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    ABC Learning Centres: why corporate governance matters

    Dec 18, 2019 10:50:24 AM

    ABC Learning Centres was the biggest childcare company in the world. From humble beginnings in Brisbane in 1988, it grew to 43 centres in Australia at the time it was listed on the Australian stock market. Between 2001 and 2007 the company acquired a further 2195 childcare centres across Australia, New Zealand, the UK and the United States.

    Below is a list indicating the growth in the number of ABC Learning centres between 2001 and 2007, as of 30 June each year, taken from the Annual Financial Reports:

    • 2001 – 43
    • 2002 – 94
    • 2003 – 187
    • 2004 – 327
    • 2005 – 660
    • 2006 – 1257
    • 2007 – 2238

    But its business model was flawed. Instead of laying the ground for natural growth (which it did in the years between 1988 – 2001), it embarked on a growth strategy involving acquisition of competitors spurred on by a remuneration policy for its senior company directors to achieve short term business strategies and financial targets.

    The result was that an eruption was brewing.

    In the 2005 Annual Report the value of ABC ‘childcare licences’ was described as ''Childcare licences at directors valuation. In the 2007 Annual Report these licences were referred to as ‘Cash generating units.

    The value of these licences was based on a so-called “value-in-use calculation”. According to the Annual Reports, a key aspect of this calculation was ‘based on experience, taking into account expected changes as a result of current and future operational plans’. In other words, the valuation of these licences was a subjective estimate provided by the directors of ABC, based on their experience and future plans.

    In 2005 the value of these licences was estimated by the directors at $772 697 000 (compared to $235 746 000 in 2004) and in 2007 it was $2.4 billion (compared to $1.3 billion in 2006).

    Despite appointing an experienced and well-educated Board of Directors, the inexperienced founders of ABC were driven by a relentless ambition for, and obsession with, growth. This wasn’t helped by the Board approving a remuneration policy which further spurred the fixation on buying more and more centres.

    As banks started to chase payments from its major customers during the height of the Global Financial Crisis in 2008, ABC Learning Centres found itself defaulting on debt repayments. This in turn resulted in its liquidity crumbling.

    Nobody noticed that while the 2007 annual reports painted a picture of a prosperous global company, its cash flow was almost non-existent.

    So, whilst ABC’s financial records disclosed exceptional growth in the number of centres, revenue and assets, it at the same time displayed an over-aggressive view taken by the directors in respect of the valuation of the childcare licences.

    Subsequent analysis of the reports has indicated that ABC may have technically been insolvent from as early as 2001. The ‘face value’ of the licences resulted in the operating value being severely overstated - in short, the Cash generating units' were not generating cash at all. 

    The fall of ABC was predictable, if only someone bothered to look closely at the annual reports. There were plenty of warning signals that ABC’s position was unsustainable and that it was the victim of its founders’ relentless ambition and obsession with growth (and overstated value estimates). The failure to recognise the signs is as a result of poor corporate governance and hence, the failure must rest with the Board.

    The collapse of ABC Learning Centres shows that having educated and experienced people on company Boards, is not enough. In the past few years, the courts and ASIC have taken significant steps to bring back integrity and justice to a financial market system that is struggling to gain the trust of the mum-and-dad shareholder. A more recent example of Westpac and its more than 23 million breaches of anti-money laundering provisions is a stark reminder that poor corporate governance can pose a significant risk to a company and its shareholders.

    At Frank Law we review, advise and make recommendations to Board’s to improve their corporate governance and risk management strategies.

    If you have further questions, please contact Philip at 

    This is not legal advice.