Business Essays – Corporate Governance

Corporate Governance

Executive Summary

The main goal of the report is to evaluate the current corporate governance of a certain organization. In this report, the company that has given emphasis is a food retailing company which operates in UK. This company has been able to have effective corporate governance. However, there are still issues that should be given attention in order to ensure that the company is implementing effective corporate governance. The report includes the analysis of the corporate governance structure of the company as well as the issues concerning the board of the organisation. Furthermore, this report also analyses the positive and the negative aspects of the corporate governance implemented in the organisation.All in all it can be concluded that the company has been able to have as strong and systematic corporate governance to ensure quality output.

Late in the 1980s, it became apparent that a fundamental shift in the power relationship between a firm’s shareholders and its professional managers was taking place. Shareholders increased their control over the firm’s professional managers, demanding that managers respond more quickly to poor financial performance and to changes in the competitive environment.

Stockholders were becoming increasingly dissatisfied with management’s slowness and the ineffectiveness of their actions in trying to adapt to new environmental conditions. Many stockholders became convinced that management did not keep the shareholders’ interests in mind while developing and implementing new strategies. Numerous stories have appeared in the business press chronicling the efforts of shareholders to exert control over corporate management. Fortune magazine’s January 11, 1993, issue featured a cover story by T. Stewart titled “The King Is Dead,” proclaiming the death of the imperial corporate presidency (Chaganti & Sherman, 1998). An increasing number of chief executive officers have been forced to relinquish control of their organizations to others who will more quickly implement massive corporate change.

According to Stapledon (1996), corporate governance can be defined as a system that is used in order to direct and control companies. As a matter of fact, this idea applies to all business sectors all throughout the world such as the banking institutions, financial corporations and other types of businesses such as the retailing industry. In particular, corporate governance refers to the examination of the control of a company as utilized by its directors. In accordance to theory, the directors of public companies are held responsible for their action by their shareholders (Davies, 1999). On the other hand, the authority of the shareholders to influence the behavior of the company directors is limited in practice and is rarely exercised. This then provides directors of considerable power to take action as they see fit. However, this is not always the case as it appears to be relatively different form that of the government in which the action of the officials is slightly restrained by certain actions of the people it governs.

Corporate governance, as a term, has come to imply good, in the non-moral as well as the moral sense. Its non-moral applications include efficient decision making, appropriate resource allocation, strategic planning, and so on (Monks & Minow, 2001). Nonetheless, in its moral sense good corporate governance has come to be seen as promoting an ethical climate that is both morally appropriate in itself, and consequentially appropriate in that ethical behavior in business is reflected in desirable commercial outcomes (Francis, 2000). Thus, the links here are with due diligence, directors’ duties, and the general tightening of corporate responsibility.

Corporate governance should set a proper example of good intent, and provide for those lower in corporate hierarchies the clear message that it is “do as I do” as well as “do as I say” (Francis, 2000). Middle and lower management find it hard to be ethical when it seems that the top of the corporate hierarchy have no commitment. The message of sincerity will always filter down, and no amount of deception will foster the view that a board is ethical when it plainly is not.

Additionally, the commitment to ethical corporate governance by a board will enhance the prospects of an ethical infrastructure within the organization. That ethical infrastructure is a manifestation of the commitment, a means of preventing and resolving ethical problems, and an impressive demonstration of sincerity. Primarily, the objective of this paper is to analyse the corporate governance implemented in the company. Herein, the company that will be given emphasis is a food retailing company.

Overview of the Company

Kay (1995) stated that food retailing in Britain is dominated by six chains and that the oldest and largest is the company that will be analysed in this report. The founder started the company by establishing its first grocery store in south London over a century ago, and the family tradition and the philosophy of good quality products at competitive prices have remained central to the firm ever since. Conservatively managed, the company came to the stock market only in 1973 and since then has expanded steadily from its loyal, and mostly southern, customer base.

Founded in the year 1869 in London, John and his wife established their first shop, a dairy business in an area called Drury Lane. Because of the fact that Drury Lane was considered as one of the underdeveloped areas in the city back then, the shop managed to gain recognition in the area as it had products that were inexpensive despite the fact that they were of high-quality. Due to the business’ resounding success, two more shops later on opened at other streets.

In the year 1882, the firm already had four shops that were in operation. But this didn’t stop the owner from further expanding his business. Hence, he unveiled his plans to have a storehouse in a town in northwest London in order to accommodate his growing number of supplies. At the same time, it was in this place that the first brand product of the company, namely bacon kilns, was made. Consequently, it was in the same year that the company opened its first branch in a town called Croydon. Unlike the other towns, Croydon was prosperous. And so, the shop here sold superior quality products. Not to mention, it looked much better than the previous shops that had opened. From here on, Sainsbury would continue to grow.

At present, this food retailing has been able to hold on to the lead in the market. As a matter of fact, the company is pretty much advanced in many aspects, especially with regards to technology and of course, its fresh products. The company was the first to be able to use scanning and computerized stock control technology. In addition, it had implemented certain techniques such as sales-based ordering. All-in-all, these factors contributed greatly to the company’s competitive advantage that it is currently enjoying. Not to mention, its computerized energy management has helped bring down the consumption of energy.

