The Annual Report of the Glaxo Smith Kline Company - Research Paper Example

Table of Content 1. Introduction Page 3 1.1 Financial Performance of Year 2008, 07 &06 Page 3 1.2 The Priorities and Commitments Page 4 1.3 Dividend Policies Page 5 1.4 Conclusion Page 5 2. Corporate Governance. GSK Model Page 6 2.1 Corporate Who’s Who in GSK Page 6 2.2. The Corporate Structure Page 6 2.3 The Analysis of Corporate Dynamics Page 9 2.4 Conclusion Page 11 3. Introduction Page 12 3.1 Cost of Sales Page 13 3.2 Basic Earning Per Share Page 13 3.3 Results before “Major Restructuring” Page 14 3.4 Remuneration Report Page 14 3.5 Notes on Financial Statement Page 14 3.6 Conclusion Page 14 Reference Page 15 1. Introduction:- “Every Organization – not just business – needs one core competence: Innovation “ Harvard Business Review on Measuring Corporate Performance, Page16 (1) To judge the health of a company, apart from those biased reports of some Wall Street mandarins, the most reliable tool that can gave a glimpse of the entire happenings is its financial statement. The organization in question is the largest pharmaceutical company under the Sun: Glaxo Smith Kline, popularly known as GSK. From its far flanged research project to the detailed analysis of cumulative sales of staggering £ 24.4 Billion (or 40.6 Billion USD) and the dividend policy as formulated in the governing body, the financial statement and Annual Report says it all. In further course, the financial statement and dividend policies will be discussed in respect of Year 2008, 2007 and 2006. The expectations of the shareholders, the return of their money invested and the thorough analysis has been discussed herewith. 1.1 Financial Performance of Year 2008.07 and 06 Head Quartered in UK, GSK posts its elaborate Annual Report where each and every account is confirmed in UK Starling Pound or £ which tantamount to 1.66 USD per £ . This report is made available in their website, www.gsk.com . From that report it is confirmed that the total turnover of GSK in FY 2008 is £24.4 Billion. The performance of 2007 is £22.7 Billion and in 2006 it is £23.2 Billion. The growth is around 7 % in respect to last year and in respect to 2006, it posts around 5% growth. The Performance has improved in respect to last year. Here it can be observed that EPS or Earning per share, the main index of a companies’ profitability, slides a little, in comparison with the FY 2007, when the EPS was 94.4 Pence per share takes a biting, it is 88.6 Pence per share, a 6% depreciation that has been reported. Still overall performance outscores this southwards posting in the statement as the profit does not come as a face saver when the entire world reels under severe recession. The low Earning per Share may lead to a lower profit margin which is attributable to the shareholders. The Profit after Taxation is £ 4312 Million and in the year of 2007 it is £ 5214 million, a 10 % decrease. And in respect to 2006, when the same was £ 5319 Million, a 3% rise in respect to the year 2007 and 12.3 % in reference to the year 2008. From this analysis it is evident that GSK, with its mammoth workforce and resources is obviously in the red zone but that does not mean that that they are going to compromise over their much coveted research project. As we are in course of analyzing the statement, we can see the allocation in research and development. In 2008 financial year, it is £ 3671 Million, a net 11% rise then the FY 2007 when it was £ 3327Million altogether. The further analysis of the statement reveals another pertinent fact which can be attributable to this plummeting in profit base. The Cost of Sales has gone up to 21 % in respect to the earlier year, I.e.2007. The management has given a strong introspection and they are going to invest in R&D for vaccines and other products to make a turnaround in days to come. (2) 1.2. The Priorities and Commitments Like all organizations with a vision, GSK has set some priority which will corroborate their views in managing the assets and setting their priorities. In the Annual Report 2008, the company has taken three priorities, in effect in the year 2009. These are as follows: “Grow a Diversified Product Business. Deliver more products of value. Simplifying the Operating Models”. (3) On the other hand, like all dynamic organization, GSK has a different priorities and strategy for the year 2007. In this year in the Annual Report, The questions which lie in the core of GSK business model are being raised. There in a narrative style these things are categorically being discussed. Discussion of a proper range of products, thorough coverage in the diverse region. Consumer Healthcare scenario and relevant discussion. Discussion regarding share price and value creation for the shareholders. Reassuring over emergent R&D facilities, the bloodline for any pioneer industry. Facilitating proper healthcare in developing countries. (4) All these things are relevant as the share price has not gone well and to regain the confidence of the investors, GSK put itself at the helm of the affairs to discuss the basics. In the year of 2006 the mood was not that somber and the company posted a 9 % growth. The reflection is evident in the Annual Report itself. The discussion over the eminent problems like Malaria, Brest Cancer, Diabetics etc, community medicine has taken the front seat. In strategy making, the approach is crisp enough. “Achieving worldwide sales force excellence. Achieving Pharmaceutical and Consumer Healthcare marketing excellence. Maintaining the highest ethical standards. Improving the cost-effectiveness of operations”. (5) All these paradigm shifts many a time personify the company which goes through bad patches followed by a smooth sailing. All that is being reminded about – Like the fate of life, the fate of a company hangs on a Sine Curve, goes from crust to ebb- again and again. 