Corporate Governance Guidelines by a UK Plc of Imperial Tobacco - Case Study Example

Name: University: Course: Tutor: Date: COMPANY LAW AND BUSINESS FINANCE A set of governance structure have been set by Imperial Tobacco as well as practices in place were designed to ensure that the company is running responsibly in the best interests of its shareholders as well as stakeholders. The provisions which were set out in Section 1 of the Combined Code on Corporate Governance are followed by the Company and they continue to keep the whole system of internal control under review. In addition to that, this encompasses operational compliance as well as risk management control (“Corporate Governance,” 2008). This paper was done to evaluate how successful has been the implementation of corporate governance guidelines by a UK PLC of Imperial Tobacco. I. Director’s Profile Robert Dyrbus was appointed in 1996, as the Finance Director on de-merger. He is a Chief Executive Committee member. He became the Finance Director of the Imperial Tobacco Limited and a three-man Hanson team, from November 1989 which is involved in strategic reorganization of the group. In shaping strategic direction he played an integral part, for the group. Graham Blashill is the Group Sales and Marketing Director. On October 2005, he is appointed to the Board. He is a member of Chief executive committee, responsible for global sales and marketing activities, and has held a number of senior sales and marketing positions, with over 39 years experience with the group which includes as Managing Director UK and Regional Director for Western Europe. Currently, he has no external Director appointments. The Corporate Development Director of Imperial Tobacco Group PLC, Alison Cooper was appointed to the board on July 2007. She is a member of the Chief Executive’s committee, responsible for strategic planning and business development as well as for corporate affairs. She joined the group in 1999 she became the Director of Finance and planning as well as the Director of the rest of Western Europe. Currently, she has no external Director appointments. Pierre Jungles is the Senior Independent Director of Imperial Tobacco Group PLC. He was appointed on August 2002 as the Non-Executive Director, a member of the remuneration Committee as well as the Nominations Committee and the Audit Committee. Ken Burnett was appointed on April 2006 as Non- Executive Director and a member of the Nominations Committee. He currently serves on the Board of ID Lanke Ltd. Michael Herlihy was appointed as Non-Executive Director on July 2007, a member of Nominations Committee, Audit Committee and Remuneration Committee, formerly a Company Secretary, General Counsel as well as Head of Mergers and Acquisitions for ICI PLC with overall responsibility for corporate acquisitions and divestments. He has extensive experience of both private and public market transactions. Charles Knot was appointed as Non-Executive Director on April 2006, member of the Nominations Committee, Adult Committee as well as the Remuneration Committee. Susan Murray was appointed on December 2004 as Non-Executive Director of the Imperial Tobacco Group PLC, a member of Nominations Committee, Audit Committee as well as Remuneration Committee (Board of Directors, 2008). II. Risk Management A. Financial The company is managing financial risk rather than eliminating it. The Audit Committee is delegated to conduct detailed assessment of strategic financial risks. In order to formally review their principal areas of risk, it must be done in all areas of the business to ensure that all major risk at all levels across the group had been reviewed. From each business entities, this formal system was based on annual submission of risk assessment summaries for the measurement assessment of risk area, together with controls which was embedded in the business process to mitigate. B. Operational They have risk management system in place for those employees who are expected to travel, as part of their job or work in countries where there are higher risk to their health and security. Within the countries where there has been or still in political unrest and war, there are small number of operations. Employees are provided with medical and security advice, emergency, procedures and insurance by human resources cooperation between commercial risk management and sales and marketing function. Like for instance, in order to protect employees where local law enforcement is poor, careful consideration is given by using security personnel. Detailed arrangements are in place to monitor and manage the security of product transport and to reduce the risk of violent attacks instructions are in place (“Progress: Corporate Responsibility Review 2003,” 2008). C. Compliance 1. Government Policy As set out in section 1 of the Combined Code on Corporate Governance, they comply with the provisions of best practice governance. The Imperial Tobacco Group actively addressed those few issues where it does not fully met the governance provisions of the New Combined Code, wherein it requires to report in respect of financial year ending Sept 30, 2005 and since the group has securities registered U.S. Securities and Exchange Commission, the group complies with those provisions of Sarbanes-Oxley Act of 2002 wherein it is applicable to foreign issuers. Work is currently well underway, in the light of this ongoing obligation, to enable the Group to meet the further requirements with regard to section 404 of the Sarbanes-Oxley Act, which are applicable for its financial year ending 30 September 2005. 