Corporate Governance

Development of corporate governance in the UK

Corporate Governance was started in the early 1990s with a report by Sir Adrian Cadbury on the financial aspects of corporate governance. It produced a two-page code of best practices aimed at listed companies in the UK. It was adopted by the city and stock exchanges and named as Cadbury Code. Later 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 of 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 their profitability for the overall business operations. Besides financial profitability good governance also inspires companies and strengthens investors' confidence by ensuring the company's commitment to achieving 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 that impacts the company's operations and its market value.
• It ensures accountability at all levels of organizations.

Background of Company

For a better understanding of the study, the organization taken into consideration is J Sainsbury PLC. Founded in 1869, Sainsbury is the third largest retailer in the UK. Pioneering the concept of self-service retailing in the 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 has been the sixth-time winner of "Supermarket of the 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 the Cadbury committee. Sainsbury has more than 16% market share in the UK retail industry.

Background of the Industry

For this study, the retail industry has been chosen as it is the fastest-growing industry in the UK. Among all other sectors, grocery retail chains have registered the highest growth in the retail industry in the UK. The retail industry in the UK posted positive growth for 2013 despite the challenging economic climate. Consumer confidence and spending have been considerably increased due to 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 a positive market outlook.

Sainsbury is the third largest retailer in the UK offering an extensive range of products from homewares 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. The retail sector in the 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

Benchmarking in business refers to measuring performance based on 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 demand improvement (Talamo, 2011). The process involves comparing the performance of a business on a set of criteria 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. To enable peer comparisons Sainsbury has adopted certain benchmarking services that are highly specialized and uniquely designed to the needs of the organization and customers (Schachler, Juleff and Paton, 2007).

Corporate Social Responsibility

Sainsbury has invested £1billion for a 20-20 sustainability plan. It has set 20 targets for corporate social responsibility to be achieved by the year 2020. The plan includes healthier and sustainable products reducing environmental footprint, and contributing to communities and human capital. Sainsbury started contributing to CSR activities in 1989 by manufacturing carrier bags from recyclable material and later founded a Fare Share community food donation program in 1994. To sell more many retailers have tested positive for the inclusion of horsemeat in their supply chains which is 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).

The active participation of staff members is critically important for any CSR program. CSR Head at Sainsbury believes in high employee engagement. Management at Sainsbury emphasizes central messaging where employees can write directly to the chief executive for CSR ideas. This approach creates teamwork and ensures messages are communicated properly. 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 their responsibilities and feedback is taken every quarter (Khan, 2010).

Sainsbury focused on attaining corporate responsibility by mixing the dual aspects of ecological and social values. It emphasizes sourcing local products to ensure the integrity of the 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 the 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 them in landfill (Banerjee, 2014).

Ethics

Sainsbury is the founding member of the Ethical Trading Initiative (ETI) which emphasizes working in close relationships with trade unions, NGOs, and corporations to ensure ethical trade programs. The ETI program is also expanding its reach in countries that supply to UK firms. The purpose of the initiative is to ensure ethical sourcing and make continuous improvements as required. As a key part of the sustainability strategy ethical trading requires all suppliers to follow the 12 key principles of the Code of Conduct based on the ETI. Its key principles include safe and hygienic working conditions, a fair wage system, and attention to labor rights. All suppliers must show compliance with 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 the welfare of the labor force and the 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 excellence in sustainability.

Risk Management

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 develops 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 laid 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 program, all drivers of home delivery services are required to undergo practical training sessions to avoid on-road damage 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 to improve the efficiency of employees and retain the best talent. It regularly reviews its remuneration policy to make sure it matches the industry norms and is competitive enough to fulfill 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 the proper functioning of IT systems and safeguard 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 criticism for their failure to adopt and implement laws. Below are some of the issues discussed in detail:

Ethical Trading

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 a practical approach, these policies and rules apply to how the decision-makers follow these rules.

