Corporate Governance and Accountability at Marks and Spencer - Case Study Example

Corporate governance and accountability BY YOU YOUR SCHOOL INFO HERE HERE Corporate governance and accountability Introduction The modern UK corporate governance regulations and frameworks for acceptable governance behaviours are founded on the Anglo-American model of corporate governance. This model entails many different ideologies with the first being a single-tier system of governance where companies have only one Board inclusive of non-executive directors and internal executives directly involved with corporate activity and operations. By having internal and external directors, it ensures a more non-biased and balanced approach to governance. Internal Board members, referred to as insiders, have knowledge of corporate strategy and operational components as well as access to important corporate data (i.e. financial data and market conditions) which gives Board members a realistic perspective of the needs of the corporation that influence governance tactics. External Board members in the single tier system are more impartial and unprejudiced, hence providing more fair-minded and detached corporate oversight. Governance in the UK is founded on the notion of protectionism in which a variety of constituencies, known as stakeholders, are protected under legislation which establishes the specific ethical expectations required for the aforesaid protectionism. This essay determines, based on the current regulatory framework for governance in the United Kingdom, whether the interests of shareholders or a broader segment of stakeholders are primarily the focus of protectionism. The essay further describes the governance policies of Marks and Spencer, a leading retail organisation in the UK, to determine whether the interests of shareholders or a wider group of stakeholders are the primary entity deserving of protectionism at this company. Shareholder protectionism or stakeholder security? The UK-adopted Anglo-American corporate governance model is founded on the values and frameworks of a free market economy and capitalistic corporate objectives. The free market system is founded on ensuring that factors of industry, production and trade maintain control by private ownership and where limited government influence allows for profitability to be a primary objective of corporate behaviour and strategy (Durlauf and Blume 2008). Free market economies ensure that supply and demand are insulated and segregated from government regulatory powers in which government cannot set legislation controlling what organisations are allowed to enter established competitive markets, where government cannot establish price controls in production output, and volume of output (including distribution) cannot be regulated by government representatives (Hacker and Pierson 2010). This serves as the foundation for the Anglo-American model of governance which gives considerably higher levels of control over governance and development of business strategy without the imposition of government control systems. Under the UK model of corporate governance, there is considerable liberalisation and self-sufficiency offered to businesses under free market economy expectations and values. UK governance is considerate, primarily, of the concept of duty of care over the governance practices of the corporation with regulatory expectations for transparency and trustworthy reporting of financial conditions so as to improve and maximise the wealth of shareholder. The actors involved in UK corporate governance include, primarily, the Board of Directors, corporate management team members and shareholders who hold common and preferred stock in the organisation (EWMI 2009). In this system of governance, the Board members and executives of the corporation are considered to be fiduciaries bounded by the duty of care to protect the interest of shareholders. Fiduciaries have a legal relationship or one founded on ethical expectations with two or more shareholder groups in which the corporate governance team is granted absolute governorship over the economic affairs of another party (Conaglen 2005). Under the legitimate legal definition of the fiduciary responsibility, fiduciaries should not ever be placing their own personal or corporate interests over that of the person who is owed the fiduciary duty (US Legal 2013). It is entrusted, through legislation and ethical codes of conduct, that governance members and executives ensure protectionism for shareholders in relation to control and oversight of financial matters related to investment in the corporation. Under English tort law, when individuals own another party duty of care, legalities are established that ensure a second investing party does not suffer unwarranted or unnecessary losses or personal harm (Bagshaw and McBride 2008; Steele 2007). The House of Lords established what is now referred to as the neighbour principle which establishes the foundation and criteria for negligence under duty of care legislation (Elliott and Quinn 2013). The fundamentals of English tort law provide the foundation for UK governance codes and regulatory frameworks that establish the punishment and penalties for breach of duty of care as fiduciaries for shareholders. Hence, it should be recognised that the primary goal of UK corporate governance activities are to satisfy the shareholder rather