Nestle - Corporate Governance and CRS - Case Study Example

Corporate Governance and CRS: Nestle Name Institution Table of Contents Table of Contents 2 Introduction 3 1. Compliance with corporate governance codes and the regulatory framework 3 2. Nestle’s corporate governance reports 6 2a. Review of Nestle’s Board of Directors 8 2b. Review of Nestle’s Auditors 9 3. Nestle CSR Practices 10 4. National institutional environment and other stakeholders 11 5. Recommendations 13 5a. Corporate governance 13 5b. Corporate social responsibility 14 Conclusion 14 References 15 Introduction Based in Vevey, Switzerland, Nestlé is a multinational wellness, health and nutrition company. The company was started in 1866 and today has factories in more than 86 countries globally (Nestle, 2013). Having been registered in Switzerland, the company is governed under Swiss company law (Nestle SA, 2002). This paper evaluates how Nestle adheres to the corporate governance codes, it also reviews several governance issues indicated in the company’s corporate governance report. Additionally, it evaluates Nestle’s CSR practices and how the company’s CSR practices are influenced by national institutional environment and other stakeholders. Lastly, it provides recommendations on how Nestle could position itself in relation to CSR and Corporate Governance. 1. Compliance with corporate governance codes and the regulatory framework Corporate governance describes the means, methods, and relations through which incorporated companies are directed and managed (Corporate Governance, 2013). It also consists of the processes through which objectives of a corporation are created and practised within the context of market, regulatory and social setting. The mechanism or means of governance come in many forms, such as monitoring the policies, decisions, and actions of companies and their agents (Anon, n.d.). Different countries have their own corporate governance codes and principles, which have been created and issued from institutional investors, corporations, or stock exchanges under the backing of their respective governments (Rey, 2014). Usually, the law does not mandate observance of these governance references. Still, these codes are associated with stock exchange listing provisions and, therefore, potentially have coercive effect (Jackson, 2010). Section IV (30) of the Swiss Code demands that incorporated companies have to make public their information on Corporate Governance though their annual reports. The SWX Swiss Exchange Directive on information relating to Corporate Governance, which is under the Federal Act on Stock Exchanges and Securities Trading (SESTA), is relevant in this respect (Nestle SA, 2002). The Nestle's Corporate Government Report complies with the SWX Swiss Exchange Directive on information associated with Corporation Governance. The company also adheres to the Swiss Code of Best Practice for Corporate Governance recommendations (Nestle, 2014). Additionally, the company’s Consolidated Financial Statements conforms to the International Financial Reporting Standards (IFRS) that was put in force by the International Accounting Standards Board (IASB). All these financial disclosures have to comply with the provisions of the SWX Swiss Exchange Directive on Financial Reporting (Olgiati, 2002). Additionally, Nestle has to comply with the self-regulation provisions set out by Swiss Code, also known as the Swiss Code Of Best Practice for Corporate Governance, which was set out by the association of businesses in Switzerland called the Economiesuisse (SIX, 2014). Mainly, the Swiss Code provisions are intended for publicly listed corporations, such as Nestle. They also specify guidelines for non-listed companies, although the non-listed companies only comply voluntarily (Nestle, 2014). In Switzerland, therefore, corporate governance is overseen by the Swiss corporate and stock exchange legislations (Nestle, 2006). Aside from the recently enacted Ordinance against excessive compensation in the listed companies, corporate governance in the country are overseen by the self-regulatory rules, including the Directive On Information Relating To Corporate Governance by the SWX Swiss Exchange of 2008, which demands the issuers to adhere to the provisions regarding management of corporations or substantially explain and publish (Nestle, 2014a). In presenting its corporate governance report, Nestle complies with the SWX Swiss Exchange Directive on information associated with Corporation Governance. Under the Swiss Code, Nestle has to “comply or explain” (Rey, 2014). The principle of “comply or explain” of the Swiss Code demands corporations to adhere to the Code or significantly provide an explanation regarding their failure to comply. The principle was originally initiated in the country under the SWX Swiss Exchange’s Corporate Governance Directive that came into force in 2002 (Nestle, 2014a; 2014b). In compliance with the Swiss Code, each successive year, Nestlé develops a comprehensive Annual Report that reviews its business and reports on governance. Additionally, it provides in-depth audited Financial Statements for each fiscal year, which is prepared in compliance with the International Financial Reporting Standards (IFRS) (Economiesuisse, 2014). The reports are balanced off by the Half-Yearly Report. Consequently, the company makes public its half- and full-year results, in addition to its first-quarter sales figures (Rey, 2014). As an addition, Nestle also develops and disseminates press releases in the event of a potentially price-sensitive event, including major divestments and acquisitions, alliances, and joint-venture agreements. Momentous announcements, including corporate activity results, are accompanied by a presentation that is televised live on the Internet, hence allowing any stakeholder or stockholder access to information on corporate governance (Olgiati, 2002; Nestle 2014a; 2014b). 