Introduction to Corporate Governance
The concept of corporate governance is gaining momentum due to the rapidly changing dynamics of the business environment. Corporate governance refers to the practices, principles and systems by which a company is administered and controlled. It implies the necessity of a fair, transparent and efficient approach to meet certain objectives which add to the value of the company and is beneficial for stakeholders in the long term. Thus key aspects of corporate governance include accountability of boards and managers to shareholders and corporate responsibility towards stakeholders. It lays down a framework of rules and regulations to be abided by the company including internal processes, governmental regulations and demand of stakeholders (Bhasa, 2004).
Development of corporate governance in UK
Corporate Governance was started in early 1990's with report of Sir Adrian Cadbury on the financial aspects of corporate governance. It produced a two page code of best practices aimed at listed companies in UK. It was adopted by the city and stock exchanges and named as Cadbury Code. Later upon followed by some reviews and revisions of code new sections were added on remuneration, risk management, internal control and audit committees. The banking crisis of 2008 brought a new version in the UK Corporate Governance Code. The Walker report of 2009 made 39 recommendations aimed at banks, financial institutions and insurance companies (L’Huillier, 2014).
Objectives of corporate governance
Companies following the best practices of corporate governance have proved its profitability for the overall business operations. Besides financial profitability good governance is also inspiring companies and strengthening investors' confidence by ensuring company's commitment to achieve growth and profitability margins (Thomsen, 2004).
- It encourages strategic thinking at the top management. It assures transparency in procedures of financial reporting.
- It ensures that shareholders are aware of any decision which impacts company's operations and its market value.
- It ensures accountability at all levels of organizations.
Background of Company
For better understanding of the study, organization taken into consideration is J Sainsbury PLC. Founded in 1869, Sainsbury is the third largest retailer in UK. Pioneering the concept of self service retailing in UK it is now the longest standing food retailing chain selling food, clothing and home products. Sainsbury is presently operating in more than 1200 supermarkets and convenience stores. It is best known for its quality of offerings and accessibility. In the last eight years Sainsbury is the sixth time winner of "Supermarket of Year", "Online Retailer" for the second consecutive year, and "Convenience Retailer of the Year 2013" for the fourth consecutive year. Sainsbury has committed itself to high standards of corporate governance by following the principles of Cadbury committee. Sainsbury has more than 16% market share in UK retail industry.
Background of the Industry
For the purpose of this study retail industry has been chosen as it is the fastest growing industry in UK. Among all other sectors, grocery retail chains have registered the highest growth in retail industry in UK. Retail industry in UK posts a positive growth for 2013 despite the challenging economic climate. Consumer confidence and spending has been considerably increased due to the improved macroeconomic factors such as positive growth in GDP, increase in employment numbers and disposable incomes. Supermarkets, convenience stores and online grocery stores have expanded their operating reach with the positive market outlook.
Sainsbury is the third largest retailer in UK offering extensive range of products from home wares to consumer electronics. Thus it is important to evaluate how companies are following the approach of corporate governance in the largest and fastest growing industry. Retail sector in UK is the leader in innovation. The international brands are becoming a magnet for investment. The brands are continuously on the pace of expanding the store range and space beyond the national boundaries.
Benchmarking in business refers to measuring performance on the basis of set standards of the industry leaders and best practices of its peers. The purpose is to measure the current position and identify the areas of business which demands improvement (Talamo, 2011). The process involves comparing the performance of a business on a set of criteria's of strategic importance against the best performers. It is a tool for improvement with a focus on better services to customers and is driven by customer and internal organization needs. In order to enable peer comparisons Sainsbury has adopted certain benchmarking services that are highly specialized and uniquely designed to the needs of organization and customers (Schachler, Juleff and Paton, 2007).
Corporate Social Responsibility
Sainsbury has invested £1billion for 20-20 sustainability plan. It has set 20 targets of corporate social responsibility to be achieved by the year 2020. The plan includes healthier and sustainable products reduce environment footprint, contribute to communities and its human capital. Sainsbury started contributing to CSR activities in 1989 with manufacturing of carrier bags from recyclable material and later founded a Fare Share community food donation programme in 1994. With the aim to sell more many retailers have tested positive for the inclusion of horsemeat in their supply chains which are sold as beef; but Sainsbury cleared all tests. It works closely with agricultural groups and farmers through proper communication channels to improve their efficiency (Spitzeck, 2009).
