Principles of Corporate Governance at Woolworth Limited - Case Study Example

Woolworth Name Institution Introduction Woolworths is among the biggest supermarket chain in Australia, and it is owned by the Woolworth limited. It is a company that was established in the year 1924. The company was founded by Stanley Edward Chatterton, Harold Percival Christmas, Ernest Robert Williams, George William Percival Creed and Cecil Scott Wayne. This essay discusses Woolworth about the concept of corporate governance. Literature Review Theories of corporate governance There are different theories that have been used to bring clearly the concept of corporate governance. The theories each have different approaches. Some of the theories covered in this essay are the agency theory and the stakeholder theory. The agency theory is derived from the concept of finance and economics while the stakeholder theory approaches corporate governance from a more societal approach. These two theories have been discussed in this paper with the aim of shedding light on how they have been implemented about Woolworth. The agency theory gives the illustration of how there is the relationship between the primary person who handles assigning tasks and also the mediator involved in the execution of the tasks. The agency theory has been found to have a major concern in solving two types of challenges that come due to this kind of relationship. When countries industrialize and develop their markets, there is the tendency to estrange the possessions and controls of companies. This is a severance together plus the postulation that the agent is acting in their self-interest hence creating the agency crisis. According to the theory, due to the presence of information asymmetries and views that are dissimilar regarding the perceived risks (Pink, 2009, p.2). First the agents are not in the position to act in the best interest that is supposed to be enjoyed by the principals. This in turn leads to the diminution of the values of the shareholders. The second concept is the fact that it is multifarious and expensive to scrutinize by the principal and also to authenticate that activities of an agent. The agent according to this theory plays an important role in determining the status of the organization. In this theory, it is evident that the agent plays a vital part in determining the status of an organization. According to research conducted by Miles (2012) clarified that the agency theory applied within the corporate governance field holds a hypothetical view. This is because, in the first instance there is the decrease in huge corporations into two participants. The two participants mentioned by the theory is the manager and the agent and also with another participant who can be the shareholder and the principal. The theory indicates that their interest are often understood to be stable and cannot be mistaken. Secondly the theory is of the idea that the postulation of human beings is centered on their self-interest that is widespread among corporations. Other researchers such as Robinson (2008, p.1) have proposed that the agency theory can be taken to mean severance in terms of ownership and control. For instance, it has been mentioned that the primary person allots the work routine to others such as the mediator. The mediator acts as the agent. This has often elucidated the fact on how there is the existence of inadequate responsibility within the companies. Literature that exists has also indicated that other researchers have different views when it comes to the agency theory. Researchers such as Kelly (2001, p.4) have the proposition that to avoid the misuse of power by the manager of any company. The manager should be routinely monitored and should ensure that there are checks and balance involved. This is referred to as the agency cost. These costs might result from the mismanagement by the management. Also, it might come as a result of the observation cost and the disciplines that are involved in thwarting the ill-treatment. In scenarios like this, the directors have to play their important role in ensuring that there is the monitoring of the principal and the agent relationship. This is to ensure that there is diminishing the problems that result from the agency. The agency theory views the board of directors as the stewards of the company and is often disposed to act in the best interest of the principals. This is the main scheme for the stewardship theory. The stakeholder’s theory gives a different picture separate from that which is shown by the agency theory. The traditional corporate governance school focused shareholder’s assets maximization. According to their model by Europeans and the Japanese, it has been able to follow the pluralistic approach regarding the stakeholder theory. According to this theory, corporations incorporates broader parties through delegating responsibilities rather than paying attention to only the shareholder. The theory stresses that the company must not only make the value of the shareholder. But at the same time it should also ensure that there is use of the capital that it has to transport reimbursement to the whole society (Miles, 2012, p.287) This has generated disagreements, and the main disagreement is the fact that not only the corporate assets that are invested by the shareholders that bring the assessment for the company. The disagreement notes that there is also the human effort that is involved in the case that are of great importance. Moreover, the decision