Conceptual Framework and Corporate Governance, Violation of Code Ethics by Vodafone and Coca-Cola - Case Study Example

Title: ADVANCE ACCOUNTING Subject code: Trimester number: Assignment title: Name: Student number: Word count: 2,507 Executive summary The importance of financial ethics has shown a significant increase from the recent past. The companies use as a tool of competition, safeguard the interest of the shareholders or adhere to the laws and regulations, since to most countries, it is mandatory for the companies to have a framework of the code of ethics and corporate governance. Therefore, the report looks at Coca-Cola and Vodafone in elaborating more financial reporting, corporate governance, code of ethics, and corporate social responsibility of the two companies. Table of Contents Executive summary ii Table of Contents iii Introduction 1 ANALYSIS 2 Conceptual framework and corporate governance 2 Vodafone Group PLC 2 Coca-Cola Company 3 Annual report comparison 4 Vodafone Company 4 Coca-Cola Company 5 SWOT Analysis 5 Strengths 5 Weakness 6 Opportunities 6 Threats 7 ETHICS AND LEGITIMACY THEORY 7 Violation code Ethics by Vodafone 7 Violation of Code of Ethics by Coca-Cola 8 GLOBAL REPORTING INITIATIVE 10 G4 Sustainability reporting violation by Coca-Cola 10 G4 Sustainability reporting violation by Vodafone 11 CONCLUSION AND RECOMMENDATION 11 REFERENCE: 13 Introduction The corporate governance framework of a corporation determines the soundness of company’s financial values. According to Duska and Duska (2003), Sir Adrian Cadbury elaborates corporate governance as; “Corporate Governance is concerned with achieving the balance between economic & social goals and between individual and public goals. The CG framework is there to encourage the efficient use of resources and equally to require stewardship of those resources. The aim is to harmonize the interest of individuals, corporations, and society.” The company is required to establish a strong corporate governance structure by incorporating five principles that include, first, effective leadership that ensures set codes are communicated to all stakeholders. Secondly, presence of a competent management is essential, since they implement the policies efficiently. Thirdly, a diligent monitoring unit that ensures it reduces or mitigates risk associated with the corporation. Fourthly, responsible risk management who are tasked with identification, analysis and reducing or eliminating risk that might deter company from achieving its set objective, and finally ensuring that there are clear accountability and responsibility that entails clarity in financial reporting principles and organizational structure. According to Aragon (2011), ethics is a moral law that controls the action of an individual or group of people. According to accounting perspective, ethics comes in through agency relationship between company stakeholders. The emphasis on corporate governance gained more importance after the collapse of big corporations such as Enron case and Barings Bank that collapsed due to poor governance. The development of G4 for sustainability reporting by global reporting initiative, and legitimacy theory has reduced issues concerning poor governance. The Coca-Cola and Vodafone Company form a common basis for analysis of corporate governance, financial reporting, and code of ethics. ANALYSIS Conceptual framework and corporate governance The figures below elaborate the conceptual framework of the corporate governance of the two companies; Vodafone Group PLC The structure above, number of directors able to vote in a meeting is odd number (13) thus adhering to company law rules on votes to reach a given agreement. Coca-Cola Company The company has four essential elements of corporate governance that include shareholders (owners), independent body (Auditors), oversight and management. Annual report comparison The performance of company net profit is a reflection of the strength of corporate governance, given that other factors are held constant such as fraudulent accounting. The growth of profit entails an increase in market share, improved efficiency, increased innovation and improved public image. The result emanates from the ability of corporate governance to provide effective leadership and appoint capable management to manage shareholder wealth. The table below shows growth in net profit for the two companies to compare effective of corporate governance. Vodafone Company Details 2009 2010 2014 Net Profit £3,080 million £8,618million £5,760million % Growth - 179.8% (33.2%) Vodafone Company recorded increase in its net profit in 2010 by 179.8% in 2009. The increase was attributed to the merger with Hutchison 3G Australia. The corporate governance structure proved to be effective since shareholders realized high dividends and capital gain. During 2014, the company recorded a decline in net profit by 