Corporate Governance Issues and the Duty of Care of the Directors of Limited Companies - Assignment Example

ANNUAL REPORT AND FINANCIAL STATEMENTS 2016 University Name Task 1 Discuss the corporate governance issues and the duty of care of the directors of limited companies. Women representation is a key corporate governance (CG) issue in Tesco group. Tesco has ensured that it has reached 27% board female representation which is above 25% as recommended and advised by Lord Davis in the year 2011 (Tesco PLC, 2016). However, the level had dropped from 30% female board directors representation that had been established at the 2014 AGM. In 2015, the nominations committee organized additional assemblies meant for replacemet of retired board of directors and the major focus was eying the women of high caliber candidature that would ensure the board is well balanced(Tesco PLC, 2016) . In March 2015, Tesco also launched a new Code of Business Conduct meant for fostering ethical and responsible business practices in all its levels of authority and governance (Tesco PLC, 2016). Tesco Inc has given great focuson its suppliers in order to achieve better supplier relationship that has ensured raw materials have been delivered on the scheduled time, timeliness is observed by the suppliers and they get better and competitive quotes on their quotations that has streamlined the procurement process as compared to where some companies do not receive their raw materials and supplies on time due to late deliveries and poor quality supplies being delivered forcing return of the goods which consumes more time, hence, affecting the operations. In addition, succession planning has been another major issue in Tesco, whereby, many of the members of the board were retiring leaving vacancies on some offices, hence, some roles not being attended to. Succession planning is a key human resource management practice that helps an organization to organize how new employees or directors will be sworn in to the offices of retirees. This avoids confusions where some responsibilities such as paying of workers might be left out because one of the directors is not available to sign the payment cheques (Tesco PLC, 2016). Additionally, some directors might be forced to work late after the working hours which is tedious due to the fact that they are overworked by other people’s roles in the company. As a matter of fact, additional meetings were set by the Nominations committee meant for selecting a high-caliber candidates to replace the retirees. Diversity in Tesco has been another major issue. Competitiveness and challenge can only be achieved in an organization that has a sure culture of scrutiny and challenge (Tesco PLC, 2016). Tesco has ensured that all its directors have diverse backgrounds as a sure way of avoiding group think which is likely to cause limitation on the competitiveness of Tesco. This is experienced when the staff shares the same ideologies and style of doing things. Members of the executive committee and the board are selected with regard to their core talents or rather skills and their areas of passion and competence for the success of Tesco. In Tesco, diversity is not only in the area of gender, but also, competence and experience, background of its board members, as well as, talents of the members. Shareholder engament is also a major issue observed in Tesco group limited. This is where the Board conducts major and constructive dialogues with its shareholders, whereby, there is a clear communication of the general objectives of Tesco as well as, understand the needs and expectations of the shareholders. This has been achieved through investor road shows, as well as conferences organized in North America, Europe and United Kingdom (Tesco PLC, 2016). There were invitations sent to shareholders in the half-year and full year results presentations. A survey was also conducted in a section of shareholders aimed at assessing their perception of Tesco. Corporate responsibility was also a major issue aimed at rebuilding transparency and trust in Tesco. Corporate Social Responsibility (CSR) was first used in the nineteen sixties and nineteen seventies. In the nineteen eighties, more businesses incorporated the idea by ensuring that their stakeholders’ needs were addressed (Rendtorff, 2011). It became a universally acceptable strategy in the two thousands. Initially, businesses applied instruments which were traditional. It is a model which has over years emphasized on the need for firms, organizations and companies to take be accountable for any impacts brought about by its activities (Smith 2003, p. 61). It is directed to all stakeholders ranging from customers, employees, shareholders, surrounding communities and the environment in general (Hancock 2012). Tesco initiated several projects aimed at promoting corporate responsibility, which include, the Community Food Connection project focusing on reduction of food wastage through partnership with United kingdom charity Fareshare that utilizes Foodcloud technology platform that identifies surplus food in given stores and, therefore provision of an effective distribution channel through responsible and vetted community groups and charities (Tesco PLC, 2016). Additionally, the government introduced levy on plastic papers, and hence Tesco invested 11.5 million pounds in a Bags of Help campaign scheme, hence the revenue raised from these sales is reinvested I local projects by developing under-utilized outdoor sections. Audition of the company operations is a major issue whereby, an audit committee was formed. Its roles involve stock controls through reception of regular updates and checks on the ledgers and records kept, as well as, audition of operations in Tesco at each management level. In general, businesses must strike a balance