2. Legislation: Environmental, Health and Safety Imperial tobacco recognizes the government objective encourage people to stop smoking most especially on children and they have consistently adapted responsible approach in not challenging Government public health messages in assisting its policy to prevent children from smoking. The policy of reducing low tar yields of cigarettes was adopted with the cooperation of Imperial Tobacco, based on independent scientific advice (“Tobacco Industry and the Health Risks of Smoking (TB 13) the Way Forward”2000). 3. Exchange Rates According to the Chairman of the Board of Directors, Derek Bonham, after ten years of the company’s listing on the London Stock Exchange, the effective and efficient execution of the Imperial Tobacco Group PLC’s strategy resulted to continuous well-impacted bottom-line results such as increasing sales volumes, impressive brand performances continuous focus on costs as well as effective cash management. All these have delivered an increase in adjusted earnings per share of 9 per cent to 122.2 pence in 2006 (Imperial Tobacco Group PLC Annual Report and Accounts, 2006). 4. Computer Systems The Imperial Tobacco Group PLC is implementing continuous improvement of the computer systems. This way, the company can cope up with compliance requirements for the various aspects of the company. For instance, to radically upgrade its data storage capability the SAP system upgrade prompted Imperial Tobacco Group PLC. Involved in the SAP upgrade is moving from a single 'instance' SAP environment to a three level architecture, retaining one server for the SAP database and two dedicated application servers. Imperial Tobacco decided to handle Imperial Tobacco's storage needs based upon various technical, economic and operational considerations on Hitachi Data Systems, after assessing the available alternatives, Thunder 9200 (Hitachi, 2006). 5. Insurance The company moved away from traditional reliance or insurance cover through the annual protection audits of the principal manufacturing and storage sites of the Imperial Tobacco Group PLC. Within the business operations of the company, it had created a strong risk management culture. As part of their daily operational environment, this company’s businesses understand as well as accept the risk management principle and as a consequence, three of the main manufacturing sites of the Imperial Tobacco Group PLC have been accredited by their insurer for meeting the highest risk management standards for the asset protection (Responsibility Review, 2006). 6. US Litigation Claims They claim that Imperial Tobacco as well as Gallaher, were negligent and in breach of their duty of care because of their failure to reduce tar yield on their cigarettes to a maximum of 10 mgs between the year 1957 and 1971 and they failed to advise the plain tiffs and all customers to switch from high tar products to low tar products moreover, they failed to inform them of the risks of having a lung cancer if they do not stop smoking (“Tobacco Industry and the Health Risks of Smoking (TB 13) the Way Forward”2000). 7. Funding The company is ensuring that the Group retains sufficient committed funding arrangements to cover its likely funding requirements for the near term. They also see to it that the company is funded from a variety of different funding sources (where possible and/or practical). Most importantly, the Imperial tobacco PLC match the currency of borrowing (post cross-currency swap where required) with that of the material underlying assets of the Group (Debt Information, 2008). 8. Liquidity The company address various aspects of financing to manage and achieve liquidity of the company. During the previous years, the company refinanced the remaining portion of the facilities acquisitions. Likewise, the fluctuation of the strength of sterling, principally against the euro, during the some specific years has adversely affected the reported net debt at the year end by several million pounds as compared to the previous year. At the year end, net debt including the deferred consideration for the remaining percentage of facilities acquisition. They are also fixing the gross debts of the company by way of interest rate derivatives (Imperial Tobacco Group PLC Preliminary Results for the 12 Months Ended 30 September 2003). 9. Treasury Management A centralized group treasury function operates which is responsible for the management of financial risks of the group together with it. This is part of the control environment and control activities of the company. The company’s treasury function operates within a well-defined policy which is designed in order to control the financing arrangement of the group as well as to minimize its exposure to interest rate and foreign exchange risks through the treasury instruments. 