Moving on, the firm has a wide range of products. In fact, during the year 1994, its number of products multiplied more than twice its original number. And as of the moment, the business continues to pride itself with its specialty in fresh foods such as fruits, breads and low-fat milks. Even up to now, their customers continue to demand for even better products which the company efficiently responds to.

The corporation is now mainly concentrated on their business in the UK (United Kingdom). This includes the supermarkets, the bank and its recently acquired stores which sells bells. Moreover, the company now has other products which are not food-associated such as home equipment, beauty products, clothing apparel and other general merchandise.

As of March 2004, figures indicate that the firm is operating at least 583 supermarkets and it also has 50 banking centers which are housed in the stores themselves and as a result, the workforce has ballooned to about 153,000 people.

Nature and Style of Governance

It can be said that the company has a very good framework that has been established in order to deal with different corporate matters. In fact, there is usually a properly structured program that is further reinforced by company policies and other procedures for the proper guidance of the directors in their daily duties. Consequently, the company has a clear reference guide to its business operations and corporate governance. The Board of Directors which oversee the businesses and the decision-making routines as well as the financial aspect of things, keeps watch. In addition, this includes the maintenance of the standards with regards to corporate governance in the corporation’s different sectors.

The Board is made up of ten directors; two are executive while six are non-executive. Because of this, there is a fair division of responsibilities and other tasks among them. And while the non-executive directors are independent from the others, they are still able to contribute their experience and knowledge during Board discussions. Without a doubt, The Board is in-charge of caring for the company’s operations, assets, and its shareholders. All-in-all, the board aims to work with these factors in the hopes of maximizing performance. Because of this, it is The Board that is responsible for the finalization of budgets and strategic plans. And in order to ensure the firm’s competent operations, The Board conducts a monthly review of the company’s businesses in relation to its financial movements.

Furthermore, there is a company law that obliges The Board of Directors to carefully prepare each year, a financial report that would have to be accurate and reliable reflecting the true state of the company. All things considered, The Board of Directors is the one that is responsible for the proper safekeeping of accounting statements and to ensure that these records are precise and truthful. In addition, the board is in-charge of guarding the company’s other assets as well as making the necessary steps in order to prevent complications such as fraud and other types of risks.

Aside from the board of directors, the company also has other committees as part of their corporate governance. Just like the board, other committees have a well-established reference guide which also discusses their duties and their scope of authority within the corporation.Composed typically of independent directors who are non-executive, the remuneration committee handles the outline for the company’s remuneration policy which would eventually be reviewed by the board. Moreover, this group is also responsible for the various remuneration packages that are given to executive directors. On the other hand, there is also a nomination committee which is also made up of mostly non-executive directors. The responsibility of this group is to recommend to The Board on which people should be appointed as directors.

Finally, there is also a group known as the audit committee. Compared to the other two, the members of this committee is purely composed of non-executive directors. This group’s duty is to make proper recommendations with regards to the company’s accounting policies as well as overseeing financial control within the corporation (Sternberg, 1998) . For this reason, the committee usually receives and reviews financial reports and other statements delivered to them. Then, they make a comprehensive report before they submit it to The Board. Of course, there is also the group’s evaluation of the risks involved which has always been done to assist with the company’s next business move, and have further control of the corporation’s different operations.

Issues Concerning the Board

The board of directors is responsible for ensuring that the organization always has the best business performance and corporate governance. However, there are several issues that concern the board. One of which is in terms of the level of skill and care expected of the directors, specifically the non-executive directors. All non-executives should take note of the following comments in the Report, which could well foreshadow the approach of a court:

“It must be recognised that non-executive directors may bring different skills to a board, some quite specialised, and that such persons may have limited accounting experience. However, accounting is not so complicated that such directors should be excused responsibility for the accounts. Accounting issues can be clearly explained so as to be understood by sensible laymen. If accounts are gone through carefully, explaining significant items in them, laymen should be able to ask pertinent questions and make informed judgments thereon. If, after all this, the layman cannot understand the company’s accounts, then he ought not to be a director of that company.

Often it is the director with little accounting experience whose common sense may lead him to question what those with accountancy experience may let pass. The accountings issues in respect of which some make criticisms were nearly all ones which involved no accounting complexity and what was acceptable and what was not should have been obvious to any reasonable director possessed of the facts who sensibly applied his mind to the issue. In most instances, those directors who decided to adopt the accounting were in a better position than the auditors to determine whether the treatment applied was acceptable or not. Those directors were thus not entitled to suspend their own independent judgment and rely upon the fact that the auditors failed to prevent them from adopting an unacceptable course.

Another issue that concerns the Board is in terms of inadequate financial information. There are time that some of the members of the board, never prepared or presented to the Board any consolidated budgets or managements accounts which brought together the budgets and results of all the divisions in the Group. The absence of consolidated management accounts facilitated the practice of unacceptable year end adjustments being made by the accountant directors, unbeknown to most of the other directors, to create extra reported profits.

