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Why Quindell PLC’s Corporate Governance Issues Could Send Its Shares Plummeting

While investors are mostly concerned about things like profitability, cash flow and forecasts, in recent years corporate governance has become much more important, too. Certainly, investors are very concerned with the credentials of a management team and whether they are doing a good job at growing the company’s bottom line and hitting pre-determined targets, but they also want to know that the company is acting ethically, transparently and responsibly, too.

Quindell’s Recent Past

So, it was perhaps of little surprise that Quindell’s (LSE: QPP) share price collapsed towards the end of last year following the sale and repurchase agreement entered into by a small handful of its management team. Although the initial announcement by Quindell had intimated that the Chairman, CFO and a non-executive director had increased their respective stakes in the company, it had failed to fully disclose the nature of the share transactions in terms of them being sale and repurchase agreements. Therefore, shares in Quindell inevitably fell heavily once the details became clear, with the individuals involved deciding to leave the company.

Board Appointments

Following such a well-publicised event, many investors expected Quindell to do all it could to present itself as a company that puts corporate governance first. After all, investors had sent a pretty clear message to the company just a few months earlier regarding their views on the matter (in terms of the share price fall). However, the appointment of a new Chairman and non-executive director has once again caused controversy, with regards to them being awarded share options as part of their remuneration packages.

The UK Corporate Governance Code, issued by the Financial Reporting Council, advises that non-executive directors should not be granted share options within their remuneration and, if they are granted, that shareholder approval should be sought. Quindell, then, has not followed this advice even though one of the appointments, Jim Sutcliffe, was chairman of the Codes and Standard Committee for the Financial Reporting Council until he stepped down earlier today.

Looking Ahead

Since the appointments were announced on Monday, shares in Quindell have fallen from around 117p to their current price of 91p and this could highlight investor disquiet regarding the structure of the remuneration packages. As was seen last year, this can snowball and lead to more outspoken criticism, thereby having the potential to cause significant share price falls.

So, while Quindell may have had the best intentions when appointing its new directors and may well be a highly ethical company, the view among investors seems to be somewhat negative. This could lead to further share price falls in the near term, as investors await the release of an independent review into the company’s business practices. As such, now doesn’t seem to be the right time to buy a slice of Quindell.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.