Corporate Governance Principles of National Grid Transco - Essay Example

NATIONAL GRID TRANSCO Contents Introduction 3 Discussion 4 Theories of corporate governance 4 Board of director’s composition 6 Compliance with expected practice 8 Audit Report 10 Conclusion 12 References 14 Introduction This study shall encompass different aspects related to corporate governance. There are certain requirements and expectations of corporate governance that needs to be addressed appropriately by any organization. Corporate governance basically means relations, processes and mechanisms through which corporations are directed and controlled. The governance structure mainly helps to identify the wide array of distribution of responsibilities and rights amongst team members. In an organization the major participants are board of directors, creditors, managers, shareholders, regulators, auditors and any other stakeholder. This framework even encompasses procedures and rules which are undertaken while framing corporate affair decision. It highlights the process by means of which are objectives are set and achieved in terms of market, social and regulatory environment. Governance mechanism takes into consideration different elements such as monitoring decisions, actions and policies of agents as well as corporations. On basis of this framework, actions undertaken by management are closely monitored in order to eliminate any form of agency risks. However contemporary interest of this concept is related to mitigating conflicting interests amongst stakeholders. There are various approaches implemented to prevent such conflicts such as well defined processes, institutions, laws, policies and customs. An important component of corporate governance is extent and nature of corporate accountability. In this study corporate governance framework of a particular firm will be thoroughly analyzed known as National Grid Transco. It is a multinational company of electricity and gas utility, and has its headquarters in London. The firm has its principal operations in North-eastern United States and United Kingdom. National Grid Plc., was founded in 1990 and in current decade has a market capitalization of £31.4 billion. The company has gone through a series of mergers and acquisitions but the most important merger took place in 2002 where Transco’s owner Lattice Group Plc., merged with National Grid Group. This in turn resulted into a new organization which came to be known as National Grid Transco Plc. In this study corporate governance expectations will be analyzed on the basis of practices undertaken by National Grid Transco. Discussion Theories of corporate governance There are different theoretical frameworks related to corporate governance but some amongst them holds great deal of significance in modern era. Finance or principal-agent model is a well known corporate governance framework. It states that residual voting rights of shareholders will commit towards value maximization of corporate resources. This particular model states that agency costs increases when there is a separation of control and ownership, since both groups are inclined towards maximizing their respective utilities (IRRC, 2009). The agent’s divergence can only be prevented by establishing incentives in terms of stock option or aligning agent’s action with principal. Bonding costs also needs to be taken into consideration by principal. This means that agent has to be paid by principal so as to ensure no harmful actions is taken by agent or serves as compensation. Though all possible costs are incurred in order to resolve differences between agent and principal but there is bound to be some kind of divergence. This kind of divergence is related to principal’s welfare maximization and agent’s decision. It is also termed as residual loss and can be addressed properly by eradicating any form of restrictions (Singh, 2009). The restrictions on corporate control market can be removed so as to eliminate unsatisfactory performance of management. On the other hand, the myopic market model states that capital failure will result if excessive concern is shown towards short term gains. It even outlines that shareholder welfare maximization is not similar to share price maximization since long term expenditures are often undervalued by market system. However long-term investment plays a major role in enhancing shareholder welfare. Corporate structure’s myopic nature forces managers to be focused on short term decision making. This model believes in creating such an environment where managers and shareholders are motivated in order to share long term performance (Crowther and Seifi, 2004). It is believed that managers and shareholders establish long term interest with the support of relationship investors. These investors are the ones who are bounded within long term position. On the contrary increasing exit cost of shareholders will result into poor corporate governance. Market efficiency will also be impeded through this approach resulting into prevention of takeover attempts. This in turn will even serve as a mechanism to eliminate inefficient managers from the system. The stakeholder model can be stated as the most convenient framework in terms of analyzing operations of corporate governance. It is considered to be a big challenge for the principal agent model. The model clearly states that purpose of an organization should be elaborated in comparison to shareholder welfare maximization. Corporate governance as a concept must refer to institutional design so as to enforce managers to internalize welfare of shareholders (Larcker and Tayan, 2011). The other groups who are focused towards long term success of a firm needs to be incorporated when objective function is been set. These important stakeholders are customers, suppliers and employees. Supporters of stakeholder model believe that it is a framework which is socially efficient and more equitable. The four models described mainly states the various failures associated with corporate governance. All these factors need to be taken into consideration so as to meet set expectations of corporate governance. Board of director’s composition National Grid Transco has been able to sustain its market position over the years due to its innovative strategy and appropriate execution. The firm is well aware about the fact that talented employees have to be retained within the system in order to achieve desired goals. Successful delivery of the company’s strategy is highly dependent on attracting and retaining talented people in the firm. Board members of National Grid Transco take the first step in context of creating a pool of talented individuals. It comprises of a wide range of backgrounds and expertise so as to ensure there is a good balance of knowledge, skills and expertise. A high performing board is not just related to how efficiently directors work in order to show their experience or skills but it is also about dynamics and behaviours. The board of National Grid Transco has been at a transition state recently. They are thinking about developing a diverse and inclusive culture that