10. Credit Risk Due to its trade receivables due from customers as well as cash deposits and financial institutions, they are exposed to credit risk. To ensure that sales of their products are made to customers with an appropriate credit history, they implemented policies and to reduce the risk where this is considered to be necessary, guarantees and other means of credit were obtained. Imperial Tobacco has no significant concentrations of credit risks from Financial Institutions. In order to manage its credit risk to any one financial institution, with a diversified group of financial institutions having suitable credit ratings cash deposits are placed by the group and entered into derivative instruments (Financial Statements: Notes to the Financial Statement, 2006). 11. Interest Rate Risk In interest rates on its borrowings as well as surplus cash, the Imperial Tobacco is exposed to fluctuations and in order to manage interest rate risk, they maintain fixed and floating rate debt and use derivatives which include interest rate as well as cross currency swaps, to vary the mix (Financial Statements: Notes to the Financial Statement, 2006). . 12. Foreign Exchange Risk Due to its commercial trading denominated in foreign currencies, foreign currency borrowings, translation of net assets of foreign operations into the consolidated financial statements as well as foreign currency dominated costs, they are exposed to movements in foreign exchange rates. To reduce exposure to risk that these sales will be adversely affected by changes in exchange rates the group uses foreign currency derivatives instruments, such as forward foreign exchange contracts. To change the debt into the desired currency, the group issues debt in the market or markets which are most appropriate at time of execution and uses derivative financial instruments such as cross currency swaps. They have foreign operations wherein net assets are exposed to foreign currency translation risk when consolidated into the Group financial statements. Through borrowings denominated in relevant foreign currencies, a proportion of the currency exposure arising from the net assets of the foreign operation group is managed (Financial Statements: Notes to the Financial Statement, 2006). III. Remuneration a. Remuneration Policy The remuneration package for Executive Directors as well as the members of the Chief Executive’s Committee is determined by the Remuneration Committee. In order to attract and retain high quality executives, induce loyalty and motivate them to achieve a high level of corporate performance in line with the best interest of the stakeholders, while not being excessive, the package is designed. The remuneration policy is continuously set by the executive to provide base salary at around the median level of the comparator group, while providing the Executive Directors and Chief Executive’s Committee members with the capacity to earn upper quartile total compensation on achievement of superior business performance. In addition to that, when setting remuneration for the Executive Directors, the remuneration Committee has the discretion to consider corporate performance of environmental, social and governance issues (Business Review: Directors’ Remuneration Report, 2008). b. Individual Performance Remuneration policy combines short term and long term rewards which focus on and significantly weighted towards the performance related elements in which, individual, functional as well as corporate performance are taken into account. The main components of this, are base salary, annual cash bonus, share matching scheme, long term incentive plan as well as pension benefits(“Statutory Report: Director’s Remuneration Report,” 2006). c. Basic Salary The remuneration Committee, review and determine, annually, the base salary, followed by the detailed consideration of a lot of factors which include individual responsibilities, performance and external market data and it is set within a range around the market median of the comparator group to be able to reflect the experience, responsibility, effectiveness as well as market value of the relevant executive. The comparator group of companies chosen remains the FTSE 50 excluding companies in the Financial as well as Pharmaceutical sectors. Base salary is the only element of the package used to determine pensionable earnings (“Statutory Report: Director’s Remuneration Report,” 2006). d. Bonus Schemes The potential maximum bonus for the financial year which ended September 30, 2007 was 100% of the based salary for the Chief Executive as well as Financial Director and 75% for other Executive Directors. In addition to that, any bonuses earned up to 100% of the base salary for the Chief executive as well as Finance director and 75% for other Executive Directors will be paid in cash and be eligible for investment into the Share Matching Scheme. Any bonus which is payable in excess of this level will be paid in shares wherein the Director will be required to retain for a minimum of three years. These Shares will not be eligible for investment in the Share Matching Scheme (Business Review: Director’s Remuneration Report, 2008). e. Share Options An executive share option scheme is not operated by the company but, the Executive Directors along with employees of the company as well as participating subsidiaries of the group are eligible to participate in Imperial Tobacco Group PLC savings-related Sharesave Plan wherein options