Corporate Governance Practices of Kingfisher Plc - Essay Example

Corporate governance practices of Kingfisher PLC Introduction Kingfisher Plc is a global home improvement merchant with headquarters in the United Kingdom. It is the biggest home improvement merchant group in Europe with over 1000 outlets in eight nations in Europe and in Asia (Kingfisher Plc 2012). The main retail brands of the company are B&Q, Screwfix, Brico Dépôt, Castorama, Koctas and Hornbach. Kingfisher PLC is currently the third-largest retailer in the global market, the leaders being Home Depot followed by Lowe’s (Ramamurti & Hashai 2011, p. 389). The group was established in 1982 in the UK as part of FW Woolworth Company which was later dissolved (Manley 1992, p. 235). It started to expand internationally through the establishment of outlets in foreign countries and through acquiring foreign companies. By 2012, the company had acquired five million square metres of selling space with more than 90,000 employees. Lately, the business serves over six million customers every week and has been generating annual sales amounting to £11 billion (Kingfisher Plc, 2012). Generally, Kingfisher Plc can be said to be successful in its venture. There are various factors that are attributable to the successful performance of any business organisation. One of these is a strong commitment by the organisation’s board to high standards of corporate governance. As FRC (2010, p. 4) notes, corporate governance is key in determining how well a business is able to deliver its strategies and achieve set goals while safe-guarding long-term interests of shareholders and generating value for their investment. In this view, the rationale of this paper is to offer a critical appraisal of the corporate governance operations of Kingfisher Plc to determine whether the company maximises shareholders’ wealth. Evaluation of the corporate governance practices of Kingfisher PLC According to the Kingfisher Plc website (2012), good corporate governance is one of the key drivers for the long-term successful performance the company. Kingfisher Plc is highly compliant to the UK Corporate Governance Code and other sources of principles that guide corporate governance practices. To start with, the Kingfisher Plc board consists of a non-executive chairman, six autonomous non-executive directors and two executive directors. As described in the UK Corporate Governance Code, such a size is sufficient to enable it meet the requirements of the business and of the right composition to ensure that executive views do not dominate the board’s decision making (FRC 2010, p. 11). According to Kingfisher Plc (2011), the board members have an appropriate balance of knowledge, skills and experience which enables them to discharge their responsibilities and duties effectively. The board has put in place a formal, transparent and rigorous procedure for appointing new directors. The appointment is conducted by a nomination committee and is done on merit and against objective criteria. Diversity of the board is also observed. The directors are re-elected annually by the shareholders subject to continued satisfactory performance (FRC 2010, p. 12). The UK Corporate Governance Code requires that the board should consider the autonomy of all non-executive directors annually to determine if they have formed any relationships or circumstances have occurred that may affect their independent judgement (FRC 2010, p. 12). In compliance with this requirement, the board of Kingfisher Plc evaluates the independence of each of the non-executive directors every year and includes the findings in the annual report. According to Kingfisher Plc (2011), the board members allocate sufficient time to their activities to discharge their duties effectively. Directors are rarely absent in the meetings that they are required to attend. The board performs annual evaluations of its performance, its committees and its individual directors. The chairman acts on the results of the evaluation by determining the strengths and weaknesses of the board and the board members and where necessary, seeks resignation of some of the directors and arranges for the appointment of new ones. The board also presents a balanced and understandable assessment of the corporation’s position and prospects. According to Kingfisher PLC (2012), the board has also established and maintained sound internal control and risk management systems. It has put in place a formal and transparent arrangement for the application of corporate reporting and internal control and risk management principles and for maintaining good and appropriate relationships with the corporation’s auditor. In regard to remuneration, the directors are compensated sufficiently enough to motivate them. However, the company avoids paying them more than necessary or to a level that would lead to dissatisfaction of the shareholders (Kingfisher Plc 2011). Unlike the situation in most corporations, Kingfisher Plc engages in constructive dialogue with institutional shareholders to discuss matters relating to remuneration packages of the directors (Mallin 2007, p. 95). Where necessary, the remuneration packages for the directors are revised in conformity with the wishes of investors. Generally, the board of directors of Kingfisher Plc is effective in discharging its responsibilities as required by the standards that guide the conduct and practices of directors. The effective corporate governance system in the company helps in maximising shareholder’s wealth. Theory Corporate governance is based on the agency theory which explains how best the relationship between principals and agents can be tapped to form governance that can help an organisation to realise its goals. Some entrepreneurs accumulate a lot of capital but they do not have enough time or requisite expertise to run their own expertises (Organisation for Economic Co-operation and Development 2011, p. 261; Roche 2009, p. 12). At