Internal and External Structures of Corporate Governance at Morrisons - Case Study Example

INTERNAL & EXTERNAL STRUCTURES OF CORPORATE GOVERNANCE AT MORRISONS By Part A Corporate governance is the vehicle by which companies are directed and controlled. As such there are internal and external structures of Corporate Governance. Introduction Corporate governance is a system in which corporations are controlled and directed with the intentions of monitoring the actions of the management and directors. It is composed of both internal and external corporate structures and aims at reducing the risks which arise from the corporate officers. Corporate governance is considered as a system which allows companies to be controlled and directed. The objective of corporate governance has traditionally been conceptualized by the principal-agency theory. From a political perspective, corporate governance is often dependent on the consent given by those governed (Fernando, 2009, p 104). Morrisons board comprises five independent, non-Executive Directors who are elected annually at the AGMs. In relation to internal structures of Corporate Governance: 1. Define the role of the Board as a mechanism for directing companies. The board of directors in Morrison’s supermarkets has many roles in ensuring effectiveness in the organisation (Directors, 2010, p 67).  The board helps in providing entrepreneurial leadership and helping the junior management in achieving its objectives.  The Morrison’s board helps in setting up strategies which assist it in keeping good customer relations. It is ranked as the 4th largest chain of supermarkets in the United Kingdom due to the formation of good strategies.  It helps in reviewing management performance  It sets the company’s values and standards  It assists in ensuring that obligations to stakeholders are understood and met In particular, discuss with examples, the role of the board of transparency in relation to fiduciary duties (relate to relevant sources) As required by the Code, which is divided into ‘main principles’, ‘supporting principles ‘and ‘provisions’ of the Morrison group and company, the board confirms they take into consideration the Annual report of the Morrison group and the company is fair, balanced, understandable and provides the information necessary for shareholders to assess the company’s performance, its model and business strategies (Directors, 2010, p 65). The board in Morrison’s group and the company is given the responsibility to prepare the annual reports, the financial statements and the director’s remuneration in accordance to the laws of the company. Morrison’s company requires the directors to prepare the company’s financial statement for each financial year. The statements prepared by the directors should be in line with the financial reporting standards as adopted by the European Union. Under the companies’ laws, the statements should not be approved by the directors unless they are certified to be true and fair view of the activities of the company and the group. The actual profit and loss in the given financial period of the company should be stated and satisfied to be true. The reviewing process of the company is done by members of the management board and other senior management and reviewed by the auditing committee prior to consideration by the board. This ensures that there is transparency in the Morrison’s organisation (Company, 2015, p 61). Accounting records which show the company’s transactions are kept by the board. The records should accurately display the actual financial position of the company. This enables the board to ascertain the financial statements and the director’s remunerations reply comply with the company’s act 2006 and the company’s financial statement article 4 of the IAS regulations (Company, 2015, p 60). The assets of the company are safeguarded by the board, hence helping in the prevention and detection of fraud and other irregularities. This helps in building up fairness in the Morrison’s chain of supermarkets (Company, 2015, p 61). The board is entrusted with the role of maintaining secrecy of the information included on the company’s website. The information on the Morrison company website, including corporate information and financial statements is protected from manipulation and this ensures there is transparency in what Morrison group does (Directors, 2010, p35). Conducting an annual assessment of the CEO is helpful in the overall efficiency of the firm. Conducting an annual review is critical in ascertaining that the board and CEO are at par with the goals and priorities for the next financial year and ensures that the CEO receives constructive feedback about his or her performance. The Morrison company law requires them to prepare annual reports evaluating the financial year’s effectiveness and success in conducting its business (Naciri, 2009, p 49). 2. In relation to external structures of Corporate Governance, Identify three structures of Corporate Governance and critically evaluate their impact on managerial behaviour on financial reporting quality of a firm from the perspective of: Firm performance; Market value of the firm The external structure of corporate governance has a big impact on the internal structure of the firm. There are several forces outside the firm which affect the decision making of the organisation and its financial outlay. The external forces affect the firm’s performance through raising up issues which they feel they have not been done right (Saleem Sheikh, 2008, p 95). It is the duty of the directors of the company to ignore them or take them as part of the organisation. However, three of the major external structures of the corporate governance includes the following; the independent auditors or the external auditors, General stakeholders and the government (McCready, 2008, p 40). The stakeholders are external members of the organisation who really have a lot of influence in the activities of the company (Marlin, 2013, p 178). Without the stakeholders in the company the firms performance is low since there will be no transactions at all. The market value of the firm depends on the stakeholders. The more the stakeholders the higher is the ranking of the market value of the firm (Jean Jacques Du Plessis, 2014, p 33). Morrison group usually has the stakeholder requests at heart, The current chairman of the Morrison group said that they will free up resources from the business to re-invest more in the customer proposition and that they will reduce the prices of different producers in order to attract more customers for business growth. The stakeholders of the organisation should be