2. Nestle’s corporate governance reports Essentially, corporate governance reports provide reviews of several governance issues, including the board of directors, executive remuneration, auditing, annual general meetings, and compensation. Board of Directors At Nestle, the Board of Directors is company’s decisive governing body. The Board takes charge of the definitive supervision of the company. It also addresses all issues that are not set aside for the Annual General Meeting or any other governance body specified by law, the Articles of Association or company law (Nestle, 2014b). As indicated in Nestle’s Annual Report 2014, the duties of the Board include the ultimate direction of the Company, specifically managing and supervising the business, determining the organisation of the company, overseeing financial and accounting control and planning, as well as appointing and removing any Vice Chairman, the members of the committee apart from the committee of compensation, the chairman of the boards and lastly, the executive board members (Nestle, 2014a). Nestle holds Annual General Meeting (AGM) each successive year, after every SWX months following the end of the financial year of Nestle (Economiesuisse, 2014). The Board of Directors usually convenes the meeting. The Board specifies the items to be placed in the agenda. Still, shareholders who have voting rights with collective holdings representing not less than 0.15% of Nestle’s share capital as indicated in the commercial register are allowed to make a request for an item to be listed in the AGM agenda. Under Article 9 of Nestle’s Articles of Association, the notification of the AGM is made through a “Swiss Official Gazette of Commerce” at least 20 days before the date set for the AGM (Nestle, 2014a). Auditors Under Article 20 of Nestle’s Articles of Association, the Annual General Meeting (AGM) appoints the auditors of the company’s annual financial statements and consolidated finance statement to ensure that they comply with the professional standards specified by the law. Nestle’s external auditors may be re-elected each year. Currently, the external auditor for Nestle is KPMG (Klynveld Peat Marwick Goerdeler). KPMG conducts the company’s audit to ensure that they meet the requirements of the Swiss law, as well as the standards set out by the International Standards on Auditing and the Swiss Auditing Standards (Nestle, 2014). The internal auditors are the Nestle Group and Market Audit. It is directly linked to the Audit Committee and is made up of a unit of international auditors who travel across the company’s subsidiaries around the globe to perform audit functions (Economiesuisse, 2014). Compensation The Board of Directors defines the compensation principles to be used at Nestle. It also endorses the compensation of the company’s executive, including the chief executive officer (CEO), the Chairman, and the Board members. However, the Annual General Meeting of 2015 is consistent with Article 21bis of Nestle’s Articles of Association. The Directors’ compensation, as well as that of Executive Board has to be approved by the shareholders (Nestle, 2014a). Additionally, the AGM approves the application of the Board of Directors in respect to the highest total compensation of the Directors until the next AGM. 2a. Review of Nestle’s Board of Directors In compliance with the SWX Swiss Exchange Directive on information relating to Corporate Governance, it is clear that Nestle has provided information on corporate government. Among the information is that on the Boards of Directors. Nestle’s Board of Directors is elected by the shareholders as specified by the Swiss Code. The Board of Directors takes charge of determining the company’s strategic direction (StrategicManagementInsight, 2013). This is compliant with the Swiss Code, which demands that the Board of Directors has to decide the strategic goals, as well as the mechanisms to attain them and to select individuals responsible for management. The Board also plans the strategy and finance management to ensure the two are in line with the corporate objective (Nestle, 2011). Indeed, the Swiss Company Law sets out the absolute and non-transferable basis roles of the Board of Directors as providing the ultimate directives of the company, establishing the company, determining the structure of the accounting system, financial controls and planning, appointing and removing individuals charged with managing and representing the company (Nestle SA, 2002). A review of Nestles 2014 annual report shows that the company’s Board of Directors has complied with the Swiss Code and the Swiss Company Law provisions. As demanded by the Swiss Code, Nestle’s Board is its decisive governing body. It is the ultimate body that supervises the company. It also resolves concerns left out at the Annual General Meeting. As indicated in Nestle’s Annual Report 2014, the duties of the Board of directors comply with the Swiss Code. Among the examples, include determining the company’s ultimate direction of the Company and appointment Vice Chairman. Nestle’s Board sees to it that the control and management tasks are properly allocated (Nestle, 2014a). 