1.3 Dividend Policies GSK epitomizes the highest order of compliance so far the valued shareholders are concerned. In their structured dividend policy, the management has taken apt care to redress the customer’s need and requirement. In the fiscal year 2008, the dividends paid to the shareholders are £ 2929 Million, £ 136 Million higher then the fiscal year 2007. The profit margin has increased and the healthy growth of free cash flow may be a reason for that. In fact, there is a 21% higher growth in cash flow. Dividend per share is been calculated as 53 Pence in 2008. As per the statement, GSK manage the going concern aspect first and then provide the shareholders with optimized dividend under a strict corporate policy. (6) Company is not keen in share repurchase as the dividend is good enough to draw the attentions of the investors. If we go on comparing the trend in between the years of discussion, it will come out in this fashion: YEAR Dividend (In £ Million) Dividend per share(In Pence) 2008 2952 57 2007 2904 53 2006 2695 48 In spite of the recent slowdown, which has constricted its borrowing capacity from £5 Bn to 3.9, the commendable effort can easily be perceived from the behavior pattern of the dividend paying. The company has managed the going concern, played safe with liquidity risk and romped profit in spite of adversity for their valued shareholders. With a policy of quarterly payment, GSK maintains the worth of their goodwill, in terms of dividends. 1.4 Conclusion In a lucid manner, the Annual Report has given an in-depth scenario about the health of the organization. The points that also need to be discussed are their thrust in new drug delivery and vaccines. In new age therapy demands new innovations and GSK has responded in an apt manner to meet the challenge that comes out of the immerging condition in days to come. Being a visionary organization, who heralds so many new vistas in today’s therapy, GSK responds not only to the world communities in terms of innovation and more humane approach but to its shareholders as well, their main strength behind. The example of good corporate governance can easily be judged if one can read the financial statement of them in proper manner. 2. Corporate Governance – The GSK Model. Under the Stewardship of a host of dynamic and able professionals GSK has once again proved its mantle under a highly competitive milieu. Their corporate governance has proved to be the sheer reflection of staunch professionalism and unitary commitment encapsulated in a dynamic thought powerful enough to propel the voyeuristic zeal that runs through the entire corporate dynamics of GSK. 2.1 Corporate who’s who in GSK GSK can be considered as a curious mixture of liberal managerial exposure and top seeded bureaucracy. The Board consists of the members where the average age rang in between early forties to early sixties. Relatively young and dynamic in nature, from different works of life including scientists and top brass accountants, the board has kept the democratic jurisprudence at the core of their heart. The MDs have the power of agreeing or not over any specific issue or issues for the betterment and holistic developments of the organization. If name says it all, GSK has an array of that which includes Sir Christopher Grant – Chairman, Andrew Witty – CEO, ten Non Executive Directors and several other personalities including the presidents of other sister organizations like GSK Consumer Healthcare. As per their corporate governance, there are different committees and these committees place their reports in the AGM or Annual General Meetings of GSK. But prior to this overview over these committees, let’s have a glimpse over the astute code of conduct of the functioning of the managing team of GSK, the formidable force in contemporary pharmaceutical business. 2.2 The Corporate Structure: $ 40 Billion turnover, presence in every nook and corner of the globe, millions of stockholders and employees, thousands of formulations, numerous acquisition – to strap up this incredible endeavor a proper structure stands out to be the need of the hour. And to meet the same, GSK has structured itself in an impeccable manner. The apex body is considered as the Board of Directors consists of Chairman, Three Executive and Ten Non Executive Directors. The multipronged activities of a corporate like GSK have been earmarked with six different committees and CET. 2.2.1 The Board of Directors The Board of directors is accountable for all core policy related matters including internal control, risk management, approval or discussion over all major issues and policies pertaining to licensing, financing, investment and major operational procedures. It is maintained, there should not be any misunderstanding that has been raised due to conflict of interest and the apex interest of the organization will hold sway in that respect. A qualified Company Secretary has to be there in the board meeting to conduct the proceedings of the house. The board governs over the entire activities as a group including: “Engaging at Board meetings with the CEO, the other Executive Directors and members of the CET as appropriate, on the financial and operating performance of GSK and external issues material to the Group’s prospects Evaluating progress towards the achievement of the Group’s financial and business objectives and annual plans Monitoring, through reports received directly or from various committees, the significant risks facing the Group.” (7) Succession planning of CEO and other board members. Analysis of niche industrial environment development. 