Corporate Governance
1. Executive Summary
2. Corporate Governance (CG) Overview
2.1 What is Corporate Governance?
Accordingly, corporate governance is regarded as a system which is used so as to direct and control industries. The idea of corporate governance is applied to all business industries such as the banking institutions, financial corporations and other types of businesses such as the retailing industry. Specifically, corporate governance refers to the assessment and evaluation of the control of a business company as utilized by its directors. In line with theoretical perceptions, the directors of public companies are held accountable for their action by their shareholders (Davies, 1999). In addition, corporate governance also includes a set of relationships between the industry’s management, their boards, shareholders and other stakeholders. It gives the structure in which the organisational objective are set as well as the approaches of achieving those objectives and performance monitoring. It has been noted that good corporate governance should be able to give proper incentives for the management and the board to pursue objectives which are in the interest of the industry as well as their shareholders and should uses effective company monitoring.
Some authors have been able to classify the definitions of corporate governances. According to Claessens (2003), corporate governance can be classified in two. The first is the corporation’s actual behaviour in accordance to measures like efficiency, performance, financial aspects, growth and the shareholder’s treatment as well as some stakeholders. The second category is in terms of the rules under which the company are operating which involve legal system, financial markets, political system and other factors such as labour markets. In addition, this also includes the context of corporate social responsibility.
2.2 Role of Executive and Non-executive Directors
In adhering to the context of corporate governance, members of the organisation play some vital roles. It has been noted that in conventional aspect, directors are considered to be accountable for maximising the wealth of the shareholder. However, in today’s generation, directors are now being expected to widen their accountabilities to include other stakeholders and to give emphasis on environmental and social issues in line with decision making. There are two classifications of company’s director. Accordingly, executive director is commonly full time employee and they are responsible for day to day operations and the non-executive director is one who is from the external of the company. The directors are also regarded as inside for executive and outside for non-executive directors.
According to Cadbury (1992), the role of non-executive directors is viewed as one that monitors the executive directors. The report recommended most of the non-executive directors to give an independent standpoint on corporate performance, approach, resources, standards of conduct and appointments (Solomon & Solomon, 2004). Non-executive directors are also accountable for managerial aspects (Keasey et al, 1997) and which have an essential role in questioning and evaluating decisions.
2.3 Why they are appointed
The executive directors are appointed to conduct general operations of the industries and to exercise the entire power delegated to them by the industry. They are appointed because they are the one who will propose strategy and create and execute business operational decisions. On one hand, non-executive directors are appointed to complement the experience and skills of that of the executive directors and provide independents judgment as well as contribute to the strategic formulation, policy creation and decision-making approach through their experience and knowledge of other sectors and businesses.
2.4 Who they represent
The executive directors represent the whole organisation to different business functions and transactions. In addition, the executive directors also represent the entire industry in an effective manner in community and build relationships and lobby on behalf of other members of the board of the company. The non-executive directors usually represents the interests of other groups in the company especially the shareholders while complementing the skills of the executive directors.
2.5 How they should fulfil their responsibilities
It can be said that even though both non-executive and executive directors have differing roles, their roles are also complementary with each other, hence, both should be able to fulfil their responsibilities in an effective, efficient and ethical manners. In addition, both the non-executive and executive directors should also fulfil their responsibilities to adhere to the organisational purpose and objectives.
3. Relation of CG to Corporate Purpose, and to Business Ethics
Corporate governance is considered to be related with organisational or corporate purpose since it guides the members of the company to work in meeting the goals and objectives of the company. In addition corporate governance imposes some corporate codes which are linked with their objective to ensure that they will be able to meet their corporate purposes. On one hand, corporate governance is related to business ethics in a way hat it 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). The corporate governance let the company to have better commitment in terms of doing the business, specifically those members of the industry.
That ethical infrastructure as part of the corporate governance is a manifestation of the commitment, a means of preventing and resolving ethical problems, and an impressive demonstration of sincerity.
4. Why bad CG will leading to the failure of businesses
It can be said that bad corporate governance lead to the failure of the business since it hinders the business to have a strong commitment for having good reputation and achieve organisational objective. In addition, bad corporate governance also leads to failure because it only enhances conflict of interest not only with the members of the company and their directors but also with other partners external to the company. Another issue that concerns bad corporate governance is it hinders the company to do their corporate responsibilities effectively.
5. Company History
“ 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 Sainsbury 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 centres which are housed in the stores themselves and as a result, the workforce has increased to about 153,000 people.
6.1 Separation of ownership and control management
Accordingly, when the manager is the sole equity owner of the company, there is no separation of ownership and control management and hence no agency issues emerge between the owner and the management because it is unified. On the other hand, when residual claims to equity are distributed among shareholders, the separation of ownership and control management leads to potential conflicts of interests.
In line with the Sainsbury, the company’s management is managed and controlled by the owner of the company John. Through his management, the company has been able to expand their business and grow to become one of the most competitive companies in London. In the case of the company, the shareholders do not completely control the company. The separation of ownership from control management is often taken to indicate major weakness in the corporate structure of the company. Since, it is noted to indicate a loss of effective (Pejovich, 1992) and efficient control management by shareholders over managerial decision making process which impacts the value of shareholder’s wealth. Herein, one of the causes of the separation of ownership from control management is the shareholder’s real intentions.