than the broader group of stakeholders that support or have a vested interest in corporate functioning and profitability. Even the United Kingdom’s Companies Act 2006 suggests that the primary governance obligations to the organisation are that of the shareholders. Under Schedule 15 of the Companies Act, the legislation states: “that a person on whom a requirement has been imposed under section 89L (power to suspend or prohibit trading of securities in case of infringement of applicable transparency obligation), has contravened that requirement, it may impose on the person a penalty of such amount as it considers appropriate.” (Parliament of the United Kingdom 2006, p.693). This provision in the Companies Act specifically enforces rights and obligations of appropriate authorities to impose penalties and criminal charges against those involved with the securities market, including executives and Board members who are directly responsible for securities trading as a means of procuring capital through common and preferred stock issuances. There are no provisions in the Companies Act which specifically identify the protectionist rights and obligations of fiduciary leadership within the corporation for a broader group of stakeholders, which indicates that shareholder protections and safeguarding dictate the essence and foundation of corporate governance in the country. Today, many of the existing corporate codes of conduct for governance behaviours are founded on the principles of the U.S.-based Sarbanes-Oxley Act of 2002. This Act is being adopted by the UK government and the EU government, again based on free market economy ideologies. This Act establishes that the Chief Executive Officer and Chief Financial Officer make public statements that attest to the reliability and trustworthiness of publicised financial statements and ensures new legislative policies that are designed to protect shareholders from instances of both breach of duty obligations as fiduciary agents as well as proven unethical behaviours related to financial reporting and evaluation (USGPO 2002). The Sarbanes-Oxley Act of 2002, which has had many of its underpinning principles adopted by contemporary UK corporate governance regulations, establish only controls and penalties to executive leadership and Board members as it pertains to shareholder interests and not a wider group of stakeholders. Should UK companies be governed this way? It is absolutely appropriate for UK companies to have a focus on, first and foremost, ensuring protection for shareholders rather than a broader group of stakeholders. Shareholders provide the necessary capital for expansion and business improvement through the purchase of securities available in the UK capital markets. Without their support and investment, companies would be forced to rely on traditional lending practices in the financial industry (i.e. banking) which is, today, an inconsistent and unreliable method of procuring necessary financial capital. Hence, to deceive or otherwise defraud these investors could jeopardise the longevity and competitive position of major corporations in the country such as in the well-known case of Enron where these activities eventually bankrupted the organisation. Though stakeholder groups have somewhat of a vested interest in the activities of the corporation, it is shareholders that maintain the most influence and sponsorship that guarantees corporate profitability success. This is supported by the dynamics and expectations of a free market economy which provides considerable autonomy to corporate leaders as it pertains to the stewardship of the company. In July of 2010, the Financial Reporting Council of the UK established the foundations of what is now referred to as the UK Stewardship Code, a section of the UK Corporate Governance Code, which details the obligations of corporate leaders to sustain the needs of investors. It sets out eight different principles of stewardship to guarantee best practice as it pertains to the relationship between investors and the corporation (Wilberg 2011). Again, in order to ensure longevity and profitability of the corporation, which does maintain some implications to a broader set of stakeholders, it is necessary for corporate leadership to focus primarily on shareholder protectionism as a primary objective rather than focusing on stakeholder interests. Wider groups of stakeholders gain advantage when shareholder interests are secured, not the other way around. Hence, it is highly suitable to govern corporations in this fashion with shareholder interests being the fundamental obligations related to governance and fiduciary stewardship. Specific governance mechanisms – Marks and Spencer Marks and Spencer does highlight its corporate governance policies as it pertains to shareholders and stakeholders, which is different than the corporatism view of governance obligations in the UK. The company indicates the specific, recurring discussion that occurs at the Board level that are focused not only on shareholder interests, but also internal employees and customers who serve as stakeholders in the company. The 2013 Annual Report for Marks and Spencer indicate that the Board regularly discusses opportunities to ensure fair and respectful treatment of customers (Marks and Spencer 2013). The company indicates that the Board and executives ensure that product labelling and advertising