Corporate Governance at Walmart - Case Study Example

Corporate Governance at Walmart Name Institution Course Date Option 2 Corporate Governance at Walmart Introduction Corporate Governance has over the years received a lot of attention among large organisations in both developing and developed organisations (Cremers and Nair, 2005). It is argued that good governance tend to bring about investor goodwill as well as confidence. Research has confirmed that good corporate governance in an organisation increases both profits and company valuations. Well governed organisations also enjoy lower capital expenditure, better performance, favourable treatment of the stakeholders and higher sale growth. Weak corporate governance may result to poor performance and productivity, risky financing patterns and makes organisations susceptible to economic recessions. Ragothaman and Gollakota (2009) have identified several reasons for the growing prominence of corporate governance. These reasons may include the pension fund report, deregulation of the capital markets, the evolution of the private savings and series of corporate scandals. Corporate governance has subjugated policy agenda for more than a decade (Cremers and Nair, 2005). In order to satisfy the expectations of the stakeholders, most countries have developed national regulations defining the “best practices” in the corporate governance (Cremers and Nair, 2005). Walmart has been criticised for its business performance and operations for many years now. Its governance practices have been thought to be weak thus affecting the overall performance of the company. This paper will focus on Walmart Stores Inc. And will discuss its governance protocols and practices in relation to responsibilities of directors, independence of directors, qualifications of directors and length of tenure of its directors amongst other issues. In addition, the paper will outline the criteria suitable for the review of Walmart corporate governance and will list some recommendations for the improvement of the company’s governance practices. Background of Walmart Walmart is a multinational retail firm that runs a chain of hypermarkets, grocery stores to name a few (Lichtenstein, 2009). The corporation has its headquarters situated in Bentonville, Arkansas. It was established by Sam Walton in the year 1962 and therefore incorporated in the year 1969. Till then, the corporation has open over 11,500 stores in 27 nations. According to Fortune Global 500, the corporation is considered the world’s largest corporation when value in terms of revenue. It roofs almost 2.2 million employees. It is also considered the world’s most valuable corporations by market value as well as the largest grocery retailer in the United States (Lichtenstein, 2009). For instance, in 2015, 59.8 per cent of its 288 billion dollars sales were generated from the grocery. Between the years 1980’s and 1990’s, the company gained its momentum tremendously to become a national giant. For example, in 1988, the corporation became the most moneymaking store in the United States. Criteria for Review of Walmart’s Governance Reviewing the corporate governance of Walmart will enable the clarification of where the company is and where they should be for them to achieve good governance (GNDI Principles, 2014). Reviewing of the corporate governance will also ensure the company is conforming to the “best practice”. By reviewing Walmart’s governance, it will be possible to benchmark the company against other companies. Effective governance allows companies to operate their activities with proper accountability and create value in the long run. The first guiding principle in reviewing the effectiveness of Walmart’s governance is independence. Board of directors in organisations should have an independent judgement and provide an independent overview of management (GNDI Principles, 2014). Thus, corporate governance should be developed in order for the board to offer an independent leadership separate from management and influential stakeholders. This is important because, the board can have polices on managing and preventing conflicts of interests. Another principle to be considered when reviewing the governance of Walmart is composition and leadership. Considering the nature and extent of the company’s operations, the board should have a proper number of directors with relevant skills, expertise and experiences who can effectively provide insight and add value (GNDI Principles, 2014). The duties of the chair and the CEO should be separate. Nevertheless, in other circumstances where directors’ independence is safeguarded, the board name a lead that has the authority to call meetings and act as the first among equals. This enables directors to effectively discharge their duties and allocate time to discharge their duties. Another principle of review is nomination. A formal, transparent and severe procedure should be implemented for the nomination and re-election of the board of directors. In addition, a formal performance assessment is expected to be undertaken of the directors standing for re-election. In circumstances where the directors’ re-election is not a requirement of the law, the directors ought to be handed over for re-election at systematic intervals by the shareholders (GNDI Principles, 2014). Nomination principle ensures a free and fair election in an organisation. Responsibility is another principle that has provided guidance in the review of Walmart’s corporate governance. Every company is expected to be managed and led by an effective board of directors that collectively oversee both the short-term and the long-term organisational success (GNDI Principles, 2014). The board ought to be accountable for approving the vision, purpose, mission and strategies of an organisation. In addition, the board is expected to oversee the company’s performance and should act and conduct its roles in the best interest of the company. This principle is important since judging a company’s governance in terms of the responsibility of the board will give an overview of what