6.2 Effective Corporate Governance systems and processes
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.
6.2.1 Principles of Corporate Governance (OECD)
According to OECD, corporate governance principle includes set of relations the management of the company and their boards as well as their stakeholders and shareholders. According to the principle of OECD good corporate governance encourages industries to make value and give accountability as well as control systems integrated with the risks involved (OECD, 2004). This principle is noted by the OECD not only because of the complications and range of operations of the business but also to some legal aspects which depends on the jurisdiction of the host country including both the cultural and social issues. This also includes the corporate governance models includes the rights of the shareholders, transparency and disclosure and the accountability of the executives and boards (Healey, 2003).
6.3 How Governance operates in an organization.
In the company, 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.
6.4 Good Conduct (INED vs ED) or (CEO vs Chairman)
Part of the role of the management including both the non-executive and executive director is to ensure good conduct in their every action. In line with the company (Sainsbury), it can be said that the CEO of the company as well as other members of the board of directors has been able to ensure good conducts in every decisions that they make and in all their operations. Because of these, they gain good reputations in the UK market. It can be said that one of the CEOs of the Sainsbury is Justin King. He joined the company on March 29, 2009 and enable the company win their market share. Unlike the other CEO of the company, King removed the Colleague Christmas Bonus award as part of his strategy and in October 2004, the CEO has launched the recovery programme approach for Sainsbury using the logo “Making Sainsbury’s Great Again”. Through the recovery programme approach of Justin King, the company has been able to gain market and sales growth in January 2008. it can be said that being a CEO, King has been able to do his best to gain the trust not only of the shareholders of the company but also the trust of their target market.
On one hand, 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 specialized, 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.
6.4.1 How to promote performance and business growth
The company can promote performance and business growth by ensuring that they are able to follow the guidelines and principles of corporate governance. In addition, the company can also promote growth and performance by indicating positive and strong commitment in adhering to business ethics and corporate social responsibilities.
6.5 Reasons for the growth of interest in an organization
On a very abstract level, the system of corporate governance of the company appears like a rather “harmonious” arrangement. However, there are also conflicting interests, and there needs to be room for them. But the company’s corporate governance system entails mechanisms that keep the specific interests and the level of conflict at bay and tends to assure that the common interest prevails. At first glance, it might appear as if the Sainsbury’s corporate governance system were inimical to “small” shareholders and therefore simply bad by international standards.
6.6 Why it is of interest to diverse stakeholder groups
The company are composed of diverse stakeholders groups; these include the customers and shareholders. In order to get the interests of these stakeholders, the company must be able to provide proper management with these groups.
6.6.1 High Transparency to gain customers
To gain customers, it can be noted that the company maintains high transparency with their on time release of company information to the general public. This is their commitment to prompt disclosure of related industry information which includes press releases and other environmental and social information and annual and interim reports.
6.6.2 Shareholders
Furthermore, the company is currently maintaining good relations and open communications with its shareholders. 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. 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.
6.7 Committee reflect effective Corporate Governance
6.7.1 The Audit Committee
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.
6.7.2 Nomination Committee
The company are also composes of 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.
6.7.3 The Remuneration Committee
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.
6.8 Internal Control and Risk Management
The company also gives emphasis on internal control and risk management. The company risk management is said to follow an organized, systematic decision-making process that efficiently identifies risks, assesses or analyses risks, and effectively reduces or eliminates risks to achieving goal of the company (Greenfield, 1998). Herein, the risk management approach of the company deals with planning, leading, and controlling the use of the organization’s budget or resource in order to diminish its risk of loss effectively. Herein, the company has also been bale to balance the risk of loss from unexpected causes against the economic cost of protection. The risk management approach of the company requires decision-makers to have a thorough understanding of the particular risks involved in a situation, the principles on risk management, and the development of an organized risk management process.
6.9 Better Performance
6.9.1 Key performance indicators (KPI)
Key Performance Indicators, also regarded as KPI or Key Success Indicators (KSI), enables an industry define and measure progress toward organizational goals. Since each company has different goals, each of them has their own KPIs. Key performance measure is also a way of measuring organisation’s success. The key performance indicator that is used by Sainsbury is its annual growth, unique management style and technological infrastructure. The strategies used by the company include intensive strategy, which aims to competently position and promote their products and services in the entire market.
6.9.2 Financial performance indicators
In terms of the financial performance indicator, the company used the balance scorecard. This measure is chosen to evaluate success factors from various points of view including the productivity of the employees, customers, financial success, and business operations. View of past, present and future performances are also being measured by the company. By using performance measurement approach the company would be able to formulate objective setting, formal performance evaluation, and linkage between evaluation outcomes and development and rewards, in order to reinforce desired behaviour among their employees (Storey, 1993).
6.9.3 Stock price
Through the quality of the products of the company, Sainsbury has been able to have an excellent stock price in the market. The corporate governance used by the company has made them achieved such excellence which include their provision of quality products and services.
7. 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. 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.
8. References
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