encourages dynamics and enhances positive behaviour in all boardroom interactions. The opportunity of board refresh has also been explored significantly so as to broaden the range of background and knowledge of board members. Diversity is the prime focus of board members since they believe it to be the best medium for acquiring wide set of creative ideas. The base of appropriate skills is correlated with thinking style diversity (Monks and Minow, 2006). Constructive challenge and lively debate is equally encouraged by the board members. National Grid Transco defines its board room to be a place where each and every question is equally valued, all forms of debates are encouraged and non-executive directors irrespective of their tenure, expertise or background must possess an equal voice. The Chairman of the firm is Sir Peter Gershon. Current board membership encompasses a total of three female directors. A board diversity policy has been formally announced in 2013. Executive directors with the board agreement can experience of other firm’s operations, boardroom dynamics and governance frameworks. Chairman is solely responsible for management and leadership of Board and governance. While promoting a culture of debate and openness, director’s effective contribution is highly facilitated and constructive relations are established between non-executive and executive directors (Idowu and Caliyurt, 2014). On the other hand, Chief Executive of the firm is responsible for day to day management and executive leadership. With the support of Executive Committee Leadership one can show commitment towards financial, safety and operational performance (Nordberg, 2010). Senior Independent director of the firm serves as a medium of communication for other directors. This director is also held responsible for conveying required information to shareholders. Non-executive directors are independent of management and comprise of diverse experience and skills. These factors are highly essential for any form of boardroom debate or constructive challenge (Rezaee, 2008). They undertake the role of developing proposal strategy and form nominations, SEH, audit and remuneration committee. To be more precise board members are responsible for some specific tasks and this in turn gives rise to wide array of committees. The board is responsible to closely monitor operations being performed within an organization. It even helps to determine governance structure and strategic direction that facilitates achieving long term success and deliver shareholder value. The different committee’s within the organization has different set of duties and responsibilities. Audit committee is responsible for financial reporting and analyzing various external risks (OECD, 2014). On the other hand, finance committee is inclined towards setting grants authority and policy in order to make financing decisions. Nominations committee is responsible for composition and structure of board along with succession planning. Management committee of National Grid Transco ensures that expertise and time is allocated in appropriate way. These committees work in coordination with governance framework in order to complete tasks efficiently and achieve desirable goals. Compliance with expected practice National Grid Plc. was founded in 1990 and since then it has outperformed in the industry. The company believes that vision sets out aspirations and intentions at highest level. On the other hand, strategic objectives create an outline needed to achieve set vision. The vision of the company is to be the energy today and help people to meet their needs related to energy tomorrow. Strategy of the firm is to be a leader in operation and development of safe, sustainable and reliable energy infrastructure. This helps to meet needs of communities and customers and generate value for wide base of investors (Crane and Matten, 2005). There are different elements encompassed within strategy formulation such as delivering operational excellence, engaging more people, stimulating innovation, embedding sustainability, engaging externally and driving growth. The major area of concern for management of National Grid Transco is to deliver expected quality product and services. An enthusiastic team is required for contributing innovative ideas and formulating strategies. The requirements of corporate governance are well applied by the firm. This is majorly done through enabling flexibility within the system and then dividing tasks amongst expert professionals (Carpenter and Sanders, 2009). Skills and experience are possessed by the board of members and they are presently focusing on diverse knowledge base and culture. In this organization it is believed that superior performance can only be achieved when team members work in collaboration with top authority. However this trend is firstly started within board members whereby all members irrespective of their tenure or experience contribute their innovative ideas. This in turn helps management to develop a wider base of ideas and knowledge. Non-executive directors are even posed with challenges as they need to focus on developing proposals apart from finance sanction. It can be stated that through this mechanism the firm is being able to incorporate more personnel in strategic decision making. Apart from the tasks undertaken by board there are series of committees who are responsible for performing certain tasks (Tricker and Tricker, 2012). The main aim of corporate governance structure is to maximize shareholder value. It is not only concerned with shareholders but even needs to focus on stakeholder’s interest or demands. Audit committee forms one of the most important parts of National Grid Transco’s corporate governance. They are responsible for financial reporting so as to ensure that appropriate funds are been allocated for task completion and desirable outcomes are achieved. Audit committee even adopts best practices so as to facilitate proper internal control and proper assessment of various risks. Finance committee also consists of some members from board and panel of experts who are responsible for granting authority and setting policy (Tricker and Tricker, 2014). All these operations are associated with finance decisions. These duties comprise of undertaking finance related decision, policy for foreign exchange transactions and hedging, credit exposure, indemnities and guarantees. This committee also approves tax, insurance strategy, treasury, pensions, etc., and further convey message to the board. Nominations Committee plays a critical role since they form the composition or structure of the board. Various managerial position descriptions are formed by this committee and they are held responsible for placing right candidate at right position (Henry, 2008). Risk management is done in collaboration with the board so as to implement appropriate managerial policy. In this function risk profiles are carefully analyzed and risk management process is closely monitored within the group. Safety, environment and health functions are all about developing policy recommendations for the board of