Corporate Governance and Market Value- Thomas Cook Company - Case Study Example

Corporate Governance By Student’s Name Course Code + Name Instructor Date Corporate Governance Introduction Indeed in the corporate world, a number of governance issues usually come up and if not handled professionally they might lead to the overall closure of the company. Corporate governance is a demanding task which needs the cooperation of stakeholder of a business for the company to achieve its core goals and objectives. A company might be having a number of goals that it wants to achieve at long run, however, has been seen with the majority of companies; the primary goal of a Company is to make a profit. In Fact, if a company is not able to widen its profit margins then it is likely to collapse. Due to this reason, every shareholder of a company usually tries very hard to ensure that their firm achieves much in terms of profit making. One of the stern measures a Company is able to take in case it wants to do much as expected in terms of profit making is to cut boss's payout as seen in the case of Thomas Cook tour operations Company in the article. Apparently, it is very necessary for the shareholders of a company to assess the company’s performance and take corrective measures for the benefit of the company in time. The summary of the arguments made by the article In brief, the arguments being made in the article is that Thomas Cook has bowed to its shareholders’ pressure and cut the maximum payout of the chief executive staff as far as the new long-term bonus plan is concerned. This action comes in following the revolt of a third of its shareholders voted against the long-term bonus plan. Nearly 32.7% of the shareholders of the Thomas Cook Company refuse to pay Peter Fankhauser a long bonus which is of up to 225% of his base salary of around £ 703, 000 by arguing that there is no need for paying out such amount of salary and the company is making a loss (Julia, 2017). Further, augment is that Thomas Cook, the company, reduced the maximum potential payout of the chief executive drastically to nearly 200% following the strategic share incentives Plan (SSIP). However, the company declines to put it into effect immediately (Julia, 2017). The shareholders argued that implementing this policy would replace the present one of the long-term bonus scheme which is the performance share plan (PSP) and this would in exceptional scenario pay out 200%. Furthermore, the shareholders argued that following the performance share plan, Peter Fankhauser has been able to get a long-term bonus of 165% of his base salary which would be implemented in three years in case the company achieves its targets. Consequently, Thomas Cook argued that it would further consult the shareholders before implementing the strategic share incentives Plan (SSIP). In fact, almost 22% of the company's shareholders voted against the strategic share incentives Plan (SSIP) of remuneration policy, thus opposing the general report. The author of the article argues that some companies have been subjected to fresh pressure with regards to executive salaries in the recent periods. In fact, the author further notes that even earlier the week, the major institutional investor of the Church of England wrote to nearly 350 listed companies, warning them against boardroom pay deals. The author continues arguing that during last month, the world's asset manager, BlackRock, also warned the UK companies to ensure that they match the boardroom pay rises with regards to the workers’ salaries. Indeed, according to the author, the Thomas Cook’s share price fell drastically over the previous years due to cases of reported terror attacks in Turkey which might have scared away the tourists. This fall of the share price was witnessed as from Jan 12th, 2016 at the time it was 121.7p dropping to 85p today which is a 7.5% decline. Nevertheless, due to this reduction of the numbers of passengers for the Thomas Cook travel operator due to the terror attack, the second notable shareholder with 13% shares also voted against remuneration policies the company was intending to implement (Julia, 2017). Among this remuneration policy included the re-election of the remuneration committee chairperson and all the committee members (Julia, 2017). The second last shareholder noted that “We disagreed with the introduction of a potential payment to executives above the remuneration policy’s normal upper limit. In addition, we opposed the introduction of new elements to the remuneration plan as we strongly believe these should be dealt with in the existing policy” (Julia 2017). In fact, even the smaller shareholders disagreed with the remuneration policy of huge bonuses during the company’s Annual General Meeting (AGM) which took place in London. The holder of the Thomas Cook’s shares for nearly 15 years now argued that “On the one hand you say business is not going well and on the other hand you give such a huge bonus ... at more than twice salary. You should review this policy” (Julia, 2017). However, Frank Meysman, the current Thomas Company’s chairperson defended the company’s performance by saying that the company’s share price was 16p previously during the time he joined