Corporate Profitability in the UK - Research Paper Example

To what extent do corporate structure, governance and strategic-decision making enhance corporate profitability in the UK? BY YOU YOUR SCHOOL INFO HERE DATE HERE To what extent do corporate structure, governance and strategic-decision making enhance corporate profitability in the UK? 1.0 Introduction Corporate governance is defined as processes and systems through which business decision-making is directed and controlled. Governance is inclusive of regulatory frameworks that guide executive-level management activities, the processes by which market evaluations are conducted, and working diligently to ensure proper alignment between managers and the Board of Directors’ imposed and developed strategies (Tricker 2009(a); Tricker 2009(b)). Yet another definition of corporate governance is the development of an appropriate structure by which responsibilities of internal and external stakeholders in the corporation, inclusive of shareholders, directors, auditors and managers are determined and outlined. Governance involves establishing which procedures, policies and rules are relevant for decision-making in business activities (Clarke 2007). Corporate structure is defined as the differing units or departments that are contributory to the success of a company’s mission and objectives. Most of these divisions are represented by Michael Porter’s Value Chain model that are inclusive of accounting, sales and marketing, information technology, human resources, procurement, logistics and service (Slack, Chambers and Johnston 2010). All of these inter-dependent divisions or units are responsible for coordinating joint activities in the pursuit of achievement of an organisation’s ultimate goals. Corporate structure is also considerate of the specific roles within the organisation, inclusive of chief executive officers, management and support employees in relation to how their responsibilities and authorities are structured, such as centralised versus decentralised. Strategic decision-making involves the most paramount initiatives that are undertaken by an organisation to satisfy ownership, such as determining appropriate resource allocation, marketing strategy, and to generally improve competitive performance as responses to changing external conditions (Nag, Hambrick and Chen 2007). Strategic decision-making involves assessing the corporation’s current competitive position, whilst also examining corporate goals, to identify opportunities to improve company performance to ensure longevity of the organisation. Having defined corporate governance, corporate structure and strategic decision-making, the question arises as to what extent these factors serve to enhance corporate profitability for firms in the United Kingdom. Many corporations in the United Kingdom utilise the Anglo-American model of corporate governance, which is a system by which shareholder interests are the primary goal, using ideologies and principles toward this end. It is a system of regulated corporate guidance at the highest levels of authority in which executives and non-executives within the Board of Directors make decisions that alter or improve business activity and performance. Models of governance in the UK are modelled under the doctrines of free market and capitalistic economies. A free market system of this variety is founded on the principles of private ownership of industry, trade and manufacturing whereby these mechanisms are not regulated by government influence (Durlauf and Blume 2008). This economic model ensures that corporations are given much higher levels of autonomy in setting prices on goods and services in which government is restricted in setting legislation and policies to regulate pricing structures (Hacker and Pierson 2010). Free market economies ensure that all factors of supply, demand and production are maintained under the jurisdiction of corporations rather than through government. Decisions made at the governance Board level are typically disseminated downward throughout the corporate structure by which executives and mid-level managers mould strategic decision-making as based on directives and objectives issued by the Board. There is, however, a significant gap in available knowledge literature regarding the extent to which governance, structure and strategic decision-making are able to contribute to profitability for corporations operating in the United Kingdom. It is often expressed in various domains of knowledge that external market conditions, such as consumer behaviour or regional economic status, are primary predictors of profitability (Abimbola 2001). It is even recognized that shareholder confidence in corporate viability, through the capital markets and securities markets, strongly contribute to the economic position of the UK corporation. However, with limited understanding of the role of governance, structure and strategic decision-making (hence internalised activities), it can potentially improve knowledge to recognise the role of the aforementioned internal dynamics toward enhancing profitability. 1.1 Aims and objectives This proposed research study aims to identify whether corporate governance, corporate structure and the methods of strategic decision-making are able to provide superior profitability outcomes for UK firms. The proposed study maintains four distinct objectives: 1. Determine the foundation and ideologies of the UK governance models that drive governance behaviours and strategies. 2. Uncover the potential relationships between the style of corporate structure and how this might contribute or detract from profitability. 3. Examine appropriate case studies of companies that emphasise corporate governance efficiency to determine its potential role in procuring higher profit. 