33.2% that was attributed to increased impairment losses (£2,100million) and competition in the telecommunication industry. The drop in revenue can be an indicator of reduced effectiveness of the management in shareholder wealth. Therefore, the matter needs special attention before settling on competition and impairment losses as the cause of the decrease in profits. Coca-Cola Company Details 2010 2011 2012 2013 201 Net Profit 11,809 8,572 9,019 8,584 7,098 % Growth - -27% 5% -5% -17% According to the table above, it is evident that Coca-Cola Company has recorded high level of losses compared Vodafone Company. The only positive growth recorded is in 2012 where their profits grow by 5%. Therefore, responsible bodies should investigate to find out the major cause of the decline in profits despite growing market share. The company management attributes the decrease in profits to increase in expenses, changes in consumer preference and competition. The reliance of accounting reports can mislead the shareholders since it does not give the real and fair value according to societal perspective. In recent past, social accounting has received great importance as a competitive edge for the local and multi-international companies. The reporting incorporates corporate social responsibility reporting, which determines company sustainability that is useful in making long-term investment decisions. SWOT Analysis The two companies shares almost the same SWOT since they are active multi international companies in the global scene. Strengths They are leading brands in the world: According to Forbes Coca-Cola Company ranks 81on most innovative companies and brand is on top 100 globally. On the other hand, Vodafone is ranked 3rd in telecommunication globally. They have economies of scale: Coca-Cola Company operates in more than 200 countries worldwide and produces approximately 52billion of its products is consumed every day. Vodafone operates in 26 countries with more than 55 partnerships serving over 400million customers. The economies of scale enable them to exercise some level of monopoly since they produce at a cheaper cost. They experience high growth: The recent 100% acquisition of Grupo Corporativo Ono by Vodafone shows company rapid growth. On the other hand, Coca-Cola Company has registered 30% growth in market share this year though it brings little impact on net profit due to increase in operation cost. Weakness The violation of human right: Coca-Cola faces scandal on human in Colombia in connection to unions and advocacy of proper working condition. The violation of environment and social livelihood: Vodafone was accused of polluting environment in china by according to report prepared by 34 Chinese environmental groups. On the other hand, Coca-Cola was accused of soil and water pollution in India. Opportunities The innovation: Vodafone has a great opportunity in improving mobile money transfer for example, M-pesa platform in Kenya and Tanzania. The Coca-Cola Company can invest more in rebranding and marketing to counter competition and increase market share. Threats The increased competition: Coca-Cola Company faces high competition from Pepsi, Nestle and other beverage companies. On the other hand, Vodafone faces competition from orange, Deutsche Telekom AG and Telefonica Europe PLC. The Bad publicity: Coca-Cola scandals have tainted brands popularity, which has affected the demand greatly thus decline in profits. Also, Vodafone faces bad publicity from being listed among environmental polluters in china and other regions. ETHICS AND LEGITIMACY THEORY According to legitimacy theory, corporate have an obligation to give back to the society since they enter into a social contract with community (Aragon, 2011). Therefore, businesses are expected not to give only trading profit but also account to economic, social and environmental impact they bring to society. Violation code Ethics by Vodafone According to Clarke (2007), Vodafone went against the code of ethics provided by Mannesmann division. The issues arose in the year 2000 when Vodafone decided to sell off automotive and engineering division of Mannesmann, which had the highest number of employees (90,000), accounting for 70% of employees in the entire organization. Also, the section provided a turnover of 53% for the entire organization. German unions raised concerned that Vodafone had breached promise of avoiding job losses after the takeover. The case provides two scenarios that the company went against its code of ethics that includes selling off productive sector of Mannesmann to its competitor, which jeopardizes living standards. The management is based its decision on libertarianism, which entails putting forth your interest before the interest of other parties (Krenn, 2014). The management and board of directors placed more emphasis on their interest than looking at the effects of their decision to