the company six years ago. In addition, he noted, “We’ve come a long way since then,” (Julia, 2017). In fact, the chairperson, Frank Meysman, further noted that the salary for Peter Fankhauser was cut drastically in the previous year when he only got 30% of what he was supposed to earn, and this made Peter Fankhauser get nothing in the long-term (Julia 2017). The author argues that Thomas Cook Company also suffered the shareholder’s revolt during the last year’s Annual General Meeting with regards to the executive pay when 25% of the shareholders voted to oppose the remuneration report. In fact, during that Annual General Meeting, the Peter Fankhauser’s salary was truncated from $4.3 to £1.2m. This means that Peter Fankhauser only got a third of his potential bonuses since the Company failed to achieve its targets. The author argues that due to this, Thomas Cook travel agency had raised the prices of its summer packages holidays by nearly 9% and it also extended its deals away from Spain since the hotel rates have soared. The company decided to surge the Greece Holiday Bookings with almost 40% and noted that it had experienced double-digit growth in Cyprus, Croatia, Bulgaria, and Portugal. A short introduction about Thomas Cook Company Thomas Cook is one of the best-known worlds class tours operator and travel agency limited. The Company traces its origin in London, and currently, the company has branches internationally. The company was started with a single man, Thomas Cook in the year 1841 and following a one-day successful rail excursion at only a shilling, a journey which began in Leicester and ended in Loughborough on 5 July 1841. In fact, from this humble launched, Thomas Cook has launched an entire all-inclusive kind of travel operations which is devoted to helping the British see the whole world. A brief summary of the arguments made by the author of the article The author of the article brings his argument to touch real issues associated with corporate governance today in the world. The author presents a real corporate situation where companies operations have been tremendously facing the challenges of ever growing levels of losses which in many cases result into truncation of employees pay cut. The author argues the issues of the executives’ salaries have been a world corporate concern. This s because the executives usually demand higher remuneration packages irrespective of the profit margins of the company. The article’s author gives an example of the Thomas Cook’s company where the shareholders have taken it upon themselves to slash the salary of the chief executive officer during the Annual General Meeting following the company’s drop in the profit margins. Indeed the author agrees with the shareholders that salary decrease might be the immediate corrective measure to save the company’s credit strength; however, the author holds a contrary view with the boardroom pay deals which he argues are not appropriate. The boardroom pay deals have been condemned in the article by the author, and he argues it is not the best platform for awarding the employees their salaries. Moreover, the author tries to presents the challenges that are associated with corporate governance apart from executive salaries. Another challenge the author talks about in the article is the issue of terrorism which can impact negatively on the overall performance of the business just the same way the Thomas Cook travel operations company started experiencing a decline in business during the Turkey terrorism. This at long run might result in the overall decline and the profit margin of the company. Therefore, the author poses a challenge to various companies to put a lot of considerations on the issues that might interfere with the overall corporate governance of a company. The discussion in the context concerning the issues of corporate governance The author presents three major issues that are related to corporate governance in the article. The first issue the author presents in the article is the issue of pay deal for the corporate chief executives. The author provides a scenario with the Thomas Brook Company where the shareholders decided to cut the salary of the chief executive officer, Peter Fankhauser, by arguing that the executive was being paid a lot of money irrespective of the company’s constant loss. The issue of salary to the executive officers of every company usually brings a lot of challenges to various corporations in the world today (Julia, 2017). Moreover, the author talks about the issue of boardroom pay deals which he saysis among the corporate governance challenge in the world of today. The boardroom pay deals have several weaknesses since it limits the employee’s consent concerning their welfare which remuneration policies are part of this welfare. This means that companies are advised to exploit other avenues of pay deals as opposed to the boardroom pay deals (Julia, 2017). In addition, the author observes the corporate issue to do with terrorism which he notes is hazardous to various businesses, particularly, the service organizations and he gives an example with Thomas Cook travel operations whose business were significantly affected by the terrorist activity which took