4. Uncover known effective strategic decision-making that has led to real-world firms achieving corporate profitability in the UK. 2.0 Literature Review This section explores the relevant literature describing principles of UK corporate governance, various types of corporate structures relevant in diverse UK corporations, and the conception of strategic decision-making and how this is addressed or considered within a corporate context. 2.1 The UK governance model The paramount objective of maintaining responsible fiduciary duties is defined as a legally-bound relationship occurring between two or more entities in which one party maintains administration and control over financial matters on behalf of another entity (Conaglen 2005). This is a fundamental obligation of governance Board members within the UK corporation. It is the obligation of those with fiduciary duty to ensure that proper care for a second party is adhered to and that the fiduciary does not consider their own motivations and interests ahead of that to which a duty is owed. This is the foundation of the standards imposed by the internationally-adopted legislation in the Sarbanes-Oxley Act which imposes penalties and consequences for fraud liabilities, breach of duty, and ensuring fair and accurate financial reporting to owners of the corporation (USGPO 2002). The UK governance model, which is strongly founded on the Anglo-American model used in North America, places the main obligation of fiduciary duty with the CEO, the CFO and the governance board. Historically, many Board members and executives have been charged with such breach of fiduciary obligations. The CEO, Board and CFO maintain primary liability for ensuring that financial statements delivered to the public are accurate and that legally-mandated accounting standards are complied with. Under relevant legislation designed to outline obligations and responsibilities of Board members and associated, inter-dependent executive leadership, no such laws provide regulation that guarantees that a broader group of stakeholder needs receive equivalent consideration and protection. Many corporations develop their own ethical code of conduct regarding governance activities, however these are left to the autonomy of the corporation and broader stakeholder group interests are not protected by legislation by government representatives that mandate compliance and adherence to their interests (Healy and Palepu 2001). Having an understanding of the UK governance model, how could this ideology and set of obligations potentially contribute to profitability? The House of Lords has developed legal compliance measures that are called the neighbour principle by which the criteria and consequences of negligence for protecting shareholder interests have been established (Elliott and Quinn 2013). English tort law now ensures that Chief Executives, Chief Financial Officers and Board members guarantee accuracy of financial reporting data (which clearly reports on the financial condition of the firm). Many companies seek capital procurement through the securities market (the stock market) in order to raise funding for business expansion and improvement. It is then theoretically necessary for corporate governance to maintain this constant awareness and consideration for the needs of stakeholders to ensure that their stock value is adequate and accurate. In the securities market, it is not difficult for stock values to drop due to lack of confidence in corporate leadership or when legal authorities indicate false financial reporting or other fraudulent activities. Hence, the UK model of governance should theoretically improve profitability simply through truthful accounting and reporting practices and protecting shareholder interests. Additionally, a case study of the UK supermarket chain, Sainsbury’s, is an example where corporate governance activities are the likely catalysts leading to profitability. Sainsbury’s actively publicises its stern commitment to corporate social responsibility as part of its governance ideology (Sainsbury’s 2011). The business has developed a very sophisticated steering group system whereby designated managers and other business representatives work directly with the corporate governance team. Such committees as part of governance philosophy include brand governance, climate change, the Great Place to Work group and even a community steering group (Sainsbury’s 2011). The steering groups were launched in 2001. In February of 2000, the common stock value of Sainsbury’s was £258.33 (Yahoo! Finance 2014). In 2001, the stock climbed to £443.27 (Yahoo! Finance). Today, Sainsbury’s is holding its highest level of market share in the company’s history against main competitors such as Tesco and Morrison’s (De Angelis 2013). Additionally, revenues have increased year on year since 2009. Corporate governance that focuses on more than just the shareholders but with an emphasis on a broader group of stakeholder needs could theoretically be a catalyst for what is driving higher profitability at Sainsbury’s. According to research, there is a growing trend in ethical consumption, whereby consumers punish organisations that do not adhere to moral and ethical behaviour whilst providing rewards to corporations that have high ethical principles and a focus on corporate responsibility (GlobeScan 2009). Supporting this is a study of 5,000 different consumers that returned results showing the 33 percent of participants in the study would pay higher prices for goods or services if they knew the business had high ethical goals and objectives (Grande 2007). Other competitors have witnessed drops in sales volume showing inconsistency and they maintain corporate governance systems that are rather traditional and not necessarily transparent to consumers and other shareholders and stakeholders. This would seem to provide evidence that corporate governance can theoretically be a positive predictor of corporate profitability in the UK especially when utilising stakeholder and shareholder protectionism models with ample PR systems. 