Recently Sainsbury has been criticized for rejection of trade with Israeli firms (Dysch, 2013). Israeli suppliers sell citrus fruits, mangoes, medjoul dates, and other fresh produce to Sainsbury stores in the UK. There is evidence that the Israeli suppliers operate in illegal Israeli settlements and are responsible for destroying 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 the business environment about politics and culture in which it operates defines its morality and ethics. A few business ethics theories exist such as the utilitarian, rights, justice, common good, and virtue approach. The oldest business ethics theory focuses on promoting good and value to society while minimizing the proportion of loss. Business organizations can use this theory to minimize the loss and escalate the society's benefit.
The rights ethical theory suggests that all humans have a fundamental right to life and the 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, and moral and ethical values of the society (Rezaee, 2009).

Selection of Board member -

Organizations find it very difficult to search for outside directors who are independent, knowledgeable, competent, and actively engaged in business operations. The need for such a 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 business operations and may lack the required knowledge. There is also a risk that many outside directors speak from shareholders' perspective rather than communicating information from management to shareholders. There is another challenge that outside directors lack the general business knowledge and technical expertise in areas such as finance, IT, legal, and the labor market. Added to these challenges board also finds it difficult to measure how much time the directors should devote to the company and who is willing to take the risk of shareholder lawsuits.

Independent Audit

An independent audit committee is essential to be appointed to review the financial statements and the company's performance to determine whether management has established and adhered to the laws and policies. The primary role of the auditor is to check the reliability of information provided by the management to shareholders. Auditors are responsible for expressing their expert opinion on the fairness of the 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 in reporting of financial statements and internal control. Moreover, management is under obligation to provide all information to the audit committee (Solomon, 2007). The 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.

Executive Compensation

As per the Cadbury committee, all UK companies have to disclose the total compensation of directors and chairpersons with a breakdown of salary and performance-based elements. The remuneration of the 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).

Political Expenditures

Secret political contributions and lobbying by corporations have always resulted in high criticism and tarnishing of brand image. There is no denying that large corporations pay huge sums in lobbying to influence the decisions of government officials. Therefore strict policies and approval process is mandatory for any political contribution by corporations. Every political donation should undergo a thorough review process and be verified duly. All political contributions whether monetary or nonmonetary are required to be centrally controlled and necessary to be planned and budgeted. A review of external advisors can be taken in certain cases. Political expenditures are usually controlled by public relations units 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 senior executive levels. Currently, the board of Sainsbury comprises 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, and opinions to make better decisions at the top level. Women's appointment on board increases transparency and accountability (Mishra and Jhunjhunwala, 2013). Organizations following this approach have proved to be more profitable than boards consisting of only men.

Social Media

The rise of the internet and social media has been equally merit and demerit for corporations. Social media alone can make or destroy a brand. It has raised numerous risks for companies in the disclosure of information. Organizations have to strictly keep a check on which information needs 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 they avoid unethical and improper behavior.

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Conclusion

The above study covers the basic concepts of Corporate Governance and its impact on business organizations. Corporate governance is not a new concept but it has been followed by organizations now effectively to add value to its brand image. The first part briefly explains that corporate governance is not limited 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 the Cadbury committee introduces several laws and policies to govern the working of an organization. It gives an overview of corporate governance in terms of corporate social responsibility, ethics, and risk management for the company in study i.e. Sainsbury. A part of the study explains Sainsbury has long-term plans for CSR listing down various programmes. The ethical practices followed by the organization and risk management measures specifically designed for different business units. The third part covers the issues in corporate governance and the ways to deal with them.

References

• Dysch, M., 2013. Sainsbury’s rejects call for a ban on Israeli goods. [Online].
• Bhasa, P. M., 2004. Understanding the corporate governance quadrilateral. Corporate Governance.
• Thomsen, S., 2004. Corporate values and corporate governance. Corporate Governance. 4(4).
• Talamo, G., 2011. Corporate governance and capital flows", Corporate Governance, Vol. 11 Iss:
• Schachler, H. M., Juleff, L. and Paton, C., 2007. Corporate governance in the financial services sector. Corporate Governance. 7(5).
• L’Huillier, M. B., 2014. What does “corporate governance” actually mean? Corporate Governance. 14(3).
• Spitzeck, H., 2009. The development of governance structures for corporate responsibility. Corporate Governance. 9(4).
• Parker, S., Peters, F. G. and Turetsky, F. H., 2002. Corporate governance and corporate failure: a survival analysis. Corporate Governance. 2(2).

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