analyzed the market cap of Ahold using three distinct measurements in time, the
analysis can go even further by combining the market capitalization with net sales, to calculate
the so-called Price-to-Sales ratio. It is calculated by dividing the market capitalization by the
total net sales over a specific period.
The Price-to-Sales ratio (P/S) is used as a: Stock valuation tool to compare the market
capitalization of a company to its sales. To put it differently, it reveals the market value assigned
to each euro of sales generated. A low P/S ratio indicates a profitable investment, while a high
P/S ratio indicates a lower profit.
For this calculation three distinct measurements are taken in order to value the Ahold stock
relative to its own past performance. In this case P/S ratios for Q1, Q2 and Q3 of 2003 will be
compared and the stock price on the final day of each quarter will be used for market cap
determination. The ratios for each quarter are shown below:

First Quarter of 2003 1st of Jan 2003 to 20th of April 2003

Second Quarter of 2003 21st of April 2003 to 12th of July 2003

P/S ratio of 4,118,349,300 / 17,400,000,000 [19] = 0.24

P/S ratio of 9,588,992,400 / 13,000,000,000 [20] = 0.74

Third Quarter of 2003 13th of July 2003 to 5th of October 2003

P/S ratio of 11,627,677,750 / 12,900,000,000 [21] = 0.90

Due to the accounting irregularities that arose on the 24th of February a lot of investors got rid of
their Ahold stock during Q1. Next to this, the P/S ratios reveal that during Q2 and Q3 the market
is increasingly starting to value Aholds sales again for what they are. This is reflected in the
trend of the growing P/S values. Therefore, from P/S calculation it can be concluded that the
Ahold stock was severely underpriced during Q1 of 2003 with respect to their sales.

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THE AFTERMATH
The accounting scandals had a significant impact on the market standing of Ahold. Soon after the
news about the scandals spread, Merrill Lynch gave a neutral rating on Aholds stock. Ahold's
long-term debt was downgraded by Standard & Poor to BB+ or junk status. Criticism poured in
from all quarters. However, some industry observers expressed optimism about Aholds revival,
given its high sales turnover.
A week after the scandals came to light; Aholds CEO Cee van der Hoeven and CFO Michael
Meurs resigned from their posts. Almost immediately, several investors filed securities fraud
lawsuits against Ahold; these were consolidated into a single class-action suit. The scandals
proved costly for Ahold with professional bills amounting to more than US$ 117.2 million in
2003. The huge bill was to be paid to lawyers, accountants and external consultants. Apart from
these, the company's earnings in 2003 were affected by low margins at US Foodservice. Aholds
accounting procedures were being investigated by the US SEC, US DoJ and Dutch regulators.
After the announcement relating to the accounting frauds, Aholds shares had plummeted to US$
6.53. Owing to the scandal and the investigations into the scandal, Ahold suspended the reporting
of its 2002 financials. Aholds supervisory board was successful in securing a lifeline credit of
2.65 billion to meet its working capital and other contingencies.
In October 2003, Ahold released the 2002 audited consolidated financial results. The company
had posted a huge loss of 1.2 billion. However, the saving grace was an operating profit of
2.4 billion and sales of 62.6 billion. Ahold was obliged to adjust its reported sales downwards
by 40 billion euros over the period beginning 2000 and ending with the third quarter of 2002 as
well as entering a downward adjustment of 970 million euros to posted profit. The loss in terms
of stock value was estimated to be 23 billion.
On November 7, 2003, Moberg launched a comprehensive recovery program called Road to
Recovery. The three year program included financial planning and a clear-cut strategy aimed to
bring the company back to profitability. The program intended to turn the company around by
improving its business focus and putting a fool-proof accounting and control mechanism in
place.