2.2.2 CET The CET or Chief Executive Team is being headed by CEO Mr. Andrew Willy. The CEO is instrumental with the implementation of the strategy and policies adopted by the Board. The Chairman here represents the board and communicates on regular manner to oversee the activity of the CET. CET consists of seventeen office bearers including Presidents or Vice Presents of different sister organizations, different frontal heads, Company Secretary, Chief Finance Officer, Chief Information Officer, Chief of Stuff and so on. Their post signifies their duties and responsibilities. CET has met 11 times and many a time either President or The other members of the Board meet with them to formulate the strategy to marshal the growth of the organization. CET members meet with all board members to give them the details of their individual responsibilities and performance and CET formally met with Board of Directors in Annual General Meeting to discuss strategy for holistic development. In fact, CET, chaired by CEO Mr. Willy is being considered instrumental with the exponential growth and progress of GSK. 2.2.3Audit Committee Audit Committee consists of six individual non executive Directors.“Audit committee reviews the financial and internal reporting process, the management of risks and the external and internal audit process. The Committee also proposes to shareholders the appointment of the external auditors and is directly responsible for their remuneration and oversight of their work.”(8) The Audit Committee has placed its report in front of the board. In 2008, there were 6 full meetings of the committee. The main thrust area of the committee is corporate accounting, Internal Accounting, Internal Financial risk and Security management and overall management of law, business ethics and other regulations. Headed by Mr. Tom de Swaan, the audit committee has placed its report. Apart from these auditors there is a group of external auditors who keeps tab on the activity of this audit group, represented by venerable professionals considered to be the authority in their own accord. In fact, as per international accounting convention, the external Auditors audit the entire process of the GSK and the role of Audit Committee is to keep the shareholders informed about the happenings. 2.2.4 Nomination Committee: In GSK, Nomination Committee, headed by Sir Christopher Gent has Chairman, has 4 Non Executive Director as the members. The main works of this committee are: A. Review of the structure of the board. B. Making the assessment of the Board members and the members of CET. C. Planning the succession of the Board members and CET members. The committee is responsible for a balanced approach in selecting the members in respect with their experience, market coverage, especially for sales and their specific skill, expertise and knowledge. The committee has met three times on last year and they are considered as the sole guardian in safekeeping the chest of the company. (9) 2.2.5 Remuneration Committee In an absolutely elaborate manner, the Remuneration Committee has framed its work and so are the recommendations of them. In fact, a competitive edge of an organization depends upon its people and the quality has its own cost. So, to maintain a professionally chiseled team, to satisfy the shareholders demand, the Remuneration committee has been set up. In fact this committee has been responsible for a quite exhaustive work report, which, with its strong analytical exponent, is bound to attract the attentions of all quality researchers. Remuneration Committee gives strong recommendation of the salary and incentive part of the board members and CET. The pay package of the top honchos is being governed with the cross industry comparator and Remuneration Committee is responsible for that. Besides, the Annual Bonus Plan, The Dividends of the Board and CET is being determined by Remuneration Committee. The other recommendations included rebalancing long term initiatives and the subsequent effect over the coffers of the organization also being taken for reckoning by the committee. (10) 2.2.6 Finance Committee and Corporate Administration and Transactions Committee: All Board members are deemed to be the de facto members of the Finance Committee. In fact, Finance committee is responsible for approval of Reports, preliminary and final financial statement, Form 20-B, all other financial aspects and so on. In other words, the finance committee regulates the cash flow of the organization itself. They met more than three times in year 2008. The report that is the outcome of the exchange of their valuable opinion is being jotted down as Annual Report so, the entire report that has been toiled out is the direct outcome of an intellectual conglomeration namely, Finance Committee. On the other hand the committee that takes interest in Corporate Administration etc; is responsible in reviewing and approving the matters responsible for the business of the organization. (11) 2.3 Analysis of the corporate dynamics Corporate governance is in no way less complicated then the sprawled