that are made by corporations have dire consequences for the entire society, and this is because they have a big force such the capital or toxic waste depletion. The concept of corporate social responsibility has been widely propagated by the shareholders theory, and it has been a major issue (Kelly, 2001, p.4) Companies and business have been forced to have their actions conscious and morally towards the stakeholders such as the society. There has been the argument that the most significant cause is the manager. It has also been found by other studies that always manage ignore their ethical obligations that are a distinct feature of human beings. Thus, they must stick to the ethical behaviors that are stipulated regardless of the consequences that it may have on the revenue from the company or the business. This is because the profit that the organisations might gain might not last for long as compared to the human value and their importance that can be long term (Greenblat, 2013, p.2). Overview of Principles of Corporate Governance and Best Practice Recommendations by AXS Woolworth has adapted to the principles and the practices that are recommended by the AXS. The ASX Corporate Governance Council is tasked with the responsibility of coming up with the principles and the recommendations. The following are the principles and recommendations that have been adopted by Woolworth. Structural Principles This principle assumes that corporate governance mechanism are important for the performance of any firm for the purposes of achieving its goals. This principle gives the ideal board of director’s composition that ensures there is effective and efficient functioning of the company. Woolworth has adopted this principle by ensuring that there are annual meetings that always take place among the board of directors, and they occur four times within a year. The company has a majority of the board of directors as being independent non-executive (Plunkett-Powell, 1999, p.3). There is also the differences in terms of the board roles. This although has been found by economists to be unrelated to the financial performance of any business organisations when other things remain equal. However, with such kind of board structure, there are times that the operations of the board tend to improve around the company’s important events. This includes events such as CEO dismissal about poor performance. In the Australian economy, there is the link between the non-directors and a likelihood of CEO dismissal and also a negative association with excess remunerations being given to the CEO. Through adopting this principle, Woolworth has been able to observe and experience better financial outcomes regarding its equity and the debt holders (Clarke, 2007, p.7). Behavioral Principles Woolworth has also adhered to the behavioral principle. This principle assumes that adherence to the board structure does not necessarily lead to a better governance of the company. This is a principle that is mainly designed for the purpose of influencing the performance of the management of the company. This has been able to ensure that there is a positive generation of the spillovers in terms of the behavioural changes of Woolworth. The principle is set to have major influences on the behaviour for the purposes of achieving the spirit of compliance and also to operate in agreement with the law (Clarke, 2007, p.7). This is drawn based on the theory that is associated with the “expressive law” that states that with expressing the desired company behaviour, then there can be the encouragement of the behaviour. By adopting this principle, Woolworth has been able to ensure that there is a move towards new organizational behaviour by its management through the use of the non-adopters. This has also enabled Woolworth to minimize its transaction cost in cases that the compliance might require greater resources that are required to explain the case for the company opting out (Anazett, 2012, p.1). Risk management Woolworth continues to growyearly, andthis has madeitfacevariouschallenges. Woolworth depends on theability of the management of thecompany to understand andalso to give a responseto therisks that are involved. Thecompanyhas developed a comprehensiveriskpolicy that covers all thepotentialrisks that might arise from thecompany on a dailybasis. Theriskcoversmanyaspectsincludingtheworkers. In terms of the governance risk, the Board has been mandated with acceptinganyrisk that might occur on thesameline. Thedailyresponsibilityof identifyingtherisksof thecompanyhas beenleft to themanagementof thecompany. Thecompany has decentralized its riskmanagementsystem withinthe businessoperationfunctions, and a standardsystem is appliedall through in themanagement of therisks (Zappone, 2009, p.2). Community engagement This istheprocess in which communityenjoysbenefits from organizationsandindividualswhorunbusiness within it. Itinvolvesthebuilding of a permanentrelationship with theaim of having a collectivevisionforthepurposes of benefitingthecommunity. Woolworth Company is committed to supportingthecommunity, andthis has beendone through thedevelopment of a communitypolicy that has beenput in place. Thepolicyoffersemployees a volunteering leaveandalsotheopportunity to takepart in the workplace giving. Thecompanyalsoprovidesannual corporate socialinvestment. Thecompany has alsobeeninvolved in childrencharity. Forinstance in 2008 thecompanysupportedthechildhoodcancerinitiative (Carlisle, 2015, p.3). This hasbeensignificant in