2b. Review of Nestle’s Auditors In consistency with the SWX Swiss Exchange Directive on information relating to Corporate Governance, Nestle has provided information on its auditing functions. The Swiss Code demands that the Board of directors appoint the Audit Committee. Indeed, this is what is indicated in the annual report, where it is indicated that the Board selects the KPMG auditors. At the same time, the Audit Committee assesses the company’s consolidated financial statements, in addition to the interim statements before they are published. When it gets to auditing, the tasks of external audit are undertaken by the statutory auditors who are selected by the shareholders. In the case of Nestle, this task remains unclear, as it is not indicated whether shareholders play a role in selecting the external auditors. What is, however, clear is that the Board of Directors selects the external auditors, in this case KPMG, each year (Nestle, 2014a). The Annual Report indicates that the Audit Committee assesses and selects the auditors in accordance with the Swiss Company law. Afterwards, it brings the names to the Board, which proposes it at the AGM. It is showed that this is how KPMG was appointed as the company’s auditors. However, no clear information is provided to show that AGM elected KPMG. Still, Nestle has disclosed information on auditors, including their duration in office. Nestle’s Annual Report shows that KPMG renews its contract each year. Information on how KPMG validates the financial reports is also indicated. The Annual Report shows that the lead auditor for KPMG signed the financial statements, as well as the Consolidated Financial Statements of the fiscal year ended 31 December 2013. The report further indicates that the Audit Committee assesses the suitability of retaining KPMG each year as Nestle’s auditors (Nestle 2014a). 3. Nestle CSR Practices Like many other multinational companies, Nestle takes and reports CSR initiatives subject to international programs, such as the Global Reporting Initiative, Business for Social Responsibility and United Nations Global Compact. However, for the company, its values and responsibilities are depicted in its commitment to its Corporate Business Principles, which require that it maintain the highest standards of conduct to bring value to shareholders and the society (Nestle SA, 2002). Nestle’s corporate social responsibility is based on the principle that to create long-term value for its shareholders, it has to develop long-term benefits to the society. The company starts with creating superior long-term value for its shareholders by producing products that enable improvement of people’s wellness, health, and nutrition. It, therefore, uses the Shared Value approach. Through this approach, the company focuses on quality nutrition, as well as human rights advancements in the areas of environmental sustainability, clean water supply, and rural development (Ioannou et al, 2014). When it comes to nutrition, the company uses continuous research and development to enhance the quality of its products. It also seeks to make its products affordable. For instance, the company set up a Clinical Development Unit that undertakes research and development to rationalize the manner it evaluates the implications of foods and ingredients on human health and wellness (Nestle SA, 2002; Piedade & Thomas, 2006). Concerning rural development, the company provides finance and research support to rural farmers in the places it sources the raw materials. This is to ensure enhanced quality of their products, as well as to assists the farmers to get the best out of their efforts. The company set up Rural Development Framework in 2013, which is expected to rollout the Rural Development in 21 nations globally by 2015 (Dally, 2014). In respect to ensuring environmental sustainability, Nestle places its focus on water. It advocates for protection of the scarce sources of water, as well as uses water efficiently while producing and distributing their core products (Ioannou et al, 2014). For instance, Nestle works collaboratively with UN, Water Footprint Network and 2030 Water Resources Group to address water challenges. In ensuring that it has low environmental footprint, the company’s water usage, since 1998, has reached a 28 percent (EthicsWorld, 2014). 4. National institutional environment and other stakeholders On analysis, it is clear that Nestle’s social responsibility emanates from its corporate strategy of value-added consumption, regulatory demands for quality in addition to the shareholders and investors’ believes (Dally, 2014 Luo et al, 2013). This can be illustrated by the theory of the Pyramid of Corporate Social Responsibility, which suggests four layers of responsibilities that make up CSR concept (Dally, 2014). In the first layer is the economic responsibility. The concept seeks to maximize the company’s long-term financial standing. This is consistent with the demands of the shareholders for the company’s better financial performance (Amiram, 2008). Figure 1: Carrol's CSR Pyramid (Dally, 2014) At the second level is the legal and institutional responsibility. This level consists of the national and international laws that the company has to comply with (Miron et al, 2011). In Australia, Section IV (30) of the Swiss Code demands that incorporated companies have to make public their information on Corporate Governance though their annual reports. The company has to