bureaucracy that runs a democratic country. Here, apart from bureaucrats and civil servants, who literally run the country, contrary to the popular belief that it is the political leaders who are at the helm of the affairs? There are several laws and by laws, regulations and memorandums which are instrumental to run the nation. Similarly, the governance of a corporation like GSK has some specific rules, norms and regulations that make a successful company like GSK to go from strength to strength. In the AGM of 2008 in May 08, the board members are been given a questioner that seeks their views regarding the time investment of them in their respective meeting, succession plan and the continuous education plan that has been unfurled by the management to empower non executive Directors. (12) 2.3.1 Share Holders Perspective: GSK meet shareholders in AGM and in the half yearly meeting. In these meetings, the concerns are being discussed. Apart from that, the crux of entire shareholding business rests upon the big institutional shareholders and their plight needs to be redressed as well. CEO, CFO and the chairman of the Board himself are in constant touch with them and the dialogue is being done in regularly basis. The shareholding of GSK is being enlisted in London Stock Exchange and NYSE as well. Ordinary shareholders are in a position of voting , transferring there share and receiving their dividends. In case of the takeover bids the company (read GSK) will not be responsible to take care of their going concern including employees, as per the regulation of the organization. GSK has also published their FSA discloser and Transparency Rule in their website. 2.3.2 The governance of Directors The selection of directors is based upon a simple notification that is taken by the members of the board. The Remuneration Report says it all so far the responsibilities and duties of a director are concerned. In an abridged report, what are the parks of the members are being analyzed in an impeccable manner. The Directors need to reelect themselves in the AGM in the interval of three years. The director’s duty is being terminated under these circumstances as per company rule book under these circumstances: If the said director is being considered as bankrupt. Under the circumstances of bad health. If the director fails to be in the meeting in a span of six months Prohibited by the board to be the Director Prohibited by law to be the same. (13) 2.3.3 Memorandum of Articles and Share Buy Back: As per existing laws of the land and internal company memorandum, the company directors are expected to perform. The company rule and regulations are binding, amendable by special regulation passed by the members. The shares can be regulated by the directors as per the Rule 8 to Rule 10 of the company. In 2007, the share re purchase is aimed at £ 12 Billion and the achievement is £ 6.2 Billion. Share premium and the share re purchased in the head of ‘Share Capital and Share Premium Account’. Since 2000, the shareholders have authorized to invest in political agenda. As per that option, the donation in US and Canada is £ 347,000. The company also supports the PAC- Political Action Committee by their employees in USA that takes part in donation rising on behalf of the political parties. A total £ 359359 is being donated by GSK-PAC. (14) 2.3.4 Annual General Meeting: The Annual General Meeting of 2008 was held in 20th May,2009. There are multipronged agenda that has been discussed which are as follows. Approving 2008 Remuneration report Retirement, Election and Re-Election of Directors. Re appointment of Auditors Special Business 2.3.5 Internal Control Network: The internal Control network consists of financial, financial and operational control and risk management. This review is being managed and maintained by the Audit Committee appointed by the board. Internal control and the implementation of the board decision has been entrusted upon CET towards effective control of the situation and its worth in terms of implementation which will eventually boil down towards the lowest rung of the organization. This risk control sequences have been assisted by some groups for proper compliance. 1. Risk Oversight and Compliance Council (ROCC): Comprising with several CET members and other senior officials, ROCC oversees risk management and internal control mechanism. 2. Risk Management and Compliance Board (RMCB): The basic aim of RMCB is to oversee the risk factor in all the relevant units of GSK. Chiefly consists of senior officials and executives and duly supported by the outside experts whenever is applicable, to conduct different level of audits in different layer of the organization. These include Quality Control Audit, considered to be the essence of pharmaceutical business, health and safety audit, Supply and risk Audit and so on. The fortification of this work is being done by a Corporate Assistance Group and is being supervised by Corporate Compliance officer. 3. Corporate Ethics and Compliance (CEC): Given the conditions, CEC oversees the conditions and make the employees to adhere with company ethics and other laws and by laws. CEC promotes ethical behavior, awareness of law and regulation and corporate governance among its employees. (15) 2.4 Conclusion: As per the given circumstances, the corporate governance in GSK is at per with all other compatriots in Europe and USA. The Corporate Governance Report in 2007 and 2006 consists of the same structure as discussed so far. Only some key position has been changed. From this analysis, one may reach to this conclusion that GSK, like the other peer groups in the niche market segment, maintains a complex, multilayered governance system. But, far away from stiff upper lip bureaucracy and corporate hierarchal legacy that happens to be instrumental with all big corporations, GSK radiates new energy and dynamism that makes the leeway towards further growth and prosperity. 