2.2 Corporate structure There are many different corporate structures that are considered viable and relevant to UK corporations. Some are decentralised, where decision-making authority moves horizontally and is inclusive of more than executives and Board members, but also lower-level employees. A decentralised structure breaks down the bureaucratic red tape found in autocratic management systems and focuses on developing employees and managers to achieve a sense of social belonging, participation, and autonomy (Armstrong 2007; McShane and Travaglion 2007). Strategies of a decentralised structure provides employees with a higher level of commitment and loyalty to the organisation and management, making employees more motivated and productive (Jing-Zhou, Xiao-Xue and Xia-Qing 2010; Schlosberg 2006). When employees are more committed and dedicated, through fulfilment of their psychological needs, it provides a business with better human capital that often translates into more effective competitiveness and profitability. Once such example can be illustrated with Google, a multinational enterprise. This is a highly decentralised business model that offers employees autonomy with diminished managerial supervision and promotes collaboration (Weber 2007). Google is considered one of the most valuable global brands according to Forbes Magazine and is number 73 on Forbes’ Fortune 500 list for revenue growth. Hence, it would seem that the specific type of corporate structure can contribute to higher levels of profitability. There is also the autocratic corporate structure where managers maintain high levels of controls over employees to ensure compliance to policies and procedures. However, these centralised structures are known to have rigid-thinking management and for subordinates to challenge management decision-making is deemed inappropriate. Toyota is one example of a firm with a very centralised structure where decision-making moves top-down. In recent years, the company has had a plethora of quality issues that have led to excessive recalls (and expensive recalls) that have eroded the company’s reputation (Madslein 2012; Toyota 2012). With little opportunity for shared decision-making and motivational strategies to better engage and dedicate employees, profitability seems to have been affected. Hence, again, it would seem that corporate structure is strongly correlated with profitability, but only in relevancy of the type of structure being utilised at the corporation in the UK. 2.3 Strategic decision-making Strategic decision-making is considerate of financial analyses, product markets, internal cost structures and control systems to ensure that the company is meeting objectives and internal representatives of the corporation are complying with productivity expectations. It also deals with positioning the business competitively to ensure a better market share position. Strategic decision-making attempts to align internal activities with external market conditions in a way that improves holistic business performance. For instance, Porter (2013) identifies potential threats to a business stemming from the external market. One of these is competitive rivalry and the intensity of rivalry between competition in an established market or industry. Many companies in the UK utilise marketing strategies in order to differentiate their products or services from other competition, especially true in industries where products and services are homogenous. One such example is the UK fashion retailer Cos, which operates in a very saturated competitive market with such competitors as Reiss, Marks and Spencer, and Zara (to name only a few). Since many fashion retailing competitors were using pricing as a means to gain more consumer attention, Cos decided to improve its in-store layouts and service modelling to build stronger relationships with consumers as a differentiation strategy at the strategic level. This is not surprising as a strategic decision since Berman and Evans (2009) states that in-store ambient characteristics have a strong influence on consumer perceptions of the company. Cos had been having trouble, prior to this repositioning and marketing strategy, to gain revenue growth and attract markets. After launching this competitive tool, Cos, a company that was concerned about its longevity, is now poised to expand into the United States, Australia and open many new facilities. Cos recognised how to scan the external market, assess consumer behaviour patterns and needs, and develop a relevant model that gained more attention and interest from consumers. Fournier (1998) identifies that fashion buyers are very self-aware and want to build relationships with fashion brands. Cos management used a strategic decision-making model that altered operational strategy which immediately led to revenue production gains. Hence, this shows evidence that strategic decision-making can directly lead to higher levels of profitability for UK corporations. 