adhere to the Swiss Code of Best Practice for Corporate Governance recommendations (CSRWire, 2014). It also has to comply with recommendations for international institutions. For instance, Nestle updated its “Corporate Business Principles" in 1998 to assimilate recommendations by the “UN Secretary General's Global Compact: Labour Standard, Human rights, the Environment” (Dally, 2014). The ethical responsibilities level demands that the company has to be fair and just to the stakeholders (Dally 2014). The general society is also a stakeholder, as it demands that Nestle has to behave ethically to accomplish its entire obligations of reducing or damage and increase societal benefits, as well as benefits to the environment and the humanity (Carroll & Shabana, 2010). By behaving ethically, Nestle builds an attractive reputation as a social partner (Ioannou et al, 2014; Amiram, 2008). The last level, which is the philanthropic responsibility level, demands that the company be a good corporate citizen, as well as to add to the societal well-being and better quality of human life (Dally, 2014). 5. Recommendations 5a. Corporate governance Nestle’s Board of Directors should create a nomination committee that should be chaired by the chairman of the Board’s directors to determine the qualifications needed by the executive board and the directors to join the board, as well as the mechanisms for monitoring and assessing their knowledge and competences in corporate governance. The current criteria for selecting members to the board are not clear (Zadek, 2006). Instead, it remains a reserve of the board, which acts out of its mandate without proper guidance for selection and evaluation of the board members. At present, some directors have been criticised for incompetence, yet they have remained in the board long after shareholders have expressed concerns (Australia Security Exchange, 2007). Additionally, rather than just assess the size, structure and composition of the board of directors, the shareholders should be given an opportunity to submit proposals on the relevant persons they need to consider to the board of directors and the executive board. Shareholders should also be allowed to submit action plans on the future make up of the board of directors and the executive board. This will strengthen the confidence of the shareholders on the composition of the board as potentially catering for their needs (Corporate Governance, 2013). Additionally, the total remuneration granted to members of the board of directors and the executive board should be disclosed in the annual report. Additionally, the link of the compensation to the remuneration policy should be explained. Currently, while the remuneration is provided, the link to the remuneration goes unexplained. This may lead to transparency issues (Australia Security Exchange, 2007). 5b. Corporate social responsibility To achieve greater level of cooperation between Nestle’ global subsidiaries in terms of attained corporate social responsibility- related objectives, Nestle has to engage in strategic utility of social investment budget (Nestle, 2014b). Allocating equal funds for CSR to its subsidiaries will ensure that its entire subsidiaries are motivated to engage in CSR (Carroll & Shabana, 2010; Kercher, 2007). It should also ensure that its employees are equipped with the skills and expertise in CSR. This is achievable through employee training on CSR (Twigg, 2002). Additionally, Nestle should implement an effective audit targeted at improvement of the quality of the existing CSR activities (Dudovskiy, 2012). This will ensure that the CSR activities are continually improved, as well as remain committed to the attaining Nestle’s principle of ‘Shared Value’ (Sarvaes & Tamayo, 2013). Conclusion The Nestle's Corporate Government Report complies with the SWX Swiss Exchange Directive on information associated with Corporation Governance. Nestle’s corporate governance reports provide reviews of several governance issues, including the board of directors, executive remuneration, auditing, annual general meetings, and compensation. In compliance with the SWX Swiss Exchange Directive on information relating to Corporate Governance, Nestle provides information on Boards of Directors, auditors and compensation. On analysis, it is clear that Nestle’s social responsibility emanates from its corporate strategy of value-added consumption, regulatory demands for quality in addition to the shareholders and investors’ believes. This can be illustrated by the theory of the Pyramid of Corporate Social Responsibility, which suggest four layers of responsibilities: economic responsibility, legal and institutional responsibility, ethical responsibilities and philanthropic responsibility . References Amiram, G. (2008). Corporate Governance as Social Responsibility: A Research Agenda. Berkeley Journal of International Law, (26), 452, 2-8 Anon (n.d.). Corporate Social Responsibility, Corporate Governance and Corporate Regulation. Retrieved: Australia Security Exchange. (2007). Corporate Governance Principles and Recommendations with 2010 Amendments. ASX Corporate Governance Council. Retrieved: Carroll, A. & Shabana, K. (2010). The Business Case for Corporate Social Responsibility: A Review of Concepts, Research and Practice. International Journal of Management Reviews, 1(1), pp.85-105 Corporate Governance. (2013). Recommendations on Corporate Governance: Committee On Corporate Governance May 2013. 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