are granted at 20% discount to closing mid-market price of an Imperial Tobacco Group PLC Ordinary Share on London Stock Exchange to participants who have contracted to save up to £250 per month over a period of 3-5 years, on the day prior to invitation (“Statutory Report: Director’s Remuneration Report,” 2006). f. Long Term Incentives Under the Long Term Incentive Plan, annual awards to Executive Directors as well as other senior management are made which is vested three years after grant. Over a three year performance period, these are subjected to satisfaction of performance criteria. Moreover, all grants are at the discretion of the Remuneration Committee and to receive any grants, no employees has a right. For all Directors as well as at lower level for other senior management, awards which are granted prior to November 2005 were equal to 75% of basic salary. In 2004, following a comprehensive remuneration review and subsequent shareholder approval at 2005 AGM, awards which are made in November 2005 were equal to 200% of the basic salary for the Chief Executive, 150% for Finance Director and 100% for the Other Executive Directors with awards at lower level for other senior management (“Statutory Report: Director’s Remuneration Report,” 2006). 13. Annual reports & Accounts This year has been a good year for Imperial Tobacco. There is observable growth which was acquired through organic developments in new as well as existing markets. Imperial Tobacco had focused on costs and effective management of the cash which was generated and this successful combination has delivered an increase in adjusted earnings per share of 12 % to 136.7 pence. Moreover, the basic earnings per share was 134.3 pence and the Board recommends a final dividend of 48.5 pence per share, bringing the total dividend for the year to 69.5 pence, up to 12 % on 2006 (Annual Report And Accounts 2007: Chairman’s Statement, 2008). 14. New Companies Act Tobacco Damages Recovery Act was adopted on July 28, 1997 by British Columbia (B.C.) Legislature with all party support and in 1998, the act was amended and renamed as the Tobacco Damages and Health Care Costs Recovery Act. On November 12, 1998, the Act was proclaimed into force wherein the B.C. government filed is medicare cost recovery lawsuit in B.C. Supreme Court. A constitutional challenge to the Act was filed by tobacco companies in B.C. Supreme Court. B.C. Supreme Court, on February 21, 2000, rules that the Act, on the grounds of extraterritoriality, is unconstitutional. That same year, July 6, B.C. Legislature amended the Act to respond to the court judgement. The amended Tobacco Damages and Health Care Cost Recovery Act was proclaimed into force on January 24, 2001. In B.C. Supreme Court, the B.C. government again files its medicare cost recovery lawsuit. A new constitutional challenge to the amended Act was filed by tobacco companies in the Supreme Court. The Supreme Court Rules, on June 5, 2003, that the amended Act on the grounds of extraterritoriality is unconstitutional. The Court of Appeal reversed the lower court and unanimously rules, on May 20, 2004, that the amended Act is fully constitutional. Supreme Court of Canada hears on June 8, 2005, oral arguments in an appeal brought by tobacco industry. In arguing that the Act is valid, eight provinces joined B.C and on September 29, 2005, supreme court of Canada judgement was rendered (Backgrounder- Imperial Tobacco Canada Limited et al. v. British Columbia Supreme Court of Canada Judgment,” 2005). References Annual Report and Accounts 2007: Chairman’s Statement.www.imperial-tobacco.com. 2008. Backgrounder- Imperial Tobacco Canada Limited et al. v. British Columbia Supreme Court of Canada Judgment.” Canadian Cancer Society. 29 September 2005. Board of Directors. www.imperial-tobacco.com. retrieved 13 January 2008. Building on our Success. Imperial Tobacco Group PLC Annual Report and Accounts 2006. England: Butler and Tanner. Business Review: Directors’ Remuneration Report. Retrieved on 5 January 2008. Debt Information. Annual Report 2006. Imperial Tobacco Group PLC. 2008 http://www.imperial-tobacco.com/index.asp?page=70 Financial Statements: Notes to the Financial Statement. Annual Report 2006. Imperial Tobacco Group PLC. 2006. www.imperial-tobacco.com. Hitachi. 2006. Future-Proof' SAN Provides Superior, Cost Effective Alternative to SSA for Imperial Tobacco Australia. Techrepublic. Imperial Tobacco Group PLC: CR in the Product Value Chain. Responsibility Review 2006. http://www.imperial-tobacco.com/files/environment/cr2006/index.asp?pageid=32. Imperial Tobacco Group PLC Preliminary Results for the 12 Months Ended 30 September 2003). http://www.imperial-tobacco.com/files/financial/results/pr2003/prelim03.pdf. Progress: Corporate Responsibility Review 2003. Imperial Tobacco.com. retrieved on 24 January 2008. Statutory Report: Corporate Governance Report. Annual Report 2006. Imperial Tobacco Group PLC. http://www.imperial-tobacco.com/files/financial/reports/ar2006/index.asp?pageid=37 Statutory Report: Director’s Remuneration Report. Annual Report 2006. Imperial Tobacco Group PLC. www.imperial-tobacco.com. 2006. Tobacco Industry and the Health Risks of Smoking (TB 13) the Way Forward. Memorandum by Imperial Tobacco Group PLC. Parliamentary. 28 February, 2000. Read More