2.4 Discussion Businesses appear to have considerable autonomy as to whether to ensure stakeholder needs are satisfied under accepted UK corporate governance models. It was shown that shareholder protection and consideration, along with regulatory and compliance frameworks in the country, that profit can be enhanced through a more stable and secure capital market. Coupled with in-depth development of steering committees at the governance level, it would appear to make consumers more interested in selecting the corporation over that of competition under the foundation of ethical consumption; a trend in the UK that dictates buyer behaviours. There is still a gap in literature showing exactly how (and what varieties) of corporate structures provide greater opportunities or hindrances toward the profit model. However, the research evidence seemed to indicate that strategic decision-making is very paramount to achieving higher profit in UK firms, as shown by the example of the retailer Cos. Since strategic decision-making is highly concerned with external business conditions and then attempting to align internal strategies and processes to fit these needs, it would seem that dependency on managerial competency in strategic decision development would be necessary. However, this requires a primary study to verify such an assertion. 3.0 Methodology The study will take a qualitative approach to research, an approach most relevant and valuable when the individual conducting research is not fully confident about the specific variables or criteria that should be measured (Miles, Huberman and Saldana 2013). It is most appropriate when interpretation of attitudes and values are subjective and when objectives demand a detailed and rich description of events (Miles and Huberman 1994). It would be difficult for this proposed study to utilise a quantitative approach, as not all factors involved with governance and executive-level activity can be measured scientifically or statistically. For instance, as identified in the literature review, Cos used strategies aligned with emotional and behavioural attributes of consumers which have a higher contextual set of explanations for why this was deemed the most viable strategic decision for the company. Measuring attitudes and managerial opinion dictates a more theoretical approach to research. With no clear foundation or criteria by which to hypothesise, qualitative research provides opportunities for inference and subjectivity that will be necessary to gauge the plethora of contextual factors related to corporate governance and strategic decision-making that will dictate its potential relation to profitability. The study will adopt a case study approach, which is relevant in the situation where the focus of the research is to answer “how” and “why” questions, “when it is necessary to explore contextual scenarios because there is a belief in their relevancy to the phenomenon being studied, and when there are no clear boundaries between context and phenomenon” (Yin 2003, p.22). Such is the case, as identified by the review of literature, of the drivers that lead to various governance models and strategic decision-making. The research will primarily consult with business journals and corporate reports to identify which organisations have utilised the UK governance model and sustain diverse corporate structures. The researcher will thoroughly examine consequences and outcomes of known and research-supported governance models and strategic decision-making in these organisations. To supplement the research, field data collection will consist of between five and six different semi-structured interviews with either executive or Board representatives from the identified companies achieved through secondary research. The researcher will make face-to-face contact with the identified organisations to gain access to important senior leaders, constructing interview questions focusing on Board control systems, strategic decision-making, corporate code of conducts, and other appropriate inquiries to determine the social, legislative and internal best practices related to governance policy and known outcomes of these policies as it relates to shareholders and stakeholders. Interviews will be scheduled for a time period between 30 and 45 minutes per recruited participant. Data analysis will involve consultation with published information related to organisational psychology and corporate reports to supplement an interpretive analysis of all identified phenomenon gleaned through the case study. Interviews will be transcribed and analysed using a correlational approach to identify whether any recurrent themes or opinions have been offered by respondents. Findings from the interviews, if such correlations are identified, will be charted using appropriate graphs or tables highlighting commonalities from participants. 4.0 Ethics and limitations The only notable ethical consideration in this study is ensuring anonymity for all participants. An informed consent form will be delivered to the recruited participants, indicating anonymity and the fact that there will be no remuneration for agreeing to the interview process. The only limitation of the study is that the researcher, due to capacity and economic considerations, cannot recruit a broader sample of executives and Board members representative of multiple industries. As the literature review, which serves as the underpinning groundwork for this proposed study, has indicated there could be contextual factors other than governance policy and corporate structure that leads to different strategic decision-making models, it would enhance study findings to have a more diversified sample group recruited. However, validity for this study will be enhanced by improving researcher competency in business, psycho-social, and governance theory and strategic decision-making to provide the justification for an interpretative analysis of case study findings. 5.0 Structure of dissertation The chapters of the submitted dissertation will be as follows: 1. Introduction 2. Literature Review 3. Research Methodology 4. Findings 5. Discussion of Findings 6. 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