Corporate Governance - Term Paper Example

Running head: Corporate Governance Corporate Governance as a source of Competitive Advantage ___________ ________________________ ________________ Corporate Governance as a source of Competitive Advantage Executive summary Corporate Governance is described as conscious adherence, by an organization, to a set of guidelines and code of conduct in carrying out its organizational transactions with the primary object of making adequate disclosures to its various stakeholders that not only their stakes are safe with the organization but also that such stakes are being kept protected in a manner which is ethical and above the board. Most jurisdictions have devised and implemented corporate governance principles in the activities of all organizations having a corporate form. Such principles usually address the top managements of the corporate entities comprised of their Board of Directors and their various committees. This paper examines in the context of the company, The Body Shop, as to how adherence to corporate governance can be turned into a competitive advantage as it traverses the concepts of corporate social responsibility and business ethics. Issues of Corporate Governance The Financial Services Authority has evolved a refurbished code on corporate governance replacing the1998 intending that the new Code will apply for reporting years beginning on or after 1 November 2003. This Code supersedes the earlier Combined Code issued by the Hampel Committee on Corporate Governance in June 1998.The highlight feature of the new code is the leveraging on the work of Derek Higgs on the role and effectiveness of non-executive directors and a review of the structure and functions of audit committees by a group led by Sir Robert Smith. The Code has substantial prescriptions on the Board, Chairman and chief executive, Board balance and independence etc (Combined, 2003). “At The Body Shape the Board meets formally six times a year and is responsible amongst other things for strategy, allocation of financial resources, annual and interim results, acquisitions and disposals and risk management. For each formal meeting, the Board reviews how the Company has performed against its Values.” Its share holders’ surveys reveal that the Board needs to take leadership initiatives in resolving following important values’ based corporate governance issues which seem to be affecting company’s social and corporate image and competitive edge.(The Body Shop,2005) The Body Shop is in the business of selling personal care products. It has a rich retailing experience spanning well over 30 years. It also has a world wide market with operations in 54 countries. It shares stakeholders’ relationship with its shareholders, customers, suppliers and retailers, employees and other non governmental organizations. In fact Body Shop is a unique organization that has pointedly sought to be a socially conscious organization that survives commercially. This is revealed by the following company profile in respect of company’s beliefs,” The Body Shop has been a leader in the trend towards greater corporate transparency, and has been a force for positive social and environmental change through its lobbying and campaigning programmes around five core principles: Support Community Trade, Defend Human Rights, Against Animal Testing, Activate Self-Esteem, and Protect Our Planet.”(The Body Shop, 2006). While this is laudable belief menu; however stakeholder feedback distinctly shows that The Body Shop has taken its social accountability aspect a bit over the board. In fact some stakeholders even made comments such as,” The Body Shop is not UN” and that “Campaigns should not be run on company funds” and “Do not over-stress ethical values and neglect the financial interests of your shareholder.” etc. (The Body, 1999).In fact the values are laudable however here has been a strategic error of highlighting such incidental activities to the main business more than required. Such activities are normally taken up by corporates in hushed manner as publicity does more harm than good. In fact the beneficiary base of campaigns and programmes would be good enough to provide silent and solid acclaim. Similarly the stakeholder audience who is communicated such social activities’ progress should be categorized by some form of research into those who are interested in such activities and others who are basically interested in dividend from the company and who do not deter from advising the company that it should not pay token dividends but accumulate profits to declare a decent dividend. It can be imagined that if such a dividend expectant shareholder is paid a paltry dividend and paltry dividend is followed up by reports after report of deployment of company funds and resources in social campaigns and programmes; then the reaction is going to be highly negative. “In 1999, 34% of respondents agreed that The Body Shop is being managed in the interest of maximizing shareholder interests representing a small improvement on the 1995 figure of 26%.”(The Body, 1999) This reported figure needs to go up substantially if The Body Shop was to be viewed as a commercial success by its investors. Thus The Body Shop can maintain the value system as it is but needs to run it more quietly. This issue needs an address which is minimum board level or some committee of the board. Another compulsive and related issue seems to pertain to hire and fire policy at the Body Shop. It appears that the employee turnover in The Body Shop is quite high. This has been termed as a virtual ‘unrest’ by some of the stake holding investors. The prime reason they furnish for this is the insistence of company management that its social and ethical orientation is as much assimilated inside the company as it is popularly exercised outside the company in its environment. While strategically the employees must be one with company missions and objectives; it is a wrong tactic to devise petty and observable system of rules based o such a value system-a slight violation or dilution of which results in firing. Thus while the employees are able to carry company’s corporate responsibilities on their shoulders it may not be wroth while to point out why an employee has caved his shoulders a bit. Moreover there seems to e schism in the ranks of employees and a certain section of the employees seem to have alienated entirely from the value system of the company. Investors gave the following feedback to support this contention,” The top management in the company has integrity. The shop staff has values and work hard to sustain them. The middle management at Head Office has self-interest and promotion in mind and is destroying the company with its dishonesty.”