In the last few years, the first the board as a whole knew of the results to be published was when the preliminary or interim announcement was circulated ‘for information’ at the close of the board meeting that invariably occurred the day prior to announcement. In effect, the board as a whole never discussed the details of the results or what lay behind them. “The main board’s lack of understanding of the composition of the reported results was an extraordinary state of affairs which no director should ever have tolerated.

Positive Aspects of Governance

The Board has been able to attain complete control of all matters regarding the company. Their self-perseverance and obligation to their duties and finally, their obedience to the company laws all contribute to the development of the corporation. As such, The Board constantly believes that all the data pertaining to financial information and other facts regarding to their operations that are currently being used is reliable. The Board’s authority is clearly recognized within the company. And because of this, it is able to have a solid grip on the corporation’s actual operations, stakeholders and its financial concerns. Needless to say, because of the corporation’s proper structure and its commitment to the stakeholders and to the community as well, the board of directors has proven that it can efficiently handle both its ethical and legal responsibilities.

Furthermore, the company is currently maintaining good relations and open communications with its investors. As a matter of fact, shareholders are regularly invited by the corporation whenever there are gatherings to discuss trade updates. Moreover, whenever there is an annual general meeting, investors get the chance to meet The Board members themselves. And of course, for private investors, they can also access the company’s website for various shareholder services. Undoubtedly, the company has good consideration for all of its stakeholders; past, present and future. There definitely seems to be a very well planned framework in the firm’s corporate division. It has good policies and procedures with regards to financial matters and operational concerns. Its procedure of assessing the different kinds of situations that come up is certainly a good move on their part. Not to mention, they have maintained good relations with their stakeholders. And finally, The Board’s authority is unsurpassed. Clearly, these facts prove the strength of the company’s corporate governance structure.

Negative Aspects

The weakness on this case however, is the fact that it cannot always be assured that there are no losses or other errors which may result from mistakes and inconsistencies by one of the committees or employees involved. In addition, having diverse populations, there can be a possibility of having internal problems between members who have different culture and beliefs. In addition, some problems occur in terms of giving value to the companies’ shareholders. There are times that the shareholder is not given the enough information about the status of the company, specifically that shareholder which have a small part in the business. This happens when the board of directors does not give value to their shareholders. Other negative aspects include the imperfection of financial reporting procedures which may definitely result in ineffective corporate governance.

Recommendation

Corporate governance is said to be one of the most important aspects to be considered in an industry. Hence, it is recommended that the company should be able to determine the most appropriate and effective corporate governance structure and approach so as to ensure that the business will adhere to all social responsibilities, legal and ethical aspects.

In addition it is also recommended that this food retailing industry should give value not only to its customers and employees but most especially to the shareholders who have trusted the company and its capabilities. The company must be able to align carefully their corporate governance approach with its organizational objectives.

Conclusion

Corporate governance is a process which is concerned about how corporations are managed, how managers are governed, what questions face by boards of directors and the accountability a corporation has to shareholders. In this case, it can be seen that the food retailing industry has been able to implement effective corporate governance which guides the organization to become more competitive in the marketplace. Accordingly the issues concerning the board include the level of skill and care expected of the directors and inadequate financial information. In order for the organization to address the issue, the members of the board are trying to create a resolution for these issues.

In terms of positive aspects, the members of the company have been able to contribute well in ensuring competitive performance of the company. The board of directors of this organization ensures that all their actions are legal and adheres to business ethics. In addition, they also ensure that their social responsibility is also incorporated with their accountabilities.

Although the company has positive aspects, it also has its negative aspects. One of which adheres to the notion that, because of the mistakes and inconsistencies of the individual involved, it cannot always be assured that there will be no losses or errors that will occur. In ability to handle diversities and differences is also a negative aspect that can be attached with the company’s corporate governance practice. Lastly, inability to ensure shareholder value is another negative aspect of the company. It is said that the shareholder is regarded as the central stakeholder of each industry.

It can be concluded that in order for the company to have a competitive business performance, the company must start from within, from its corporate governance.

Reference

• Chaganti, R., & Sherman, H. (1998). Corporate Governance and the Timeliness of Change: Reorientation in 100 American Firms. Westport, CT: Quorum Books.
• Davies, A. (1999). A strategic approach to corporate governance. London: Gower Publishing Limited.
• Francis, R. (2000). Ethics and Corporate Governance: An Australian Handbook. Sydney, N.S.W.: University of New South Wales Press.
• Kay, J. (1995). Foundations of Corporate Success: How Business Strategies Add Value. Oxford: Oxford University Press.
• Monks, R.A.G. and Minow, N. (2001). Corporate governance. 2nd ed. Oxford: Blackwell Publishes Ltd.
• Stapledon, G. (1996). Institutional Shareholders and Corporate Governance. Oxford: Clarendon Press.
• Sternberg, E. (1998). Corporate governance: accountability in the marketplace. London: The Institute of Economic Affairs.