An active participation of staff members is critically important for any CSR program. CSR Head at Sainsbury believes in high employee engagement. Management at Sainsbury lays emphasis on central messaging where employees can write directly to chief executive for CSR ideas. This approach creates team working and ensures messages are communicated in a proper way. The employee involvement admires brand value both internally and externally (Vandekerckhove and Commers, 2005).
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Corporate responsibility at Sainsbury is viewed as a day to day operating activity rather than a specialized function. In a large organization, a clear framework is established based on the company's core values and attention is paid to every small detail from the top level of management. Managers are held accountable for the responsibilities and feedbacks are taken on quarterly basis (Khan, 2010).
Sainsbury focused on attaining the corporate responsibility by mixing the dual aspects of ecological and social values. It emphasizes on sourcing the local products to ensure integrity of supply chain and lower transportation costs. At the same time it is also encouraging local farmers and nearby societies. Sainsbury is the first supermarket to practice Fairtrade and it now covers largest market share in Fairtrade products. It produces the highest number of recyclable bags from any other supermarket. Every Sainsbury store is linked with local charities to donate spare foods rather than dumping in landfill (Banerjee, 2014).
Sainsbury is the founding member of Ethical Trading Initiative (ETI) which emphasizes working in close relationships with trade unions, NGO's and corporations to ensure ethical trade programmes. The ETI programme is also expanding its reach in countries which supply to UK firms. The purpose of the initiative is to ensure ethical sourcing and made continuous improvements as required. As a key part of the sustainability strategy ethical trading requires all suppliers to follow its 12 key principles of the Code of conduct based on the ETI. Its key principles include safe and hygienic working conditions, fair wage system and attention to labour rights. It is mandatory for all suppliers to show compliance against the code of conduct and work on continuous improvements in practices (Tuan, 2012). Also the supermarket chain prefers suppliers to have their own code of conduct and policies to attain ethical trading.
Sainsbury measures the risk factors of all its suppliers and requires riskier parties to conduct regular and independent ethical audits. In addition to this, suppliers of Sainsbury are required to undertake training on ethical practices and follow practices to improve welfare of labour force and minimum wage system. Sainsbury also conducts regular workshops for suppliers to share best practices in employee motivation and maximizing labor productivity. Sainsbury is working closely with farmers and producers to build an efficient supply chain to attain excellency in sustainability.
In a large organization risk management process has to closely align with every business unit depending on their unique nature of activity. The system of risk management has to be aligned in such a manner that it identifies the principal risk of the business unit and develop measures to control the operations (Jalilvand and Malliaris, 2013).
Sainsbury has developed a risk management strategy in partnership with DriveTech. In 2008 when Sainsbury joined the growing revolution of home delivery of grocery items, it lays down a programme of training and support for its drivers. The approach proved successful and established standards for efficient and safe delivery of items while maintaining the driver's safety. Under this programme, all drivers of home delivery service are required to undergo practical training sessions to avoid on road damages and learn safe driving practices. This program at Sainsbury minimizes operating costs and improves profitability.
Sainsbury has also laid down specific risk management measure tools for its various business units. For its human force of 150,000 members who are very critical for its business the human resource management at Sainsbury has laid down to provide training and development in order to improve the efficiency employees and retain the best talent. It regularly reviews its remuneration policy to make sure it matches the industry norms and competitive enough to fulfill the employee expectations.
To maintain financial soundness in the business operations, the concerned department maintains the level of funds and ensures the availability for short and long term needs. It has also integrated high security levels to maintain proper functioning of IT systems and safeguard of data.
Corporate Governance Issues
Corporate governance predicts the compliance of rules and policies. But organizations move slowly in adopting the code of conduct (Okpara, 2011). Organizations may face criticisms on their failure to adopt and implementation of laws. Below are some of the issues discussed in detail:
It is very easy for organizations to lay down lengthy business plans, policies and practices to follow ethics. Organized trainings and workshops, seminars are also conducted to ensure follow up by parties related to the organizations. But in practical approach, these policies and rules applies to how the decision makers follow these rules.
Recently Sainsbury has been criticized for rejection to trade with Israeli firms (Dysch, 2013). Israeli suppliers sell citrus fruits, mangoes, medjoul dates and other fresh produce to Sainsbury stores in UK. There are evidences that the Israeli suppliers operate in illegal Israeli settlements and are responsible for destroying the Palestinian agriculture and violations of international law. However Sainsbury has claimed that it does not source from any illegal Israeli supplier but facts are still under question (Parker, Peters and Turetsky, 2002).
