Royal Ahold: From Europe's Enron To Model Citizen?

More than 800 angry shareholders of Royal Ahold (AHO ) gathered at the Hague on Mar. 3 for what would be a first in Dutch corporate history, a shareholders' meeting devoted purely to corporate governance. It took six hours for management, led by new CEO Anders C. Moberg, to describe the sweeping changes the company had instituted to comply with the Tabaksblat Code, the Netherlands' new and widely praised governance guidelines.

Yet all irate shareholders wanted to do was talk about the fraud uncovered a year earlier in the company's key U.S. Foodservice Inc. unit, which had earned Ahold the dubious label of "Europe's Enron" and sent the value of their shares plummeting to a low of $2.40 last year. While Ahold's shares have rebounded to a little more than $7 currently, the price is still a long way below the $37 per share high hit in 2001.

For Moberg, the former CEO of Sweden's Ikea Group and more recently head of U.S. retailer Home Depot Inc.'s international operations, (HD ) the meeting was a painful reminder of the enormity of his task. But he's determined that by this time next year investors will be rewarding Ahold for being the most transparent company in the Netherlands, if not all of Europe. Under Moberg, Ahold has dramatically increased rights for shareholders, giving them say over everything from executive compensation to potential acquisitions -- and more important, the right to give management the boot with a majority of votes. "We learned that as a company you can lose your reputation overnight, but it takes some time to rebuild it and restore trust," the 54-year-old Swede says. "We knew we needed to be at the forefront of implementing corporate-governance reforms."

The Zaandam-based company's new zeal is the result of its dramatic fall from grace. Ahold, which evolved from a single grocery store to the world's third-largest retailer since its founding 117 years ago, had been brought to the brink of bankruptcy. A handful of executives in its key U.S. Foodservice business, a major food distributor that Ahold acquired four years ago, inflated its 2001 and 2002 earnings by more than $1 billion by booking rebates from suppliers in advance. The discovery led to the resignation of the CEO, CFO, and 39 other employees.

After an independent forensic audit by PricewaterhouseCoopers revealed lax internal controls and poor financial and accounting practices, the company found itself the subject of probes from the U.S. Securities & Exchange Commission and the U.S. Justice Dept. as well as the Dutch public prosecutor and the Euronext stock exchange. No wonder Moberg calls 2003 a "lost year." He concedes that he has spent most of his time doing triage. He beefed up the management board, bringing in Hannu Ryopponen, a former colleague from Ikea, as CFO and leading Dutch lawyer Peter Wakkie as chief corporate governance counsel, a brand new role. A whole new management team was brought in from outside to run the troubled U.S. Foodservice unit. Then he tackled the finances, using $3.5 billion raised in an equity issue last December to pay down debt. In the last year, the company has almost halved its outstanding debt to just under $9 billion and is on track to divest assets worth $3 billion by 2005. After declaring losses of $1.4 billion in 2002, the company posted a more modest loss of $1.2 million in 2003.

Reviving Ahold's balance sheet is one monumental task Moberg faced. Rebuilding Ahold's reputation is the other. After spending $205 million since February, 2003, on legal and accounting advice, the company is tightening financial and accounting controls. Besides setting up centralized systems to track vendor allowances and contracts -- the area where the U.S. fraud occurred -- the company has set up internal task forces to ensure that every one of its subsidiaries is in compliance.

Now the focus is not just on improving governance but also on setting an example. "Ahold has led other Dutch companies in seriously tackling corporate governance," says Kristof Ho Tiu, an analyst at Brussels-based consultancy Deminor Rating. Ahold has set up an internal whistleblower's program, which is being rolled out in the U.S. before expanding globally this summer. The company also plans to appoint three new independent supervisory board members at its annual meeting in June, making the entire board independent. "We're not hiding behind barriers," says Wakkie. "We've abandoned our old ways, adopted an open structure, and given shareholders more say." Europe Inc. should take heed.

By Kerry Capell in Zaandam, the Netherlands

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