3. Introduction: Annual Reports and Account Statements are becoming increasingly complex in nature to the stockholders. As a whole, a common investor, who has invested his hard earned money, are being left high and dry with too much of technical jargons and, at the end of the day, the Annual Report in his hand left a bitter test in mouth. If we take some examples from the existing Annual report of GSK which we have discussed so far, the matter will be clear. The relevant data, up to date comments and other understandable data are pathetically absent in this mammoth report. Let us check this information in light of the said Annual Report 2008 of GSK. Here we will ponder over five points which fails to bring the eventual clarity in this annual data sheet. 3.1 Cost of Sales As per the Annual Report 2008, the Cost of Sales is £ 6415 Million and the Selling, Genreral and administration is £ 7356 Million. Here the point that needs to be noted that the authority have used the term selling in two occasion but no where it has been mentioned what is the exact Sales turnover of the company itself. In state of that, the appropriate authority could have made a specific row where the total sales turnover could have been discussed, that would be better approach in every respect. 3.2 Basic Earnings per share Again another fallacy as the basic earnings per share is being told as 88.6 Pence but it is not told at what base this “Basic Earnings” have been calculated. Accountants have every right to disown their responsibility as they have mentioned that as per British GAAP the report is being prepared (Page 107 of the Annual Report, 2008) but that does not mean that they should wash their hand about this matter when a bona fide shareholder want to know the fullest details of his hard earned money that has been vested. 3.3 Results before “Major Restructuring” Again another fallacy wrapped in enigma. It is observed that in the Earning Per Share(EPS), cost of sales and other data, already confusing enough to any common stockholder who perhaps knows nothing about accounting, got flummoxed further when he sees that the end result before and after “Major Restructuring “ appears to be the same while the results of all other rows have been changed. To a common man, it appears to be a morbid attempt to meet the bottom line by any means. (16) 3.4 Remuneration Report. Though it may carry significance in accounting policies but a shareholder never gets baffled with the remuneration details of the Directors or CET members. Considerable weight has been given upon this painstakingly simple fact. In fact a good 20 pages have been vested to discuss what the CEO should drew or what the Non Executive Director could not. For a commoner, there is hardly any relevancy over these trivia as it never draws any active interest under all practical circumstances. (17) 3.5 Notes on Financial Statement: The management has taken enormous pain to make everybody understand that the process that has been followed is good enough to calculate and extract the bottom line at the end of the day, the profit earned. Good endeavor indeed, with a miniscule number of takers. No one is interested to bury itself with loads of inane information. Apart from number crunching, Accounting Application and the tail tall explanation never evokes any popular interest. (18) 3.6 Conclusion We are living in such a point of time when information of anything and everything is simply a few clicks away, it is really appealing if we look at the cumbersome and toiling corporate presentations in all Annual Report and GSK is no exception. Instate of that, all these classified information could have been posted separately to the net so that the requirement of a few CA and Researchers can be fulfilled. The report should be crisp in nature, easily understandable and should be taken without any aspirin. We can hope for the day when, by breaking these rules, a new, more flamboyant version of Annual Reports will be unfurled. References 1-1. Page 16, Harvard Business Review on Measuring Corporate Performance, 1998 ISBN No: 0-87584-882-6 2-1.1 Page 12, GSK Annual Report, 2008. 3-1.2 Page 4 GSK Annual Report, 2008 4-1.2 Page 4 GSK Annual Report 2007 5- 1.2 Page 14 GSK Annual Report 2006 6-1.3 Page 43 GSK Annual Report, 2008 7- 2.2.1 Page 64 Board Process: GSK Annual Report, 2008 8-2.2.3 Page 67 Corporate Governance Audit: GSK Annual Report, 2008 9- 2.2.4 Page 75 Nomination Committee Report ; GSK Annual Report, 2008 10-2.2.5 Page 78 Remuneration Report; GSK Annual Report, 2008 11- 2.2.5 Page 69 Interest of Voting Rights ; GSK Annual Report, 2008 12- 2.3 Page 68 Evaluation of Board, Board Committees and Directors; GSK Annual Report, 2008 13-2.3.2 Page 62 Directors and Officers, GSK Annual Report, 2008 14- 2.3.3 Page 70 Share Buy Back Program; GSK Annual Report, 2008 15- 2.3.5 Page 72 Corporate Governance ; GSK Annual Report, 2008 16- 3.3 Page 14 Financial Trends and Ratios; GSK Annual Report, 2008 17- 3.4 Page 78 -98 Remuneration Report; GSK Annual Report, 2008 18- 3.5 Page 106 Notes on Financial Statements; GSK Annual Report, 2008 Read More