between their desire to make profits and the needs of the society at large. The stakeholders that are usually directly affected by the ethical performance of the company are the employees, some of the practices that a corporation might be engaging in such as their selection process, their recruitment and their professional growth determination process (ranking) impact the employees and potential employees as well (Anderson, 2013). If this process is not ethical and does not meet the fair standards that all employees feel comfortable with, then the corporation is bound to have corrupt means of operation (Griseri, & Seppala, 2010, p. 462). In such an environment the human resource; which is the most vital resources in a firm is bound to be lost due to factors such as; limited and unguaranteed chances of professional growth, incidents of harassments and so on. Therefore, a business can be termed as one that is ethical and adheres to corporate social responsibility if it obeys the moral principles that guide organizations in the world of business and if the organization respects its obligation to maximize its positive impact, and minimize its negative impact in the society. The ethical responsibilities of the corporation towards the people revolves around the expectations of the society from an organization, these expectations are not laws or regulations but are an appreciation of the existing laws. For instance, until recent decades, industries were disposing their waste into rivers and water bodies (Treviño, & Nelson, 2011, p. 45). There had been no documented law against this practice, but the public expected their water to be pure and without industrial wastes. A corporation that was engaging in such practices was not only being unethical, but also not adhering to its corporate social responsibility. Another example that can be drawn here is the tobacco industry advertising campaigns in the early 1900s. The company was not informing their consumers of the increasing risk the consumers posed to their health by continuously smoking tobacco (Hancock, 2012, p.89). Their only interest was in making profit and were not at the very least interested on the repercussions that befell their customers. Task 2 The accounting procedures and principles are significant to all business processes irrespective of the type of business entity. The financial statements help to present an overview of business financial position, in the long and, short run. The financial statement sole objective is to try and assist in the presentation of relevant financial information of business in a structured way that is easy to comprehend (Rezaee, 2005). Income Statement and the Statement of Financial Position are novel terms for fundamental accounting traditionally referred to as trading profit and loss and the balance sheet. Although the terms have changed the calculations inside these documents, have remained constant. The income statement is used to show a beak-down of how the gross profit, as well as the net profit after all entire process running of the business, are deducted (Ou, and Penman, 1989). On the other hand, the statement of financial position is usually a snapshot of the business liabilities and assets. In a Limited company, the income statement mainly shows all the company activities during a specified accounting time. For instance, in the case of Tesco, the income statement presented cover accounting period from February 2015 to 2016 (Healy, & Palepu, 2012). The income statement for Limited company shows the revenues being generated and cost incurred in the process of generating the revenues, leading to the decrease or increase of output for the company during the accounting period. Statement of Financial Position The Statement of Financial Position in sole trader business contains a separate capital account for every partner instead of required sole trader. In the case of Tesco, which is a limited company, this is different as it generalized for the entire company. In addition, the sole trader business maintains a separate current account for every partner, in respect to drawings and benefit offers. In this situation, the capital record is utilized exchanges in view of capital and as a presentation of additional long run capital for accomplices. In a sole trader business, the statement of financial position is simple and easy to understand. The major difference in this case, while compared to that of a limited company is on the items included in the statement. For a sole trader or partnership, the statement includes two major sections: the Assets sections which carry the fixed and current assets. Another section is the liabilities section which comprises of fixed and current liabilities. The diagram below a broader picture of the above analysis. In the case of a Limited company like Tesco, the statement has numerous sections, complex and requires a lot of keenness for one to understand it. In the current assets section includes the course cash on hand, accounts receivables, inventories, as well as, prepaid expenses.The long-term investment funds, property plant and equipment's and intangible assets are all included in this section. Another very crucial section is the current liabilities sections which like others comprises of current tax assets, inventories, and short-term investments among others. The other sections include the current liabilities; the section describes the company’s obligations that must be met within a short time (White, Sondhi, & Fried, 2003). Long-term liabilities sections are also available and involve obligations that are not due but have a longer time than one year. The last section part is the retained earnings section; this is part of the company’s income that is kept in order to accumulate once the dividends are paid. It is not able that