Sample Essay On Corporate Governance
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Every corporate entity; public or private profit-oriented companies and joint ventures require a governing body and the corporate governance ensure the way law and power is governed over these entities. The main purpose of a governing body is to make sure the enterprise is run properly by the executive management. Corporate governance is considered crucial in case ownership is separated from management control.
Chaucer (c1343 -1400), the English writer, philosopher and courtier, used the word, governance but the phrase ‘corporate governance’ did not come into use until the 1980s.
According to Adam Smith:
"The directors of companies, being the managers of other people's money rather than their own, cannot well be expected to watch over it with the same anxious vigilance with which (they) watch over their own .”
Some of the core business issues, which influence corporate governance, are business ethic, strategic risk management, sustainability, and corporate social responsibility. In order to keep a business up and running all of these issues need to take care of. All corporate entities require a body, which will govern which could either be joint venture, co-operatives, profit-oriented companies or any non-profit organizations.
The organization, which I am going to select today to discuss corporate governance issues, is Tesco. Tesco is one of the largest retailers who claim to serve millions of customers throughout the world. Tesco runs with help of more than 500,000 people in 12 markets. All these employees claim to give their best in order to keep their customers happy.
According to the corporate governance report, Tesco has obeyed all the provisions of Cadbury Committee’s Code of Practice. In year 2003, company brought some necessary changes in the structure of board in order to ensure the long-term development of board practices. In this case study, some of the major aspects of changes in recent years brought by Tesco has been discussed in order to highlight the importance of corporate governance. In addition, the problems which organization has been facing in previous years have been discussed.
Corporate Governance Theories
This multinational company started operating in 1924 and is located in every part of the United Kingdom now. Other than United Kingdom, Tesco has opened more than 4000 stores in 14 different countries. Tesco has claimed to abide by all the codes and principals of corporate governance. The corporate governance comes with a set of theories,
Transaction Cost Theory
Managerial Hegemony Theory
According to the board of Tesco, company has fulfilled every principal of corporate governance but A.3.2, which is:
“Except for smaller companies, at least half the board, excluding the chairman, should comprise non-executive directors determined by the board to be independent. A smaller company should have at least two independent non-executive directors ”
According to the Agency Theory, the managers of a company who acts as agents of shareholders are supposed to act in the best interest for owners of that company. However, in a daily basis business, there is a probability that their decisions are not always in the best interest of shareholders. Therefore, to make sure they work in the best interest of shareholders; their acts need to be monitored on regular basis.
Tesco uses agency theory in order to define its main objectives. The purpose behind using agency theory is to offer its customers with the best goods and services and attract more customers to their stores. This act by Tesco board has made millions of customers happy and interested in their stores because they are able to maximize their personal interest by shopping in Tesco .
As far as Stewardship theory is concerned, Tesco claims to abide by all the rules of stewardship theory as well. According to Stewardship theory, managers of the company alone are responsible for the assets of the company. As far as Tesco is concerned, they have a huge board of directives but the company rather claims to follow the principles of Agency theory and not stewardship theory. That is why no manager or director of board alone is held responsible for the decisions of organization.
Stakeholder theory is meant to be creates value for specific group of people in order to bring success to the business. Anybody can be the stakeholder for the company for example, employees, financiers, customers, and suppliers. According to the stakeholder theory, a business needs to fulfil interests of all of these individuals in order to be known as successful.
Every person mentioned in above diagram is responsible for every other person’s success in a business.
Tesco is doing every possible effort to meet everyone’s interest. Their customers want low prices and company has achieved this by investing £30m to make their products prices unbeatable. However, this has brought only 0.1% of sales margin in recent years but the company is planning to make more investment in coming years to make this margin bigger .
Managerial and Class Hegemony Theory
The managerial hegemony theory and class hegemony theories are both successfully applied in Tesco without any doubt. That is one the reason for the organization running successfully for so many years.
The company claims to give importance to all of their managerial values and ideas with clearly defined accountabilities. None of the directors of Tesco board is held responsible for any past scandal. Their personal behavior has never affected the company’s overall interest so Tesco is abiding the basic rules of both of these theories as well.
No doubt, managerial moves play an important role in the success or failure of an organization. In year 2012, Tesco faced loss in its annual profit because only a year ago company’s chief executive Sir Terry Leahy left the company after his continuous services of 14 years. In 2014, Philip Clarke also resigned from the company as he could not bring fruitful profit and was replaced by Dave Lewis who is the past executive of Unilever .