(The Body, 1999)Even this category of employees need not be on mass firing lines. In fact attempt should be made to bring them around to company mission by conscious training and retraining. Strategic decisions in this respect,again,should flow from the level of the Board. As Michael Hammer puts it, "MVA (More Value-Added) means that you give the customer more, perhaps far more, than you ever have before....You can visualize the principle of MVA as a ladder with your product at the bottom and the solution to your customers problems at the top. The more help you provide your customers to fill that gap, the more value you add to them, which, of course, differentiates you from your competitors who are still scrambling around at the bottom of the ladder.... At the same time, your opportunity for margin and profit increase"(Hammer, 2001).It appears that product packaging and ambience of shop outlets of The Body Shop are not leading to consumer satisfaction.(The Body,1999) and making for inadequate MVA.Director looking after the marketing function should commission consumer surveys to find the missing links and provide them .Another leakage from MVA seems to be young and inexperienced staff who is more interested in pushing new products then servicing or knowing old products. Such staff needs to receive adequate training in the art of patient selling with a knowledgeable base about company products. Similarly there seems o be dishonest practices in the ordering system of the company versus its suppliers. Consider this statement made by a conscientious investor supplier,” As a shareholder and working for a supplier of printed stationery to the Body Shop, I am disgusted and extremely angry at the very inefficient and incompetent methods used for ordering… Buyers should insist on regular reviews regarding prices and check the invoices. It is frustrating for me working for a supplier and seeing the Body Shop ripped off! Urgent action required.”(The Body, 1999) This system would need to be reviewed so as to establish control mechanisms to check mal practices in ordering. This would work to improve the bottom-line of the company. Growth of Corporate Governance Approach “Todays modern organization in many instances is the institutional centrepiece of a complex society made up of many people with a multitude of interests, expectations, and demands as to what organizations ought to provide. The social contract between organizations and various parties has continually changed. Organizations that have been able to survive and thrive have found ways to respond to ever-changing expectations" (Ronald, 2003). Any corporate entity’s approach to corporate responsibility should be an exact recognition of the above fact. Ethics is concerned about value judgements. Business ethics deals with such judgements encourse doing business. The Body Shop’s business has set for itself a code of business ethics focussed around its active stake holders, as above. It is important to realize that the combined code for corporate governance in UK contributes actively to business ethics in a compliable form. Ronald further suggests that if an organization institutionalises ethics, it is unlikely to find itself trying to recover from a fall or having to undertake an ethical turnaround (Ronald, 2003). Institutionalising ethics means structuring business ethics formally not only in practised day to day business but also into companys policy formation at the board and top management levels primarily through formal coding. In any corporate, targeting adherence to corporate governance guidelines, each operative level of the corporate should be ideally aware of what they must do and what they should not. The Body Shop reports that,” the responsibility for managing The Body Shop corporate responsibility performance ultimately lies with the CEO. However, individual Executive Committee members are charged with ensuring that our values are adhered to within their area of responsibility”. (The Body Shop, 2005) In order to monitor its self set and prescribed business ethics code such corporate must have at the very top a CR Operating Board wherein apart from the Chief Executive, directors should be roped in to address concerns of CR in respect of each of the identified major stakeholders group. In the case of the corporate chosen for this paper i.e. The Body Shop ,” the Board of Directors is responsible for corporate governance in compliance with London Stock Exchange regulations and UK company law, as well as representing the interests of shareholders and monitoring compliance with formal company policies, including ethical policy”(The Body Shop,2005). The Body Shop has a director dedicated to ensure adherence to its values. The company reports that “At the heart of The Body Shop lies our Mission Statement and our Trading Charter. These fundamental principles outline our commitment to the pursuit of social and environmental change, meaningful contribution to the communities in which we operate, and our work towards sustainable development, meeting the needs of the present without compromising the future”(The Body Shop,2005). With top management leadership guiding the compliance to ethical values the company should continue its campaigns against animal testing, violence in homes. In addition it would do well to activate its operations in charity activities by making its Body Shop foundation more robust. These activities would not only be in line with its operationalized ethical policies but also project an effective image of fulfilling corporate social responsibility. However these activities must be carried out in low key fashion with emphasis on more activities than on their publicity. Their community trading is a good example of corporate social responsibility being combined with commercial intent. The company reports that, “There has been much successful progress on our Values this year. Our new branding incorporates "Passion Panels", which tell customers the stories behind our ingredients and our products. Our campaign to Stop Violence in the Home is now making a real difference in 26 markets, and weve collected significant funds globally to support Tsunami disaster victims and promote HIV/AIDS awareness and research. Weve focused our efforts on increasing internal communication of our values, through training and engagement within the business, and have improved our programmes to support Community Trade and to secure higher labour standards in our supply chain”. (The Body Shop, 2005). The Body Shop says,” The objective of our Community Trade programme is to help communities establish a sustainable livelihood. This requires a careful balance between guaranteeing a sustainable level of business - i.e. sufficient to alleviate hardship - while not sourcing so much that suppliers are unable to cope. Our product development process involves checkpoints and milestones to ensure that, wherever possible, Community Trade is designed into our product ranges from the outset. Importantly, we work in a way that focuses on both stability and sustainability; stability in the levels of ordering and sustainability in community development.”