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The plan also aimed to mobilize resources by selling Ahold's non-core assets and its stake in
Several subsidiaries in Latin America and Asia. The annual general meeting held on November
26, 2003, the first after the scandals came to light, gave small investors an opportunity to
confront the management of the company. Around 563 shareholders, representing 40.5% of
Aholds shares outstanding, attended the meeting. At the meeting, Aholds management
admitted that profits at US Foodservice were overstated by US$ 880 million and that other
accounting irregularities have been detected at other operating companies. The atmosphere at
the meeting was charged as investors demanded details about the scandal. One investor insisted
that senior Ahold executives who resigned at the time of the scandal not receive any form of
pay-off; rather that the company should begin legal action to extract damages from them.
At the annual general meeting, Moberg was officially appointed as the President and CEO
of Ahold. Though shareholders were supportive of Mobergs appointment as CEO, they raked
up the issue of Mobergs remuneration. Moberg had demanded an annual base salary of 1.5
million for the first two years and a guaranteed bonus of 1.5 million. He was also expecting
performance- based payments, 250,000 shares in the company and 1 million stock options. As
part of the deal, he was guaranteed an exit package of 2 years salary and bonus (twice the
usual bonus) which came to a whopping 10 million! Shareholders wanted to know why
Moberg was being paid such a high remuneration package, especially when the company was
financially weak. Aholds supervisory board gave in to the pressure and annulled Mobergs
exit package and made his bonuses performance-based.
At the annual general meeting, Wakkie, a famous Dutch lawyer, was appointed as Aholds
chief corporate governance counsel a new position created to oversee the business practices
of the group. The shareholders adopted the restated financial statements and the audited
financials for 2002 at the meeting. The shareholders also approved the rights issue which was
expected to give a fillip to Aholds precarious financial position. Post-scandal, Ahold was reeling
under a debt burden of 12 billion, and had already withdrawn close to 1.2 billion from its
emergency credit facility. The company had two options to raise money it could have sold
US Foodservice, or raised money through a rights issue. Considering that US Foodservice was
the center of the accounting scandal, Ahold feared that it wouldn't be in a position to extract
the right price for the tainted company. Therefore, Ahold chose to go with the second option
by announcing a 2-for-3 rights issue in December 2003. Ahold raised US$ 3.5 billion from
Corporate Governance Failure of Royal Ahold

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the equity issue which it used primarily to reduce its debt pile.
In 2004, Ahold appointed PricewaterhouseCoopers to conduct a forensic audit as part of Aholds
internal investigation into the scandal. The audit identified lax internal controls and poor
financial and accounting practices at Aholds U.S. operations as the underlying cause for the
fraud. Out of the 470 accounting irregularities identified, 275 were directly related to weak
internal controls. The audit concluded that Aholds aggressive growth strategy in the U.S.
overlooked the fundamental rules of control in a decentralized organization. The complete
absence of strict internal, financial and accounting controls across the organization was the
major cause of the accounting irregularities.
On September 30, 2004, Ahold announced that it would pay 8 million as a fine to the
Dutch Public Prosecutor which was probing the control letters issue. The Dutch Public
Prosecutor promised that it would not bring about proceedings against Ahold. On October
13, 2004, the Securities & Exchange Commission (SEC) announced the filing of enforcement
actions charging Ahold and three of its employees Cees Van der Hoeven (former CEO and
chairman of executive board), Michael Meurs (CFO) and Jan Andreae (former executive vicepresident) with fraud and
other violations. SEC also charged Roland Fahlin (former member of the supervisory board
and audit committee) with causing violations of the reporting, books and records, and internal
controls provisions of securities laws. Ahold agreed to settle SECs action. The company neither
owned up nor refuted the allegations. However, Ahold scrupulously provided documents
and assistance in the commission's investigations. Appreciating Aholds extraordinary
cooperation, SEC let off the company without fines.