the community depending on the company for livelihood. Also, the management did not act in the best interest of the shareholders thus high possibilities of conflict of interest from management and directors. The division represented 53% of the total turnover, which is very significant in ensuring growth in shareholder wealth and maximization of revenue (Garrett, 2001). The company management and board of director should have used ethical principles based on either Utilitarianism or Deontology system. Utilitarianisms require an individual or a group to make its decision on positive consequence to a greater number of the individual. According to Utilitarianism, management and directors should have taken offer management of Mannesmann and improve its operations for it to increase employment level and increase revenue. The deontology system eliminates issues of self-interest since they acknowledge and respect agency relationship between shareholders and management. Violation of Code of Ethics by Coca-Cola Coca-Cola Company has faced various unethical related issues from THE trade union, government, and activist. The issues include human right abuse and environmental pollution that affects individuals negatively while the company itself is drawing great profits from the same community. According to the Guardian (2014), Coca-Cola was ordered to close Mehdiganj plant due to protest by the community that the plant was causing water shortage within the region and realizing pollutants, which affects society negatively. According to World Bank report, 70% of Indian population depends on agriculture both for domestic and commercial purposes. The accusation raised in India touches four perspectives that includes; first, reduction of the water table in areas within Coca-Cola plant causing water shortage due to deep drilling and use of too much water, Indian ground water board confirmed that Coca-Cola plant caused the water shortage. Secondly, water drawn from deep boreholes drilled by Coca-Cola had strange smell and taste, which is disposed of in rivers and fields of the plant causing soil and water pollution. Thirdly, Coca-Cola Company distributed solid waste in the name of fertilizer to farmers in Plachimada and Mehdiganj region containing lead and cadmium (Berglund& Helander, 2015). Lastly, Indian community protested the presence of pesticides in some of its products as confirmed by government agencies. The product sold in Indian market but the same product cannot qualify to enter US market (Berglund& Helander, 2015). The concern has two perspectives of corporate governance. First, boards failure to put controls in place controls to ensure uniformity in its worldwide production. Secondly, directors’ concentration on expansion and increase in revenue base without consideration on the quality of product delivered to the customer by its subsidiaries and operational impact to society. The company has faced accounting frauds whose extent can be compared to Enron or Worldcom case. First, Coca-Cola failed to disclose fully on its financial performance. The fraud accounted for 2billion US dollars and wrongfully terminated the lawsuit by paying the whistleblower who was then financed director of one of Coca-Cola divisions to drop the case (Day, 2004). Therefore, it is evident that those charged with leadership of the company has failed in providing adequate leadership, efficient management, active monitoring, responsible risk management, and clear accountability and responsibility, thus tainting company reputation in Colombia, India, and other countries that felt discontented on how the company carried its operations. The actions of Coca-Cola Company to Colombia and Indian residence shows that the management based their decisions on libertarianism since it overlooked all the rules and interest of many in discharging their duties. Pollution of water, soil and water shortage affected large population whose 70% depends on agriculture. Also, rules on international human right that advocates for equality and justice was not followed since Colombian company pursued its interest of maximizing profit in expenses of poor working condition and oppression of union leaders advocating for proper working condition. GLOBAL REPORTING INITIATIVE Global Reporting Initiative (GRI) was established as a non-profit making organization whose major aims is to ensure that corporate implement sustainability in their reporting. The initiative enables corporation to incorporate essential non-financial issues that affects going concern of the company (Krenn, 2014). GRI and other bodies such as International Organization for Standardization plays important role in formulating and implementing sustainability reporting framework. The G4 sustainability reporting is the recent framework which is an improvement of G3. The two companies violated the G4 principles in the following ways; G4 Sustainability