place in Turkey. The terrorism problem is being experienced in the whole world nowadays, and the primary challenge with it is that it scares away the consumers, thus leads to low business. In fact, if the situation persists, the companies can even end up closing down the business. The related literature review The literature review that is related to the corporate issues mentioned above is that businesses usually acquire diverse cultural all over the world today. Banerjee et al (2009), argues that majority of these cultures are born on the corporate periphery which is established with divisions. The financial and operating models normally characterized by several problems. These issues are normally encountered as a result of new models that various companies tend to adopt at the beginning of their operations. After adopting these new models of management, the company realizes that they are not clearer as expected. Okeahalam (2004), claims that due to uncertainties of these new ventures, the company needs new adaptive approaches for them to succeed. However, other related corporate governance issues apart from the ones mentioned in the article may include lack of hard data, particularly, in the cases where the data are useful in offering cutting edge products or in the case where the company’s technology is not widely diffused in the marketplace. Indeed it is very difficult for corporations to find the market insights for markets that are not in existence. In fact, even the financial forecasts are normally unpredictable due to large amounts of error. Moreover, Okeahalam (2004), says that another common problem with corporate governance is the lack of innovation which normally requires fresh ideas from both the directors and the executive officers. The conventional thinking normally traps leaders due to this. Several degrees of unconventional thinking are necessary for the businesses to take hold though many thoughts are also not constructive. Over thinking needs mavericks which sadly are not able to differentiate between bad and good ideas. In fact, the mavericks consistently insist on defending pet themes, they only demand hearings and refuse to accept no for an answer. Harford (2012), argue that there is only a fine line between insubordination and the corporations. Nevertheless, the third problem associated corporate governance is the poor fit that exists between the business and their old systems of managements. This problem can be seen clearly in the financial budgeting and human resource managements. In fact, the corporate budgeting systems usually work in favor of creating businesses since they enhanced dollars which in many cases provides higher financial profit margins following its investment in the familiar markets as opposed to new markets. Therefore, this makes it very difficult to finance the businesses for long-term periods and even particularly, during the times of austerity. The corporate governance issues that are being discussed in the article are very eminent today in the corporate world. The media finds it very useful to address these issues with the aim of creating awareness to various corporate governance personnel to be aware of these issues and be ready to tackle them soberly. The media emphasizes on the sound thinking and addressing of these challenges associated with corporate governance since failure to tackle them professionally in many cases lead to the collapse of the company. Companies which have failed to put into considerations the media recommendations on the issues to do with boardroom pay deals, terrorism, and chief executive payouts can find it very rough to manage its affairs accurately and efficiently. This can lead to the overall collapse of the company. Conclusion Apparently, I concur with the author of this article on the corporate governance issues. The shareholders, executive officers and employees of a corporation must work coherently with the aim of ensuring that the company achieves its core goals and objectives. It is normally crucial as a shareholder or executive officer of a corporation to take corrective and prompt measures aiming at raising the overall company's profit margins. Profit margin maximization and the overall success of a company is the mandate of the corporation's stakeholders. Therefore, it is very necessary for everyone in charge of a corporation to continually research in the articles like the one above as this shall help in enriching one's corporate governance ideas. Bibliography Banerjee, A Gokarn, S Pattanayak, M and Sinha, SK 2009, Corporate governance and market value: Preliminary evidence from Indian companies, Standard and Poor’s Financial Services, 200(12), p.2. Harford, J Mansi, SA and Maxwell, WF 2012, Corporate governance and firm cash holdings in the US, In Corporate Governance (pp. 107-138), Springer Berlin Heidelberg. Julia K, 2017, Thomas Cook cuts boss's payout after shareholders revolt, Journal of the Guardian, viewed online https://www.theguardian.com/business/2017/feb/09/thomas-cook-cuts-boss-payout-shareholders-revolt Okeahalam, CC 2004, Corporate governance and disclosure in Africa: Issues and challenges, Journal of Financial Regulation and compliance, vol. 12, no. 4, pp. 359-370. Read More