responsibilities a board should uphold in a given organisation and how they could have an impact on its performance (GNDI Principles, 2014). Walmart’s Organizational Governance The corporation has adopted a number of guidelines which clearly indicate their principles and protocols. These guidelines are subject to alteration which allows the director to deviate from its procedures as they may believe appropriate or even as required by relevant laws and regulations. Therefore, Walmart’s corporate governance guidelines include; director qualifications, director responsibilities, board committees, director access to offices, director compensation, annual performance evaluation and length of tenure of directors (Walmart Store Inc., 2014). Director Qualifications The majority of directors in Walmart have a large number of directors who conform to the standards for independence as per the New York Stock Exchange (Walmart Store Inc., 2014). The directors undergo annual reviews on their skills and characteristics with which the board requires for its directors and this responsibility is carried out by the nominating, and governance committee. This committee is also responsible of conducting an annual assessment of whether the members qualify to be independent as per their applicable standards. Therefore, during this course, the directors ought to update the Board on any changes in their relationships that my affects their appointment by the Board. Nominees for director role will be chosen on the grounds of excellent achievement in their individual careers (Walmart Store Inc., 2014). These achievements may include; experience, wisdom, understanding business environment, integrity and ability to make corporate decisions to name a few. The Board in Walmart believes that if one qualifies to be director in the corporation, one should possess a fundamental understanding of: (i.) principal processes, strategies, financial objectives of the corporation, (ii.) the outcome of operations and financial settings of the corporation and (iii.) the position in which the corporation occupies with regard to its competitors (Walmart Store Inc., 2014). The Board in Walmart does not discriminate when it comes to matters of colour, race gender, religion as well as sexual orientation to name a few (Walmart Store Inc., 2014). Walmart’s organizational governance in terms of director qualification also states that directors ought to advise the Chairperson of the board if he or she would accept a request to work for another public company board. Therefore, no member is allowed to work on more than two other audit committees of public companies without attaining approval from the board (Walmart Store Inc., 2014). According to the principles of good governance, the board of directors should comprise of people with relevant and diverse skills and background in order to discharge duties efficiently and effectively. Concerning Walmart, composition and leadership of the company has been well applied and hence, the directors possess relevant expertise for organization’s success. Director Responsibilities The fundamental duties of the directors are to practice their judgment in accordance with the best interests of the company as well as its shareholders (Walmart Store Inc., 2014). They are also responsible of ensuring care and loyalty in the company. Walmart directors ought to be entitled to depend on the honesty and integrity of the senior executives of the corporation as well as its external advisors and auditors. This should be done to the fullest extent allowed by the law. Walmart directors should also be entitled to liability insurance purchased by the company on their behalf (Walmart Store Inc., 2014). In addition, specific roles and responsibilities of the Board will comprise of overseeing the performance and management of business affairs in the corporation, reviewing and approval of business plans; recommending the appropriate candidates for election from a group of shareholders to name a few. Directors in Walmart are required to serve on Board committees and hence can be appointed to any committee he or she is interested in (Walmart Store Inc., 2014). They are also required to be present in regular meetings and spend tie in order to appropriately discharge their responsibilities. The principle of good governance emphasizes on the ability of the directors to act in the best interest of the company. In Walmart, the director’s responsibilities are founded upon vision, mission and purpose of the organization and are in accordance with the guiding principles of good governance. Director Access to Officers Directors of Walmart have been allowed full access to officers as well as other associates of the corporation (Walmart Store Inc., 2014). They have the right to access and have a contact with the company’s outside advisors. Therefore, any meeting the director wishes to initiate, it can be organized either through the CEO, the secretary or even through the director. Therefore, the directors ought to utilize their judgment to ensure that any such contact isn’t troublesome to the daily operation of the company’s businesses. In addition, they have to report annually to the Board concerning management development as well as successions (Walmart Store Inc., 2014). They also ought to report progress and long-standing strategic planning. Good governance asserts that every director should have equal access to officers and information in a timely and effective manner. Walmart can be considered to having “good practice” in the basis of free access to associates as well as information in the organization. Director Compensation In Walmart, the compensation entitled to their directors is reviewed by the Compensation, Nominating and Governance Committee (CNGC) (Walmart Store Inc., 2014). They also recommend both the form and amount of compensation to the directors. These operations are done in accordance to legal and regulatory guidelines. CNGC considers if the director’s compensation is way above customary levels, the independence of the director may be jeopardized. The director’s