After reading the case study below, answer the following questions in your initial post: 1. Given the situation that faced the company, do you think the board had an appropriate structure and membership? 2. What changes, if any, would you recommend? Respond to at least two posts of your cohort members. Case study: Southern Cross Healthcare Philip Scott, who trained as a psychiatric nurse, took over Southern Cross, a small provider of care homes in 2000. Within four years, he had built it, largely through acquisition, into the largest provider of care for the elderly in the UK. His business model relied on sale and leaseback of the homes to generate funds for expansion. In other words, properties were sold and then leased back to Southern Cross for an agreed rent. In 2004, Blackstone, a US-based private equity firm, bought Southern Cross for £162 million. Its business model recognized that the UK population was ageing, and that vulnerable old people would need housing and care. Moreover, much of the fee income for such protected accommodation would come from the taxpayer, through state support for the elderly provided by local authorities. This fee income was expected to be guaranteed and to rise with inflation, while economies of scale would reduce running costs. This was a relatively risky model, assuming growing demand and state-supported income that would reflect cost rises. In 2005, Blackstone acquired NHP, a large nursing home group, merged its operations with Southern Cross, and sold most of its homes, leasing them back to Southern Cross. In 2006, Blackstone floated Southern Cross on the London Stock Exchange into a bull market. Some 60% of its voting shares are held by institutional investors. Financial institutions and advisers took substantial fees from the flotation. Four of the Blackstone nominee directors cashed in their shares, allegedly making over £35 million. The Blackstone holding was gradually sold producing around £1 billion. Philip Scott, who resigned from the board in 2008, made over £10 million. In 2010, Southern Cross operated over 750 care homes, with more than 38,000 beds and 44,000 staff, offering residential care homes for the elderly who could no longer care for themselves at home, and nursing care homes with additional levels of medical care for thoseneeding it. Southern Cross runs into trouble However, by 2010, Southern Cross was struggling with its cash flow, facing rising rents, rapidly increasing energy and food costs, and reducing fee income as councils reacted to lower government grants and cut their expenditure on care for the aged. With less revenue,the quality of some homes declined, and occupancy levels fell. In December 2010, the possibility of a takeover was rumoured (Investors Chronicle). The UK government became involved when seven age-concerned organizations complained publicly that increasing pressure on public finances was pushing an already overburdened care system to breaking poi.

1. After reading the case study below, answer the following
questions in your initial post:
1.
Given the situation that faced the company, do you think the
board had an appropriate structure and membership?
2.
What changes, if any, would you recommend?
Respond to
at least two
posts of your cohort members.
Case study: Southern Cross Healthcare
Philip Scott, who trained as a psychiatric nurse, took over
Southern Cross, a small provider of care homes in 2000. Within
four years, he had built it, largely through acquisition, into the
largest provider of care for the elderly in the UK. His business
model relied on sale and leaseback of the homes to generate
funds for expansion. In other words, properties were sold and
then leased back to Southern Cross for an agreed rent.
In 2004, Blackstone, a US-based private equity firm, bought
Southern Cross for £162 million. Its business model recognized
that the UK population was ageing, and that vulnerable old
people would need housing and care. Moreover, much of the fee
income for such protected accommodation would come from the
taxpayer, through state support for the elderly provided by local
authorities.
This fee income was expected to be guaranteed and to rise with