the statement of financial position for a limited company, sole trader or partnership are almost similar especially in the format followed. However, a limited company has a lot of entries and requires increased professionalism compared to that of a sole trader or partnership. Income Statement This statement details business revenue, resulting in profit and loss and expenses over a period. In general, the report reflects a business or company chosen the fiscal year. In a sole trader or partnership the division of net profit between the partners has to be indicated. Partners are credited with wages to permit the work they devote to the business. There is also crediting interest on capital among the partners as a way of allowing differences in the amounts of fixed capital contributed (Stickney, Brown, and Wahlen, 2004). The salaries and interest are not changes in the key part of the income statement. This division of profit is shown in the statement of the division of profit. The following diagram shows the position and other statements linked or in support of the income statement. The key point to note about the income statement for a limited liability like Tesco and a sole trader is that the format for the statement is the same. However, there are some parts that are contained in the limited liability, income statement and not found in the sole traders’ one. These include the following parts: Earnings per Share: this is about the cumulative outstanding common stock. It is some shares that are possessed by the shareholders at a particular time. These are divided into net income to come up with the relevant figure (Sprouse, 1966). This segment is not appropriate to the sole proprietorship and constrained obligation organizations, be that as it may, it must be appeared in the announcements of all publically held enterprises. Pretax Income: In order to derive this figure derive financial expenses is subtracted from total financial revenue and at that point added to add up to working pay. The assessments are likewise subtracted from the pretax income in a company income statement. The most important thing to note is that Proprietorships and limited liability companies never pay business taxes on income and instead the income reports are included in the business owners’ personal returns. Task Three Interpret the cash position of Tesco PLC from the Cash Flow Statement (p89), explaining clearly the main sections of the statement This is a statement meant to reveal how an enterprise generates cash. It also shows how an enterprise expends uses up the cash (Larry & Christopher, 2009). On that note, the cashflow statement consists of three major sections showing how the money was generated and how it was spent. They include; operating activities, investment activities, and financing activities. There is a major difference noticed in the cash generated by operations when compared to the net income realized in the income statement since, some items hit the cash flows on different occasions as to the income statement (Larry & Christopher, 2009). The Tesco group generated 2434 pounds in total an increase from 1467 pounds generated in 2015. In 2015 the operating loss from continuing operations was 5750 pounds that show a major difference in comparison to a profit of 1046 pounds in 2016. In general, the cash generated in 2016 was more than that generated in 2015. The fact that the operating loss on continuing operations was very high in 2015 is one of the major reasons why the cash generated in 2015 was low. This led to low net cash generated in 105 of 484 pounds compared to the high net cash generated in 2016 of 2126. In addition, in 2015, Tesco exploited more funds in procurement of plants, property and equipment to a tune of 1989 pounds compared to a lesser amount invested in 2016 which amounted to 871 pounds. This is the major reason why the net cash used for investment that year seems to be much lower than that of 2016 to a tune of 615 pounds as compared to 2015 pounds in 2015. On the other hand, the net investments from sale of short term investments were very high in 2016 compared to 2015. The investment made in 2016 was 2894 pounds as compared to 423 proceeds of the sale of investments in 2015. On financing of activities, Repayment of borrowings was very high to a tune of 3185 pounds in 2015 as compared to 1328 pounds in 2016. However, the total net cash used in financing activities in 2016 was high to a tune of 604 pounds, whereas, the total cash from financing activities was 814 pounds. Finally, the cash obtained at the end of the year in 2016 was higher than 2015, whereby 3082 pounds were realized in 2016 as compared to 2165 in 2015. References Andersen, B. 2013. Bringing business ethics to life: Achieving corporate social responsibility. Milwaukee, Wisc: ASQ Quality Press. Griseri, P., & Seppala, N. 2010. Business ethics and corporate social responsibility. Australia: South-Western Cengage Learning. Hancock, J. 2012. Investing in corporate social responsibility: A guide to best practice, business planning & the UK's leading companies. London u.a.: Kogan Page. 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London: London Business School. Sprouse, R.T., 1966. The measurement of financial position and income: Purpose and procedure. Research in Accounting Measurement, pp.106-129. Stickney, C.P., Brown, P.R., and Wahlen, J.M., 2004. Financial reporting and statement analysis: A strategic perspective. South-Western Pub. Tesco Plc 2016. Annual Report And Financial Statements 2016. Hertfordshere: Tesco Plc Treviño, L. K., & Nelson, K. A. 2011. Managing business ethics: Straight talk about how to do it right. New York: John Wiley. White, G. I., Sondhi, A. C., & Fried, D. 2003. The analysis and use of financial statements (Vol. 1). John Wiley & Sons. Read More