members. The actions are taken in such a manner that ethical code is maintained and ethical behaviour is promoted. These operations are performed in a way that it holds compliance with regulatory and external legal requirements. Their business practice is well aligned with organizational goal and tasks have been simplified by dividing into smaller sections. These subdivided tasks are in turn performed by respective committee members. Audit Report The audit report of National Grid Transco clearly states that there are certain issues identified in the recent financial statements. Statement of Director’s responsibilities highlights some key tasks which need to be performed by top management. The directors are responsible for preparing well structured financial statements and giving it a fair view. Auditors on the other hand have responsibility to express their opinion regarding financial statements in relation to International Standards on Auditing. An audit basically involves obtaining evidence about disclosures and amounts in financial statements (Melis, 2005). It is major duty of auditing to ensure that financial statements formed are free from any kind of misstatement which is usually caused either due to error or fraud. This assurance can only be given when it is determined whether accounting policies is aligned with company’s and group’s circumstances. These policies have to be consistently followed and disclosed as and when required (Dicksee, 2009). On the other hand, adoption of these accounting policies states the reason behind financial estimates made by directors and overall financial statement presentation. There have been some precise opinions made by auditors on financial statements of National Grid Transco (National Grid, 2013). They state that financial statements portray a clear and fair view of company’s affairs and Group’s state. Until cash flow and group’s profit ended in the current financial year the firm is witnessed to obey ethical code of conduct. The consolidated financial statements of the company are prepared while being in accordance with IFRS. Financial statements of National Grid are structured in a way that it is well aligned with Generally Accepted Accounting Practice of United Kingdom. Requirements of Company’s Act have also been kept into consideration while structuring financial statements. Since all the standards have been appropriately maintained, it can be stated that no unethical practice is encouraged by board of members. The auditor’s opinion has also been given on other aspect related to financial statements (Griffiths, 2012). Remuneration report has been audited appropriately and is aligned with norms or regulations of Company’s Act. The information highlighted in the Director’s Report regarding preparation of financial reports is true since all accounting standards have been maintained. National Grid encompasses wide set of operations and its consolidated statements do not comprise of any misleading details. This indicates that each and every financial detail is clearly reviewed by top management before it is passed on to auditors. It is a positive factor since it eliminates the scope of error and outlines a clear picture. The company in all respect is efficient in internal control (Melis, 2005). Management is responsible for financial statement preparation and financial reporting. Audits usually provide a basis on which further strategy can be effectively formulated. The audit report of National Grid Transco clearly states that accounting policies form the major area of concern for its business operations. There is no such fraudulent symbol or human error witnessed in these consolidated statements. Basically it is observed that those firms who maintain accounting standards are able to deliver required quality standard to target market. On a broader context it can be stated that these ethical practices has governed the overall behaviour of management and other stakeholders. A firm’s internal control in terms of financial reporting states reliability of financial statement for any such external purposes (Von Hauff and Kleine, 2006). Procedure and policies of internal control indicates maintaining records and reflecting dispositions or transactions of company’s assets. Internal control even provides a form of assurance due to which financial statements cannot be accessed by any other external agent. This auditing process even serves as a tool for timely detection of any kind of acquisition which is unauthorized (Chambers and Rand, 2010). The auditing report even outlines the process which has been undertaken by the firm in order to achieve desired goals or objectives. In overall context well structured financial statements of the firm clearly states that business ethics has been well maintained throughout the system. Conclusion This study has revealed various dimensions related to corporate governance structure of a firm. It is clearly evident that business goals can only be achieved when top management adopts the best possible practice. National Grid Transco has a vision of meeting energy needs of their customers. There are wide set of activities that need to be executed properly by the board in order to achieve set vision. The firm has been operating in the industry from past many years and during its journey it has never compromised on its quality. Maintaining high quality standards is essential as it helps to drive in customer attention. The major focus of the firm is to incorporate diverse cultural members and explore on wide base of knowledge. Board of members of this firm consists of diverse background members and this contributes towards strategic decision making. In complex decision making process individuals from different backgrounds can effectively contribute towards long term success. Corporate governance structure of this firm clearly portrays broad range of tasks which is divided under small units. These units are regarded as committees and each of these units comprise of board members. All these committees work in collaboration with management so as to deliver desirable outcomes. The audit report clearly reveals that all the financial statements which have been prepared are aligned with accounting standards or policies. There is no fraudulent symbol involved in the consolidated statements and this outlines the clarity or quality maintained while preparing these statements. National Grid Transco through its wide range of operations has been able to meet expectations of corporate governance. References Carpenter, M., and Sanders, W. G., 2009. Strategic management: a dynamic perspective concepts and cases (second ed.). Upper Saddle River, NJ: Prentice-Hall. Chambers, A., and Rand, G., 2010. Operational auditing handbook: auditing business and it processes. New Jersey: John Wiley & Sons. Crane, A., and Matten, D. 2005. Business Ethics: A European Perspective. Oxford: Oxford University Press. Crowther, D., and Seifi, S., 2004. Corporate governance and international business. London: Bookboon. Dicksee, L. R., 2009. Auditing: a practical manual for auditors. 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