2. inflation, while economies of scale would reduce running costs.
This was a relatively risky model, assuming growing demand
and state-supported income that would reflect cost rises. In
2005, Blackstone acquired NHP, a large nursing home group,
merged its operations with Southern Cross, and sold most of its
homes, leasing them back to Southern Cross.
In 2006, Blackstone floated Southern Cross on the London
Stock Exchange into a bull market. Some 60% of its voting
shares are held by institutional investors. Financial institutions
and advisers took substantial fees from the flotation. Four of the
Blackstone nominee directors cashed in their shares, allegedly
making over £35 million. The Blackstone holding was gradually
sold producing around £1 billion.
Philip Scott, who resigned from the board in 2008, made over
£10 million. In 2010, Southern Cross operated over 750 care
homes, with more than 38,000 beds and 44,000 staff, offering
residential care homes for the elderly who could no longer care
for themselves at home, and nursing care homes with additional
levels of medical care for thoseneeding it.
Southern Cross runs into trouble
However, by 2010, Southern Cross was struggling with its cash
flow, facing rising rents, rapidly increasing energy and food
costs, and reducing fee income as councils reacted to lower
government grants and cut their expenditure on care for the
aged. With less revenue,the quality of some homes declined,
and occupancy levels fell.
In December 2010, the possibility of a takeover was rumoured
(Investors Chronicle). The UK government became involved
when seven age-concerned organizations complained publicly
that increasing pressure on public finances was pushing an
already overburdened care system to breaking point. An

3. uncertain future and potential hardship facing 31,000
vulnerable, elderly residents of Southern Cross homes would
not be well received by voters. As can be seen from the
summary results below, the company was facing real challenges
as it entered 2011.
Stephen Schwarzman, chairman of Blackstone, defended
Blackstone’s original financial strategy, claiming that the crisis
at Southern Cross was a reflection of the global financial crisis
and not his business model. Philip Scott accused the current
directors of scaremongering and said they were partly
responsible for the decline.
The board in 2011:
The board had six members, four men and two women, whose
profiles follow.
Ray Miles, 66,
non-executive director and chairman, who has spent most of his
career in the shipping industry, became a non-executive director
of the company in June 2006 and served as the senior
independent director until he was appointed chairman on 1
January 2008.
Jamie Buchan
, 51, chief executive, was appointed as an executive director of
the company on 1 January 2009. Between 2002 and May 2008,
Mr Buchan, backed by a Malaysian private fund, led the
successful turnaround and subsequent sale of the ExCeL
Exhibition and Conference Centre in London.
David Smith
, director of finance and support services, joined Southern Cross
as group finance manager in 2006, was appointed group
financial controller in 2008 and director of finance and support
services in September 2010 (replacing Richard Midmer). A

4. chartered accountant, he previously spent ten years with
accountants Price waterhouse Coopers.
Christopher Fisher
, 57, senior independent non-executive director, who spent most
of his career at Lazard, the investment bank, joined the board in
June 2006 and became the senior independent non-executive
director in January 2008. He is a partner in Penfida, a firm
providing independent financial advice to pension fund trustees,
and is also president of the Council of Reading University and a
trustee of the Imperial War Museum.
Baroness Morgan
of Huyton, 51, became a non-executive director of the company
in June 2006.He became a non-executive director of the
company in June 2006. A former teacher, Baroness Morgan
worked as a senior aide to the British Prime Minister from 1997
to 2005. In 2001, she was made a peer and served as a Minister
in the Cabinet Office. From 2001 to 2005, she was Director of
Government Relations, Downing Street, working closely with
the Prime Minister.
Nancy Hollendoner
, 54, joined the board as non-executive director in January 2008
and is a senior adviser on the healthcare market to Hawkpoint
Partners Limited. She previously worked as an equities analyst
specializing in the healthcare market and was employed by UBS
Investment Bank between 1996 and 2002. (See the 2010 annual
By mid-2011, Southern Cross had run out of cash and the
residents of its homes seemed vulnerable. In May of that year,
Southern Cross was locked in negotiations with its landlords,
demanding a cut of 30% in current rents and looking for longer-
term solutions. In June 2011, it announced 3,000 staff
redundancies. By July, failure seemed inevitable, the stock
market suspended its shares, and the company tried to return the

5. care homes to their landlords. It was then faced with the
prospect of having to pay over half a million pounds to its top
executives under contractual ‘golden parachute’ terms, unless
they voluntarily waived those rights.
Tricker, Bob. (2012).
Corporate governance: Principles, policies and practices
Oxford U, UK. Oxford University Press. Kindle Edition.
(For more information about the company, see
www.schealthcare.co.uk)
(For comments on 2010 financial results, see
http://investors.schealthcare.co.uk/uploads/resultspresentation2
010.pdf)