The context of business environment in relation to political and cultural in which it operates defines its morality and ethics. A few business ethics theories exists such as the utilitarian, rights, justice, common good and virtue approach. The oldest business ethics theory focuses on promoting the good and value to the society while minimizing the proportion of loss. Business organizations can use this theory to minimize the loss and escalate the society benefit.
The rights ethical theory suggests that all humans have fundamental right to life and right to respect and dignity. This theory is applicable when business owners do not impose their mission and goals on the consumers. Justice theory focuses on equal benefits to all human beings regardless of religion, class, race and rank. The common good approach promotes respect for cultural values, moral and ethical values of the society (Rezaee, 2009).
Selection of Board member -
Organizations find it very difficult to search outside directors who are independent, knowledgeable, competent and actively engaged in the business operations. The need for such blend is critical given the complexity of the business operations and rapidly changing practices. Directors who are sufficiently independent and knowledgeable may have little incentive to participate actively in decision making. Directors who are paid well may not actively participate in the business operations and may lack the required knowledge. There is also a risk that many outside directors speaks from shareholders perspective rather than communicating information from management to shareholders. There is another challenge that outside directors lacks the general business knowledge and technical expertise in areas such as finance, IT, legal, labor market. Added to these challenges board also find it difficult to measure how much time the directors should devote to the company and who are willing to take the risk of shareholder lawsuits.
An independent audit committee is essential to be appointed to review the financial statements and company's performance to determine whether management has established and adheres the laws and policies. The primary role of auditor is to check the reliability of information provided by the management to shareholders. Auditors are responsible to express their expert opinion on the fairness of company's financial position, results of operations and cash flows in conformity with the accounting standards.External stakeholders rely on financial statements for decision making therefore auditors must follow sound audit techniques to review every financial statement. A fair audit report reduces the uncertainty and risk of the business. Independent auditing ensures that shareholder's interests are protected with relation to reporting of financial statements and internal control. Moreover, management is under obligation to provide all information to the audit committee (Solomon, 2007). Audit committee ensures that management follows a proper system of allocation and control of day to day financial activities and that an internal audit committee is monitoring the functions.
As per the Cadbury committee all UK companies have to disclose the total compensation of directors and chair person with a breakdown of salary and performance based elements. The remuneration of executive is to be determined by a remuneration committee of the board of directors. Thus the committee made the whole compensation process more transparent and accountable (Iqbal and Strong, 2010).
Secret political contributions and lobbying by corporations have always resulted in high criticism and tarnish of brand image. There is no denying that large corporations pay huge sums in lobbying to influence decisions of government officials. Therefore strict policies and approval process is mandatory for any political contribution by corporations. Every political donation should undergone a thorough review process and verified duly. All political contribution whether monetary or non monetary are required to be centrally controlled and necessary to be planned and budgeted. A review of external advisor can be taken in certain cases. Political expenditures are usually controlled by public relations unit in organizations working closely with business unit managers (Urlacher, 2008).
Women on corporate board
Corporations are realizing the need for gender balance in members of BOD. The third largest UK retailer is the champion in appointing women on its Board and on senior executive levels. Currently the board of Sainsbury comprises of 20% women. To work efficiently corporate have grown out of the male dominance on its boards. The all male board room and only men in top positions are no more in corporate policies. It is necessary to have diversity in skills, cultures, opinions to make better decisions at the top level. Women appointment on board increase transparency and accountability (Mishra and Jhunjhunwala, 2013). Organizations following this approach have proved to be profitable than boards consisting only men.
The rise of internet and social media has been equally a merit and demerit for corporations. Social media alone can make or destroy a brand. It has raised numerous risks for companies in disclosure of information. Organizations have to strictly keep a check on which information needed to be disclosed and which to be kept inside. In addition, companies who regularly communicate with customers on social media in day to day operations make sure that it avoids unethical and improper behavior.
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The above study covers the basic concepts of Corporate Governance and its impact on the business organizations. Corporate governance is not a new concept but its been followed by organizations now effectively to add value to its brand image. The first part briefly explains that corporate governance does not limit to measuring a company's performance and improving on set standards to enhance brand value and revenue. Moreover, it describes the responsibility of an organization towards its stakeholders, shareholders and society. The advent of Cadbury committee introduces several laws and policies to govern the working of an organization. It gives an overview of the corporate governance in terms of corporate social responsibility, ethics and risk management for the company in study i.e. Sainsbury. A part of study explains Sainsbury has long term plans for CSR listing down various programmes. The ethical practices followed by the organization and risk management measure specifically designed for different business units. The third part covers the issues in corporate governance and the ways to deal with them.
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