independence may also face risks if the company offers other forms of indirect compensation to either the director or organization which the director is allied (Walmart Store Inc., 2014). The best practice of good governance emphasizes on a formal and transparent process of compensation. Compensations are expected to be level, fair and reasonable in order to assert long-term corporate success. Therefore, as a result of constant review of the compensation policy by the CNGC, Walmart ensures its compensation policy is in accordance to legal and regulatory guidelines and is fair and acceptable by all. Tenure of Directors The number of directors in Walmart should not be less than three of exceed twenty (Walmart Store Inc., 2014). Therefore, every year, the shareholders hold meetings where they elect their directors of choice. The length of time the directors stay in position depends on the qualifications of his or her successor after every year. In order to offer a variation on a staggered board, a percentage of the board of directors is elected each year. This ensures Walmart’s continuity and stability in the management (Walmart Store Inc., 2014). By doing this, Walmart has the ability to create unitary Board that has the potential to administer good leadership in the organization. However, good governance practice emphasizes on long-term focus of organizations. Annual election of directors in Walmart has promoted a short-term focus on the organization rather than long-term success. In other words, Walmart corporate governance in terms of tenure of directors promotes a short-term perspective of the organization and this can lead to poor long-term performance of the organization. Independence of Directors From the 2012 annual meetings of Walmart, the Board of directors have less independent than before. Three independent directors of the company left the board a few years ago and the Walton’s take up more than half of the firm’s stock (Walmart Store Inc., 2014). This has made the board less independent. The founding family’s stake in the company allows it to have a very few independent directors. Investors are concerned of the growing control of the company by the Walton’s family given the several issues that are facing the company: bribery scandal, mounting costs as a result of the investigation of the bribery scandal, persistent strike of workers and human rights disasters (Walmart Store Inc., 2014). The less independent directors are less likely to solve these issues. In addition, the recent board election indicated that a large number of shareholders are unsatisfied with Walmart’s corporate governance. More and more shareholders of the company advocate for a more independent board chair. Recommendations for Improvement Walmart Stores Inc. should increase the independence of the board of directors for it to improve the board’s handling of governance challenges that has faced the company over the years. The recommendation will have a huge impact on the company given the Walton control over it. Walmart shareholders should consider a resolution that will call for an independent chairman on the board of directors. The company needs to improve leadership accountability by electing an independent chair. Perhaps the biggest challenge facing Walmart is its emphasis on short-term performance (Subramanian, 2015). Almost one third of Walmart directors are selected every one to three years. This framework promotes continuity as well as the stability of the board (Subramanian, 2015). Nevertheless, a director elected for a one year term tends to have a short term perspective. The board should be dismantled every three years and not one year. This would allow longer-term investments. Conclusion Corporate governance has attracted the attention of the media and is linked to organisational performance. Good corporate governance can generate higher profits, higher sales growth, and access to financing and better performance to name a few. Walmart is the largest retailer company by revenue in the United States. Nevertheless, its performance and operations have been criticised over the years and may be as a result of poor corporate governance. In the company, the directors are elected on the basis of broad experience, understanding of the workplace environment, outstanding personal careers and integrity. Directors in the company are expected to act in the best of the company’s interests to discharge duties and responsibility of care and loyalty. In addition, Walmart’s directors have free access to officers of the company. Any meeting a director initiates is arranged by the CEO. Also, the form and amount of the board’s compensation are reviewed by the Compensation Nominating and Governance Committee in accordance with regulatory guidelines. In general, the weaknesses of Walmart corporate governance are founded upon the decreasing independence of directors and the short-term service of the directors. The independence of directors in Walmart is low and more than 50per cent of the company’s Stock is owned by the Walton’s family. There is a need for the increase in the independence of directors in order for them to be able to solve the recent challenges faced by the company. References Cremers, KJ and Nair, VB. 2005, Governance mechanisms and equity prices, Journal of Finance, 60(6), 2859-2894. GNDI Principles 2014, Guiding Principles of Good Governance – Australian Institute of Company Directors. Lichtenstein, N 2009, The Retail Revolution: How Wal-Mart Created a Brave New World of Business, New York, Metropolitan Books. Ragothaman, S and Gollakota, K 2009, The effect of firm characteristics on corporate governance: An Investment Analysts Journal – No. 72 2010 11 empirical study in the United States, Internal Journal of Management, 26(2), 309-319. Subramanian, G 2015, Corporate Governance 2.0: Managing Organizations, Harvard Business Review. Walmart Store Inc. 2014, Walmart Store Inc.: Corporate Governance Guidelines, Retrived 15th March from, http://cdn.corporate.walmart.com/b4/aa/d83bfa1649d5a1e03946ba700e6b/corporate-governance-guidelines.pdf Read More