improvingthename of thebrand within thebusinessenvironment. ANALYSIS Overview of Woolworths Board structure Woolworth has a unitary board structure. It is made up of eleven board members who are non-executive directors, ten of them are considered as independent, and the remaining one is considered as non-independent. It also has four executive directors. The board is made up of majority members who are non-executive directors. Also, the chairman of the board is an anon-independent director. Woolworth has some board committees who are tasked with helping the board in carrying out its objectives and roles. The roles and responsibilities that have been talked to each of the committees are explained in their formal terms of reference. There are the audit committees that is tasked with an additional responsibility that is given by the virtue of the Companies Act (Robinson, 2008, p.3). The independence of the board is brought with the aim of bearing on the decisions of the board with the presence of majority executive directors who are non-independent. The structure of the board is aimed at ensuring that there is integrity of the individual directors hence making sure that no one dominates others when it comes to decision-making of the board. For the board member to maintain their independence and their integrity, the directors are required to disclose all their material interests whenever they rise (Clarke, 2007, p.1). Woolworth selects its board of directors based on specific qualifications and experiences. There is a variety of skills that they are supposed to have so as to ensure that there is steering of the company in the right direction through making robust decisions. The set of skills that are needed is the background and the experience that the aspiring board members have, includes qualifications and experience in retail, building products, engineering. Also, white goods manufacturing, banking, property, food manufacturing, construction and aviation. The directors of Woolworth besides their experiences and qualifications, they are always required at all times to act with integrity and honesty and uphold the highest levels of ethical standard. There is no single member who control the board hence there is no conflict of interest since they all have to act together in the interest of Woolworth (Robinson, 2008, p.4). Comment and analysis Board of Directors Woolworth recognizes the importance of maintaining transparency when it comes to the issue of accountability to the shareholders and the investors. The board of Woolworth ensures that there is constant communication with the shareholders in ensuring that there is mutual understanding of the objectives of the organisations. The board of the organization also ensures that there is equal treatment of the shareholders and also upholding the rights of the shareholder including the minority. Hence, Woolworth has been able to integrate the concepts that are found within the agency and the stakeholder theory to ensure that there is the protection of the stakeholders (McGregor, 2012, p.5). Remuneration practices The Woolworth has remuneration scheme that ensures all the directors get a fixed basic salary. The basic salary is tagged based on the salaries that are being offered to individuals who are in the same category. It is based on the skills and the qualifications that they have. There is also the benefits that are being given to the board members. There are the annual bonuses that are being given to them, and it acts as a motivation for the directors. Pension rights are also given to the directors for their work. They are key to the total remuneration with a long term implication to the organisations (Plunkett-Powell, 1999, p.5). Conclusion The essay has been able to cover they concept of corporate governance within Woolworth and its application ranging on various factors. The essay has covered literature review regarding corporate governance and the theories that are involved. The essay has also covered the principles and the best practices of the Woolworth organization. Analysis has been done based on the company, and it is rooted on the remunerations and the board of director’s composition. In conclusion, corporate governance is an important aspect of Woolworth organization, and it plays crucial role in ensuring it is successful. References Anazett, P., 2012. Disclose or Abstain: The Prohibition of Insider Trading on Trial. Journal of International Banking Law and Regulation 27 (9), p.1-5 Carlisle, J., (2015). Woolworths: Interim result 2015. Intelligent Investor (Company), p.1-5 Clarke, T., 2007. International Corporate Governance. London and New York: Routledge, Greenblat, E. (2013). Lion boss adjusts to supermarket duopoly. The Age, p.2 Kelly, M., 2001. The Divine Right of Capital: Dethroning the Corporate Aristocracy. San Francisco: Berrett-Koehler McGregor, K. (2012). Senator Nick Xenophon moves to smash Coles and Woolworth’s duopoly. The Advertiser, p.5 Miles, S., 2012. Stakeholders: essentially contested or just confused? Journal of Business Ethics 108 (3): 285–298 Pink, D., 2009. Drive: The Surprising Truth about What Motivates Us. New York: Riverhead Books.  Plunkett-Powell, K., 1999. Remembering Woolworth's: A Nostalgic History of the World's Most Famous Five. New York: St. Martin's Press Robinson, J., 2008. Woolworths: the rise and fall of the department store empire. The Guardian, p.1-5 Zappone, C., (2009). Supermarket duopoly blamed for soaring food prices. The Sydney Morning Herald, p.3 Read More