(The Body Shop, 2005) It is clear that Body Shop reckons its corporate responsibilities to envelop all of its stakeholders. On the one hand Body Shop has concerns for society in form of its efforts for Tsunami victims and in promotion of HIV/AIDS research, on the other it is deep into making efforts to reduce domestic violence. Each such effort tells its societal stakeholders that this corporate is conscious of the society it thrives in. Competitive advantage is derived when each such effort wins it more and more customers. The Body Shop is also committed to continuing this communication with all of its stakeholders. This statement in its 2005 value report is an elaborate testimony,” Our engagement with stakeholders provides us with valuable ideas for improvements and on-the-ground knowledge of emerging issues. We listen to Non Governmental Organizations, business networks, franchisees, employees, communities, suppliers and investors to understand where we can help make a difference”.(The Body Shop,2005) Making a difference ensures establishment of an entrenched corporate identity and earns a potential market for Body Shop. The goodwill would soon transit to other stakeholders.Thus the role of corporate governance, as a distinct corporate policy, is in creating goodwill for the company in the market in general.   Sustaining Investor Interest The above two aspects were brought into sharp focus since the major irregularities in Enron and WorldCom hit the news and brought to fore the weaknesses of current practices. As Carcello &Neal state,".... the failure of Enron amidst allegations of accounting improprieties, coupled with numerous other instances of questionable financial reporting (e.g. WorldCom, Adelphia Communications, Global Crossing, Qwest,Xerox, among others), has served to increase an already keen interest on the part of regulators, professionals and the general public in the governance of public companies ..... This contemporary interest follows closely on recent initiatives to improve the performance of corporate audit committees. This contemporary interest follows closely on recent initiatives to improve the performance of corporate audit committees. At the behest of former SEC chairman Arthur Levitt, the New York Stock Exchange and the National Association of Securities Dealers sponsored The Blue Ribbon Committee (BRC) on improving the Effectiveness of Corporate Audit Committees......... Similar efforts to improve corporate governance and audit committee performance have occurred in numerous other countries e.g. Australian Bosch Report of 1995; OECDs Business Sector Advisory Group on Corporate Governance of 1998; the work of the Canadian Institute of Chartered Accountants of 1997; UKs Hampel Report of 1997 etc." (Carcello &Neal, 2003). The Body Shop has to make efforts to strengthen its image not only as an ethical seller of products but also as a commercial success which pays its investors a healthy dividend out of year’s operations. The Body Shop’s records in this respect has brought adverse investor comments. While long terms investors had been happy with the capital growth the short to medium term investors found the dividend to be quite inadequate. For instance a survey of The Body Shop’s investors in 1999 revealed that ,”In 1995, 82% of shareholders responding to the survey were in agreement that The Body Shop cares about its staff, customers and other people affected by the Company and 12% expressed no opinion. In 1999, the question was slightly reworded, resulting in 68% agreeing or strongly agreeing that The Body Shop takes active steps to balance the needs of its employees, customers and other people affected by the Company, while 28% of respondents expressed no opinion” (The Body, 1999) These aspects clearly indicate that the company still has scope to improve upon investors’ perceptions in these respects. Once these percentages cross, say 80 % mark, then The Body Shop would be able to draw out investor confidence which would also reflect in sustained investor’s interest. The same 1999 survey revealed that the risk of investing in The Body Shop stock was classified as high to medium by 84% of the investors with only 14 % classifying it as a low risk investment. This clearly indicates the additional effort required by the company in this respect. Take for instance one very important aspect of corporate governance revealed as deficient by the above 1999 survey. When investors were asked to agree or disagree with the statement- I have sufficient access to The Body Shop’s Directors and Senior Managers, on a five pint scale, only 25% of he respondents agreed or strongly agreed to the statement. Most gave no responses. This indicates that top management of the company has to move efforts to make themselves more accessible to investors. In respect to another statement -The Body Shop’s Annual General Meeting are well-organized only 8% of he respondents agreed or strongly agreed to the statement. Most investors had no responses again. Similarly in respect to another statement -Issues relating to corporate governance are well-managed at The Body Shop only 36% of he respondents agreed or strongly agreed to the statement. . (The Body, 1999) With such perceptions the company can hardly ever hope to elicit full investor confidence. These also indicate the possible areas where company needs to strategize to sustain investors’ interest. References The combined code on corporate governance. (2003). The Body Shop. (2005).The Body Shop Values Report 2005. The Body Shop.(2006).Company profile.The Body Shop:A company With a Difference. The Body Shop Shareholder Consultation -Summary Report.1999. Hammer, Michael, (2001), Agenda, Retrieved November 21, 2006 from http://www.1000ventures.com/business_guide/differentiation_strategy.html Ronald R. Sims, 2003, ‘Ethics and Corporate Social Responsibility: Why Giants Fall’ Publisher: Praeger. Place of Publication: Westport, CT. Publication Year: 2003 Carcello, Joseph V. * and Neal, Terry L. (2003). Audit Committee Independence and Disclosure: choice for financially distressed firms. Corporate Governance. Vol. 11 No.4. . Read More