treated with equality and given the opportunity to attend the AGMs since they are a core part of the business. The directors should accept complaints from the stakeholders in order to build up a business enterprise which satisfies both the stakeholders and the organisation (Martin, 2006, p 132). Government influences the activities of an organisation and affects the organisational performance because it makes the rules of the land. A firm which doesn’t meet the requirement of the government usually has a low performance (Calder, 2008, p 214). The governments have a great impact in the financial reports of an organisation since the company must be taxed and licensed by the government in order to thrive. The financial reporting system of the firm should be in line with the rules of the land. The Morrison group statements prepared by the directors should be in line with the financial reporting standards as adopted by the European Union in order to satisfy the terms of the United Kingdom government. External auditors are part of the external corporate governance whose services affects the market value of the firm, the financial reporting quality and the firm’s performance. The external auditors reduce the risk of financial reporting fraud, therefore increasing the integrity of financial reports (Black, 2009, p 54). The external auditors output is expected to be at par with the internal auditors report under for a firm to be considered transparent. In Morrison group and company, they have a provision for external auditors who are given the mandate of ascertaining the financial reports and their validity. PART B Evaluate and discuss the chairman’s report on the past and future performance of the company; The Morrison’s is the 4th largest chain of supermarkets in the United Kingdom and is a well-known business. According to the chairman, Andrew Higginson, it has been in competition for nearly twenty years (Company, 2015, p 2). It has been performing well due to its attributes and unique characteristics. The Morrison’s has great traders, strong fresh offers and deserved reputation for offering good value and this has enabled them to be in the front row in competition. It deals with high quality, fresh products that are manufactured by their own manufacturing production facilities and this has given them the unique advantage of flexibility, speed to market and provenance. They also have qualified personnel of butchers, fishmongers, bakers and greengrocers than any competitor in the market. This enables them to attract more customers that in turn increase their sales. More customers imply more volume growth and ultimately lead to profitability in time. These firm foundations of the Morrison’s will lead to the growth of the business, by improving its trading momentum and increase in the size of the market. This will ensure an improvement in its performance in the future. Strategies to up the pace especially in core supermarkets will be done through relentless focus on the customers. It also intends to free up resources from within the business to reinvest more in the customer proposition-price cuts, service and availability in order to increase its efficiency and thereby improve its performance in the future. Critically analyze the company’s financial performance using a selection of financial ratios (use at most 6): Using the consolidated balance sheet 1st Feb 2015 (company, 2015, p 101) 1. Gross margin=Gross profit/cost of sales From the balance sheet; Cost of sales=£16055m Gross profit=£761m 761/16055=0.474 (3 decimal places) Gross margin reveals the amount that a business earns from the sale of its products and services before any deductions of any selling and administrative expenses. This implies that the Morrison’s have a gross margin of 0.474 2. Current ratio=current assets/current liabilities From the balance sheet; Current assets=£1228m Current liabilities=£2273m 1228/2273=0.540 (to 3 decimal places) Current ratio also referred to as the working capital ratio is used to evaluate the ability of a business to pay its short term loans.The calculated value of the current ratio indicates that the Morrison’s have more current liabilities than current assets. 3. Debt ratio=total debt/total assets From the balance sheet; Total debt or liability=£5577m Total assets=£9171m 5577/9171=0.608 (3 decimal places) The debt ratio indicates the percentage of a company’s assets that are provided through debt. The calculated debt ratio implies that most of the company’s assets are financed through the company’s equity. 4. Day sales outstanding =Accounts receivable/(total annual sales÷365) From the balance sheet; Accounts receivable (debtors) =£239m Total annual sales=£16055m 239/ (16055÷365) =5.433 Day sales outstanding refer to the average number of days that a company takes to collect revenue from the debtors and is used to illustrate how well the accounts of the company are being managed. Conclusion The structure of corporate governance is essential in a firm and its decisions are subject to correction by all the external forces in an organisation. If the internal and the external structure of the corporate governance come to an agreement, then there will be efficiency in the production of goods and services and also offering quality services to the customers. Bibliography Black, B. &., 2009. The Uncertain Relationship Between Board Composition and Firm Performance. 2nd Ed. S.l.: Bloomberg press. Calder, A., 2008. Corporate Governance: A Practical Guide to the Legal Frameworks, and International Codes of Practice. 2nd Ed. S.l.: Kogan Page Publishers. Company, Mt., 2015. Financial calender-Morrisons. S.l.: Morrisons group. Directors, I. O., 20`10. The Directors Handbook: Your Duties, Responsibilities and Liabilities. 3 Ed. S.l.: Kogan Page Publishers. Fernando, A. C., 2009. Corporate governance: principles, policies and practices. S.l.: New Delhi: Pearson Education. Jean Jacques Du Plessis, A. H. M. B. J. H., 2014. Principles of Contemporary Corporate Governance. 4th Ed. S.l.: Cambridge University Pres. Marlin, C. A., 2013. Corporate Governance. 2nd Ed. S.l.: Oxford University Press. Martin, D., 2006. Corporate Governance: Practical Guidance on Accountability Requirements. 3rd Ed. S.l.: Thorogood publishers. McCready, A. D., 2008. The Organisational Dynamics of Corporate Governance Structures: An Investigation of Heterogeneity in Boards Participation in Corporate Governance. 2nd Ed. S.l.: ProQuest, . Naciri, A., 2009. Internal and External Aspects of Corporate Governance. S.l.: Routledge. Saleem Sheikh, T. &. F. G. S. R., 2008. Corporate governance & corporate control.. 3rd Ed. S.l.: Cavendish publishers. Read More