Thomas Cook’s key executives were rewarded with bonuses ‘based on the company’s rosier underlying earnings rather than a true reflection of its dire financial state’, a panel of MPs has heard.
Cook’s balance sheet masked a £1.8 billion black hole, the government’s business, energy and industrial strategy committee was told on Tuesday morning (15 October), stifling the company’s ability to evolve and generate profit, ultimately resulting in its collapse.
Former chief financial officer Sten Daugaard, who joined Thomas Cook in September 2018 shortly after the business issued its second profit warning in a year, was among those called to appear before the committee.
Daugaard told MPs that his immediate aim was to return Cook to profit to reduce its massive debts, but it soon became apparent following FY2018 this was unlikely. He was asked if he thought the situation was recoverable.
“I’ve been through five restructurings, all successful – I believed this could still be turned round,” he said, before admitting the high debt and debt service costs combined with the competitive situation Cook found itself in – blighted by the summer heatwave and ongoing uncertainty around Brexit – meant it was not possible to increase margin and improve business.
Chief executive Peter Fankhauser said that when he took over stewardship of the UK business in 2014, his “primary focus” was cash generation, and stressed that over several years, Cook was able to pay back some of its debts, adding the business was in an “extremely good position” in May 2018 ahead of the summer heatwave.
Fankhauser though said the business did not enact transformation plans quickly enough owing to events “beyond our control” including the heatwave, Brexit and the competitive environment, not to mention Cook’s own debt which meant it couldn’t pivot.
MP Antoinette Sandbach lambasted Cook’s decision to leave goodwill in its 2018 accounts at £2.5 billion, £1 billion of which was in its UK business, only to have to write off £1.1 billion in May arising from its 2007 merger with MyTravel.
Former chair of Cook’s audit committee Martine Verluyten said all the forecasts Cook was working to suggested it was fine to leave the goodwill as it was, but admitted the write-down contributed to a “lack of faith” in the business’s strength.
When pressed to justify setting goodwill of £2.5 billion in 2018, Cook chairman Frank Meysman told the committee that while net debt had improved since the MyTravel merger, there was a realisation the business was not likely to grow at the level projected.
“We wrote it down as soon as we should have,” he said. “We didn’t wait for the end of the fiscal year, we did it mid-year [May].”
Sandbach though said Cook overstated its goodwill “for a number of years”. She flagged Cook only once made a profit in the past eight years, adding the board “sold the company” to existing and potential investors on the basis of underlying results.
Verluyten confirmed Cook presented its business as having two constituent parts: the underlying business; and the expenses to change and improve that underlying business, which she said “took a lot of exceptional costs” which the committee heard amounted to £1.8 billion in separately disclosed items (SDIs).
Committee chair Rachel Reeves dismissed Verluyten’s suggestion though that Cook was a complex business. “It’s complex because it was two businesses,” said Reeves. “One was the business, one was the turnaround. You had debt you couldn’t get out of.”
Reeves said she did not accept Cook’s argument that disclosing exceptional items separately “clarified” the business better and instead suggested it was done to make it look better. “If you added on that £1.8 billion, your figures would look an awful lot worse than the underlying figures.
“This all caught up with you, didn’t it? You failed to turn it around, you couldn’t hide them.”
Warren Tucker, the former chair of Cook’s remuneration committee, said the the company didn’t want to “disincentivise” investment, while Meysman said Cook was servicing 20 million “happy customers” a year, developing new product offerings and moving more of its business online.
Reeves though told him to “have a bit more humility”. “You can point to as many successes as you like, you brought down a 178-year-old business with huge repercussions,” she said. “The failures hugely outweigh the successes. I think you’re deluded about the business you ran. It went under because of the decisions you made collectively.”
The committee also heard bonuses were paid to the board on the basis of Cook’s underlying figures rather than its actual results, not taking account of its SDIs.
“This board was rewarded for failure,” said MP Stephen Kerr.