comply with ethical standards and trustworthiness with clear and concise communications strategy development to ensure accuracy and esteem for important customer stakeholder segments. The governance code of conduct at Marks and Spencer also indicates that employees are a fundamental part of governance policy, with auditing practices ensuring compliance to Equal Opportunities Laws, treating employees with respect and dignity, and ensuring that bias is removed in all dimensions of employment practice (Marks and Spencer 2012). To ensure that these activities are part of the governance model, the company utilises internal and external auditors to ensure impartiality and lack of bias that could corrupt examination and evaluation of governance policy related to stakeholders as well as shareholder interests. This is aligned with the Anglo-American model of governance adopted by most UK corporations and the government as a means of ensuring balanced corporate examinations and assessments. However, the company does indicate that the primary objective and responsibilities of directors is to ensure that management strategies of the company are designed to satisfy shareholders (Marks and Spencer 2014). The company acknowledges that this set of values pertaining to primarily ensuring shareholder interests are protected is founded on over 250 years of case law that is founded in values from the 18th Century (Marks and Spencer 2014). This establishes the most paramount duties and obligations of the directors of the company which are aligned with established tort law that guides the concept of duty of care as fiduciary agents for shareholders. The company introduces its acknowledgement and compliance to the Companies Act 2006 and common law in the country that says the first duty of business leadership is to ensure that the company is successful, hence a duty to the company primarily (Marks and Spencer 2014). This puts emphasis on shareholders who provide the most capital infusions and support for the organisation. Though the business will absolutely consider the protectionism of other stakeholders, based on established legal principles in the UK, the company would allocate the majority of its labour and capital expenditures into shareholder protectionism as a first duty to ensuring profit and longevity of the business first and foremost. Therefore, the company values the provisions laid out in the Companies Act 2006 about maintaining actions, in good faith, that are most likely to secure success of the company highlighted in s172 of the Act. This gives corporate leadership legally-supported autonomy and discretion to establish appropriate mechanisms that lead to the aforementioned end of company and shareholder security. For instance, one activity to guarantee a higher return on shareholder investment is the company’s recent share buyback program. The objective as a director obligation was to “improve shareholder value holistically to improve balance sheet efficiency and reduce the costs of capital” (Marks and Spencer, 2014, p.1). Having fewer shares on the market provides this value to shareholders whilst securing better financial performance; a determination made through Board leadership and governance strategies. Hence, it should be recognised that Marks and Spencer is considerate, primarily, of the financial situation of the firm that is directly related to shareholder interests and not stakeholders of the firm. Governance codes of conduct, best practices, and actions are designed to improve shareholder relationships and secure their financial interests in the company as primary objectives and strategies. Even though there are provisions in the company’s code of ethics and governance frameworks, it would be self-defeating to put stakeholder interests ahead of shareholder interests in a business that operates in a capitalistic, free market economy. To do this would be sacrificing the legally-supported rights for the pursuit of profit autonomy and guaranteeing permanence of the business organisation in favour of satisfying ethical concerns from various stakeholder groups that are not mandated by law under free market ideologies. Conclusion As illustrated by research into the UK legal structure for best practices and expectations for quality corporate governance, the interests of shareholders are paramount over satisfying the needs of a wider group of stakeholders. It is absolutely appropriate in the UK economy and in business industry to govern companies in this fashion as to do otherwise could deplete the economic value of corporations and might sacrifice long-term profitability and the ability of the firm to procure important capital. The example of Marks and Spencer illustrate concretely that companies will continue to govern in this fashion with support from legislation that approves and scaffolds such governance policy. References Bagshaw, R. and McBride, N. (2008). Tort law. Longman. Conaglen, M. (2005). The nature and function of fiduciary loyalty, Law Quarterly Review, 121, pp.452-480. Durlauf, S.N. and Blume, L.E. (2008). The new Palgrave dictionary of economics, 2nd edn. Palgrave Macmillan. Elliott, C. and Quinn, F. (2013). English legal system, 14th edn. London: Pearson Education Limited. EWMI. (2009). Three models of corporate governance from developed capital markets, East-West Management Institute. 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