reporting violation by Coca-Cola Coca-Cola Company has failed significantly in providing sustainability report since it has not looked deeply into issues affecting company operations. The issue of human right violation in Colombia has received concern from various human right activist and institutions, but the company has not issued accepted liability (Roston, 2001). The company has lost supply contract from institutions such as Illinois State University, and other universities who are in support of the initiative to paralyze Coca Cola market share. The company failed to report on impact it has on company profitability and sustainability in their financial report thus failing to adhere to full disclosure principle. According to G4 sustainability reporting, companies are encouraged to balance between economic, social and environmental impacts of their daily operations. But Coca-Cola failed by polluting water and soil, depriving society water and selling contaminated drinks. G4 Sustainability reporting violation by Vodafone Vodafone Company failed to provide full disclosure of the directors rewards after the acquisition of Mannesmann. According to Clarke (2007), directors were paid hefty bonuses that raised concern on whether the bonuses were genuine or a kick back for a successful merger that gave them ability to sell off major divisions to its competitors. The Directors implicated and jailed for their illegal action include Josef who was then a member of the supervisory board; he was imprisoned for two years. Esser got two and half year jail term. On the other hand, former chair of the board was given a three-year jail term. They are required to ensure that management displays a high degree of accountability that they failed to show in the merger, thus setting a bad example to management (Garrett, 2001). The move contravenes G4 sustainability reporting that requires providing full disclosure on impact of any action taken by directors and management to stakeholder. The shareholders are major stakeholders who are affected by the decision. CONCLUSION AND RECOMMENDATION The Global Reporting incentive and G4 sustainability reporting guidelines have played a great role in shaping balance on the multi international appetite for profit and welfare of the society. The adoption has brought in corporate social responsibility as a competitive tool thus boost in improving social, economic and environment elements of the society at large. It is my recommendation that the formulation and implementation of corporate social responsibility threshold should be done at government level to ensure that companies give back to the society. The impact of government participation is evident in India where it requires a company with more than 5billion market capitalization to use 2% of its annual net profit in corporate social responsibility. They are required to carry out activities such as providing social amenities which includes schools, hospital, recreational facilities, clean water and infrastructure. REFERENCE: Aragon, G. (2011). Financial ethics. New York: Oxford University Press. Opening Berglund, H, & Helander, S 2015, 'The Popular Struggle against Coca-Cola in Plachimada, Kerala', Journal Of Developing Societies (Sage Publications Inc.), 31, 2, pp. 281-303, Academic Search Premier, EBSCOhost, viewed 27 December 2015. Clarke, T. (2007). International corporate governance. London: Routledge. 'CONTROVERSIAL COCA-COLA PLANT IN INDIA FORCED TO CLOSE' 2014, Earth Island Journal, 29, 3, p. 11, Academic Search Premier, EBSCOhost, viewed 27 December 2015. Day, S 2004, 'Coke Employees Are Questioned In Fraud Inquiry', New York Times, 31 January, Academic Search Premier, EBSCOhost, viewed 27 December 2015. Duska, R. and Duska, B. (2003). Accounting ethics. Malden, MA: Blackwell Pub. Garrett, CS 2001, 'Towards a New Model of German Capitalism? The Mannesmann--Vodafone Merger and its Implications for the German Economy', German Politics, 10, 3, p. 83, Academic Search Premier, EBSCOhost, viewed 27 December 2015. Krenn, M 2014, 'Corporate Governance in Small Worlds: Accounting for the Social Embeddedness of Corporate Governance Mechanisms', Insights To A Changing World Journal, 2014, 2, pp. 22-38, Academic Search Premier, EBSCOhost, viewed 27 December 2015. McBain, D 2015, 'Is Social Footprinting Relevant to Industrial Ecology?', Journal of Industrial Ecology, June, Academic Search Premier, EBSCOhost, viewed 27 December 2015. Roston, A 2001, 'IT'S THE REAL THING: MURDER. US firms like Coca-Cola are implicated in Colombia's brutality', Nation, 273, 7, pp. 34-38, Academic Search Premier, EBSCOhost, viewed 27 December 2015. The Guardian, (2014). Indian officials order Coca-Cola plant to close for using too much water. [online] the Guardian. Available at: http://www.theguardian.com/environment/2014/jun/18/indian-officals-coca-cola-plant-water-mehdiganj [Accessed 27 Dec. 2015]. Read More