The structure of the Tesco board is designed in such a manner that neither a group nor an individual can dominate any decision making process. The board is divided into different statutory board committees the remuneration, audit, and nomination committee.
The main aim of the remuneration committee is to regulate and suggest the remuneration of the executive directors of the board. This committee, which was assigned by the Tesco, also screen salary of the senior level management thus making sure no one is getting more or less than they deserve. This definitely helps in a justification of law and management so when every member of management and other level is satisfied, he or she will perform his/her best which is only in the benefit of the organization. The committee meets ten times in a year and analyzes all these corporate governance issues in Tesco .
Another committee, known as Audit committee plays an important role in the development of success. The committee is meant to analyses the financial statement of Tesco and how company is doing financially. Any profit or loss faced by the company throughout year will be discussed by this committee and the reasons behind that will be analyzed by the members of the committee
As far as Tesco is concerned, they have some more committees as well for example compliance committee, finance committee and corporate responsibility committee. According to corporate governance report, Tesco has been facing hard time to grow its company and earn more profit than usual. Recently, company saw an overstatement of around £260m profit after which many new changes needed to be made. Under the Stewardship theory, the current CEO of Tesco Mr. Dave Lewis is planning to bring in a completely new management team in play. According to him, new people will come up with new ideas, which are better for the organization.
The changes brought by the Tesco organization will definitely be good for them. They have eliminated some layers of management, which will reduce cost the organization used to spend on their wages. In addition, it will cause less confusion and complication in making managerial decisions and will increase the efficiency of the company. So overall, all these changes made by the organization are happy changes and will eventually prove in favor of the company but nothing happens overnight.
According to Duncan Swift, partner and head of the food advisory group, Moore Stephens:
“A large part, if not all, of Tesco’s recent profit misstatement involves problems concerning revenue recognition, particularly around so-called contributions it receives from its suppliers. It is certainly a corporate governance failure too, but it is too early to say whether it was also an audit failure. Arguably, the auditors did notice the risk of overstatement – on page 66 of Tesco’s last audited accounts for the year ended 22 February 2014. This was the only time in the last six years the auditor had made such comments in Tesco’s accounts and certain elements of the recently disclosed overstatement go back beyond the period covered by those last audited accounts. ”
Main competitors of Tesco have been Lidl and Aldi since last five years. In a crucial situation like this, company needs a strong management and head to take care of all of these issues while Tesco has been operating without a CEO since more than a year. All of these actions by the company added up to the loss faced in recent year .
According to the report, all of these issues were observed by many employees working in the company but only one of them had the courage to speak up in one of the meetings. This is an appreciable quality of Tesco management team, who gave importance to the views of one employee and took action accordingly.
So what Tesco needs to do in order to bring itself back in market? Well, the company’s new chief executive Dave Lewis needs to make big changes in the company to solve all these issues. According to Fraser Mckevitt, Lewis needs to pay maximum attention to the core grocery business, which is the main sole of Tesco’s revenue. Since company is also facing brand problem, he will have to take serious actions about that as well. He may need to take customer’s reviews quite seriously and try to keep clients happy to boost company’s brand name .
According to Fraser Mckveitt, Tesco is facing many problems nowadays as they do not sell low priced items, their food is not considered high quality, and they are not known as the best super-market in their area so new CEO Lewis needs to focus on all these matters to win the brand name once again. Tesco was considered as number one retailer only 30 years ago and now the company is not in good shape. Serious changes in the company’s corporate governance strategies need to be made in order to bring company back in good shape .
In most recent news, Tesco has already started coming back in market since Dave Lewis has joined the organization. According to report of 10 March 2015, sales of Tesco grew by 1.1pc in recent months as compared to its competitors like ASDA and Sainsbury. Dave Lewis is trying his best to bring the organization to top level of retailers and this growth though small is one proof of that. Still as far as market share is concerned, Tesco is still losing that with huge graph the organization management needs to take some serious actions about that .
According to Fraser McKevitt, head of retail and consumer insight at Kantar World panel:
“Among the big four supermarkets Tesco has been the standout retailer. It has posted its strongest performance in 18 months with sales up to 1.1pc compared with a difficult 2014 .”
Tesco has also been doing many customer reviews in previous months, which have proven quite helpful. Therefore, if the company keeps taking these strategic actions, there is definitely a good hope. Dave Lewis is proving to be a good decision taken by Tesco, as he is proving fruitful to the organization .
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