PENALTIES
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Following the public disclosure of the Royal Ahold fraud in 2003, both Dutch and U.S. law
enforcement authorities filed criminal charges against the company and several of its former
executives.
In September 2004, the fraud charges filed against Royal Ahold by Dutch law enforcement
authorities were settled. The settlement required Royal Ahold to pay a fine of approximately 8
million.
In May 2006, a Dutch federal court found three of Royal Aholds former executives guilty of
fraud charges that had been filed against them. Those executives included the companys former
CEO Cees van der Hoeven and CFO Michiel Meurs. The tribunal of judges that presided over
the case gave the three former executives suspended prison sentences ranging from four to nine
months. In addition, the three men received fines ranging from 120,000 to 225,000.
In July 2004, the SEC announced that it had filed fraud charges against four former executives of
U.S. Foodservice. These individuals included the companys former CFO, former chief
marketing officer, and two former executives in the companys purchasing division. The two
former purchasing executives settled the charges by agreeing to permanent injunctions that
prohibited them from being officers or directors of public companies and by forfeiting stock
market gains they had earned on the sale of Royal Aholds common stock during the course of
the fraud.
In September 2006, the former CFO pleaded guilty to one count of conspiracy and was given
three years of probation by a federal judge.
In November 2006, a federal jury found U.S. Foodservices former chief marketing officer
guilty of conspiracy and federal securities fraud. In 2007, he was sentenced to seven years in
federal prison.
In February 2006, the SEC filed charges against two former auditors of U.S. Foodservice, the
audit engagement partner and senior audit manager who had been assigned to the companys
1999 audit engagement team. From 1996 through the conclusion of the 1999 audit in April 2000,
KPMG had served as the independent audit firm of U.S. Foodservice.
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When the company was acquired by Royal Ahold in 2000, Deloitte Accountants, B.V., chose
Deloitte & Touche to audit the U.S. Foodservice financial statements that were to be
incorporated in Royal Aholds consolidated financial statements.
The SEC alleged that the two former KPMG auditors violated numerous GAAS during the
performance of the 1999 U.S. Foodservice audit and, in fact, had identified several instances in
which the company had improperly recorded promotional allowances. According to the SEC, the
two auditors used white correction fluid to obscure audit exceptions that documented improper
promotional allowances booked by the company. Those audit exceptions were allegedly masked
by correction fluid before the U.S. Foodservice workpapers were turned over to the SEC, which
had requested the workpapers during the course of its investigation of the U.S. Foodservice
accounting fraud. The SEC also charged that the two auditors failed to inform U.S. Foodservices
audit committee of serious internal control problems related to the accounting for promotional
allowances that they discovered during the 1999 audit.
Among other allegations, the SEC charged that the two auditors frequently relied on implausible
representations made to them by client officials. By failing to investigate those suspicious
statements and other red flags apparent during the 1999 audit, the SEC maintained that the two
auditors failed to exercise a proper degree of professional skepticism, failed to propose proper
adjustments to U.S. Foodservices financial statements, and failed to collect sufficient competent
evidence to support the audit opinion rendered on those financial statements.
Also in November 2005, Royal Ahold announced that it had reached an agreement to settle a
large class-action lawsuit filed against it by the companys stockholders and former stockholders.
Under the terms of the agreement, Royal Ahold contributed approximately 1.1 billion to a
settlement pool that would be distributed to the class-action plaintiffs.
Shortly after the announcement of this settlement, another class-action lawsuit filed by Royal
Aholds U.S. stockholders against the companys Deloitte auditors was announced. That pending
lawsuit seeks damages of approximately 3 billion.
Approximately one year later, in November 2006, Royal Ahold announced its intention to sell
U.S. Foodservice.
Corporate Governance Failure of Royal Ahold

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CONCLUSION
After having discussed the main causes that led to the Ahold stock plummet , and also the related
accounting concepts that were violated in the process, the crash comes as no surprise. In
hindsight, the variables that led to stock crash seem pretty straightforward. Also, there was the
problem of having to dig deeper and deeper holes in order to fill up the previous ones. A situation
that is hardly sustainable.
For Ahold, it was managements successful investor relations program that maintained the
companys stock price and placed substantial pressure on management to sustain its growth
objective. While its initial strategy was successful, Ahold was required to alter its strategy due to
the unfavorable anti-trust ruling in the US and the increased international competition in the retail
grocery segment of its business. Poor corporate governance (absence of internal as well as
external oversight of managements strategy and implementation) was a significant factor in
Aholds collapse.
Beginning with the family and continuing under professional management, the family and
management adopted all the defenses available to Dutch companies to obtain and maintain
complete control of Ahold. The financing method used by van der Hoeven put voting control of
the institutional investors holdings in a foundation, whose board was strongly influenced by
Aholds management. These defenses negated the ability of shareholders to monitor management
on a day to day basis by depriving shareholders of their voting rights and the ability of the market
for corporate control to discipline management via a takeover.
The Ahold accounting scandal was such an eye-opener, that the SEC tightened accounting rules
with respect to vendor allowances in response to the Ahold case. The new rules require
organizations to be much more conservative with respect to vendor allowance receivables.

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