the same time, there are managers who have an excess of ideas to use that capital effectively. The owners of capital (principals) hand over their enterprises to managers (agents) for control. In this relationship, principals (or shareholders) have a duty to safeguard their investment by selecting and putting in place the most suitable governors (directors) to ensure that an effective governance system is implemented. The agents are then given the responsibility for managing and controlling the enterprise in the most efficient way. As the Organisation for Economic Co-operation and Development (2011, p. 262) explains, all corporations are exposed to agency problems which may ruin their performance if not effectively dealt with. The board of directors’ major role is to develop action plans to deal with these problems in order to ensure that the interests of the principals are safeguarded. A corporation’s board of directors is also accountable to non-shareholder stakeholders that have an interest to see that a corporation is well governed such as customers, partners, suppliers, employees and the surrounding community (Clarke 2007, p. 24). Therefore, the board of directors of Kingfisher PLC is expected to discharge its duties in line with these requirements in order to maximise shareholders’ wealth and to protect the interests of non-shareholder stakeholders. Relationship between performance and corporate governance There is a strong positive correlation between corporate governance and performance in all corporate organisations (Hirschey, John & Makhija 2009, p. 2). A well functioning corporate governance system helps in generating investors’ confidence and goodwill. As Smith (2010, p. 21) explains, good corporate governance helps an organisation to attract investors and to raise funds necessary for the organisation’s strong performance. Good corporate governance focuses on enhancing efficiency and increasing the profitability of an organisation. This helps to increase employment opportunities with better terms of work and to create wealth and other benefits for the shareholders. Transparency, probity and accountability of corporate organisations make stakeholders to accept them as responsible, caring, legitimate and honest wealth creating organs. This helps to enhance the organisational image, market standing and reputation (Smith 2010, p. 22). It also helps to attract local and foreign investors and to assure them that their investment will be well managed and secure and will generate wealth to them. Thus, a corporate organisation with good corporate governance practices is able to attract funding and to shield itself from financial distress. Moreover, such an organisation is able to record successful overall performance over time (Zheng 2007, p. 13). On the contrary, poor corporate governance makes an organization vulnerable to future financial distress in the future. As Frederikslust and Ang (2008, p. 75) explain, a weak corporate framework leads to poor performance of an organisation, risky financing patterns and non-conducive macroeconomic crises. Poor governance leads to loss of investor confidence which results into insufficient funding. Without investment, corporate organisations will stagnate and collapse. Therefore, good corporate governance is crucial to the overall performance of Kingfisher Plc (Frederikslust & Ang 2008, p. 75). Good corporate governance is a key factor in facilitating long-term successful performance of the company. Conclusion In conclusion, effective corporate governance of Kingfisher Plc has been a key factor in facilitating the successful performance of the company and hence it has played a great role in maximising shareholders’ wealth. The conduct and operations of the board are highly compliant to the principles that guide corporate governance practices in listed companies, including the UK Corporate Governance Code. The agency theory clearly explains the principal-agent relationship that exists between shareholders and directors and obligations of each of the parties. As noted, there is a positive relationship between corporate governance practices and the success of a corporate organisation. Recommendation for the company As observed, the board of Kingfisher Plc has discharged its obligations effectively and complies with the laid standards and principles governing the conduct and practices of directors of listed companies. Based on the above analysis, it is essential for the company to work on any loophole that might arise and lead to the board being perceived as not discharging its obligations effectively. References Clarke, T 2007, International corporate governance: A comparative approach, Routledge, London. Frederikslust, R A I V & Ang, J S 2008, Corporate governance and corporate finance: A European perspective, Taylor & Francis, London. Hirschey, M, John, K & Makhija, A K 2009, Corporate governance and firm performance, Emerald Group Publishing, Bingley. Mallin, C A 2007 Corporate Governance. Oxford University Press, Oxford. Manley, W W 1992, The handbook of good business practice: Corporate codes of conduct, Taylor & Francis, London. Organisation for Economic Co-operation and Development (OECD) 2011, Corporate governance board practices: Incentives and governing risks, OECD Publishing, Paris. Ramamurti, R & Hashai, N 2011, The future of foreign direct investment and the multinational enterprise, Emerald Group Publishing, Bingley. Roche, O P 2009, Corporate governance & organization life cycle: The changing role and composition of the board of directors, Cambria Press, New York. Smith, H 2010, ‘Corporate Governance: Status Report,’ viewed 21 December 2012 Zheng, Y 2007, Corporate governance and firm performance, ProQuest, New Jersey. Kingfisher Plc 2011, ‘Annual Report and Accounts 2011/12’ viewed 21 December 2012 FRC 2010, ‘The UK Corporate Governance Code,’ viewed 21 December 2012 Kingfisher Plc 2012, ‘Company overview’, viewed 21 December 2012 Read More