Analysis of Corporate Governance Arrangements - Sainsbury - Essay Example

? Analysis of corporate governance arrangements – Sainsbury BY YOU YOUR SCHOOL INFO HERE HERE Executive summary Corporate governance is defined as the system by which a business is controlled and directed, including a variety of different regulatory mechanisms, conducting market assessments, and aligning management activity to board-issued agendas and strategies (Tricker 2009). This report identifies the current corporate governance at Sainsbury, making comparisons to industry-accepted governance practices and those associated with governance theories to determine the investment viability for this organisation. Research identified a competent and revolutionary corporate governance system at Sainsbury that has much benchmarking and best practice opportunities. Based on research, a recommendation for potential improvement is provided. 2. The governance structure at Sainsbury Sainsbury maintains a very well-developed, stakeholder-centric corporate governance model following transformational leadership design, one in which corporate social responsibility is reflected recurrently associated with satisfying positive models of human resource management. Fairholm (2009) describes the transformational leadership model as a holistic model in which managers and executives regularly impart corporate mission and vision, open positive lines of communications in a flattened, decentralised hierarchy, and where power distance between board members and mid-tier managers are largely finite. The Board is structured to include three executive-level directors and six non-executive directors, in which there are clear division of authority and responsibility between the Chairman of the Board and the Chief Executive Officer (Sainsbury 2012). Non-executive board members are independent, yet they have diverse and unique corporate experience and education to contribute expert analyses and opinion regarding the establishment of Sainsbury strategic and financial agenda (Sainsbury 2012). Outside of traditional corporate governance activity found in most industries in large organisations, which include finance, operational strategy, risk management and compliance controls, Sainsbury’s board is also structured with subcommittees (Steering Groups), responsible for a wide variety of assessments ranging from corporate social responsibility to stakeholder relationship management imperatives (Sainsbury 2012). The Sainsbury corporate governance model moves beyond traditionalism, following such models as Adam Smith’s Invisible Hand, and has transformed into a holistic system of governance that includes consistent and recurrent emphasis on establishing better stakeholder relationship management. Examples at Sainsbury of this transformational model include a branding steering group, climate change steering groups, community and internal human resources steering groups (Sainsbury 2012). These committees meet annually or bi-annually depending on business imperatives dealing with positive sustainable procurement modelling, improvement of customer service, and employee relationship development (Sainsbury 2012). This diversification in extended corporate governance activities did not, however, occur within a vacuum. Rather, the dynamic and diverse corporate governance activities are a product of business evolution at Sainsbury that has occurred through emergent, historical learning and business repositioning that has occurred over the last decade due to growth in competition and diminished market entry barriers that has changed competitive and investment dynamics. In the early 2000s, Sainsbury realised that the company was gaining more target market loyalty and respect for the Sainsbury brand by emphasising corporate social responsibility as a positive brand differentiation scheme. By 2004, Sainsbury had a well-respected reputation for corporate social responsibility, taking an intangible human capital asset and transforming it to a marketable brand personality and identity that gained a great deal of market interest and loyalty. This extends into internal stakeholder management philosophy. Sainsbury developed, in 2004, “A Great Place to Work Philosophy” where fair and equal treatment policies were developed and more board emphasis on setting human resource-based risk analyses and policies became part of the innovative board model (Sainsbury 2012). “When we set our goals and priorities, we are guided by a ‘materiality’ process which enables us to focus our attention on those areas of greatest impact and importance. Examples of the most significant issues are clear nutrition labelling, supporting suppliers and farmers, and ensuring we have a diverse workforce” (Sainsbury 2012, p.15). In most corporate governance models, such activities are left to line management or HR management, however Sainsbury recognises the risks of not adopting a HR-centric model, thus these imperatives are assessed and considered at the highest level of corporate analysis. This represents significant advantages in a transformational model that provides competitive advantage in relation to effective governance systems in this industry. 3. Actual board practice in relation to governance theory Sainsbury’s corporate governance board rejects the traditionalism of agency theory, one that assumes managers within an organisation require monitoring and recurrent control systems in order to align their behaviours with the required interests of shareholders (LeBlanc and Gillies 2005; Turnbull 2000; Jensen and Meckling 1976). Under the agency model of corporate governance, directors will often attempt to use compensation as a control methodology as it pertains to executive level performance (Turnbull 2000). In the case of Sainsbury, the new transformational model is more closely akin to stewardship theory, the generalised belief that managers in the organisation are trusted and competent stewards of business activity and can be trusted to sustain profit and investment objectives (Turnbull 2000). Sainsbury’s governance boards works directly with managers and executives to establish CSR agendas, establishing less control mechanisms whereby managers and executives have more autonomy in policy formation and execution of operational strategy aligned with board-generated conceptions. This board believes, under stewardship theory, in the personal or psychological competencies of executives and managers under cooperative models of leadership and diminished power distance between board and management, an important concept in stewardship philosophy (Sanchez 2004). If the board was structured along agency theory conceptions, it is likely Sainsbury would not have achieved its positive market reputation as a benchmark-worthy leader in corporate social responsibility and internal stakeholder relationship development since 2000. According to Strandburg (2005, p.4), “good governance is primarily about values rather than establishing rules”. Good governance should also maintain a very strong “ethical backbone” in order to be perceived as valuable by shareholders and stakeholders, especially in relation to consumer markets (Strandburg 2005). How, though, did this notable ethical backbone gain interest in Sainsbury? In the 1990s, the Japanese economy suddenly declined whilst at the same time growth in global, diversified mutual funds occurred (Ibbotson and Brinson 1993). This created externally-driven pressure from shareholders on large businesses to be more transparent in their governance activities and adopt convergence of the American model of governance (Ibbotson and Brinson 1993). The globalisation of corporate finance, unpredictability in key international market environments (such as Japan), and growing consumer-generated pressures for CSR made the corporate board of directors more diverse to include brand-related activities and international investment (Useem 1996). With growth in tangible business research recognition, as well, describing the importance of human capital development to sustain market or comparative advantage in industry, Sainsbury found significant value in transforming the corporate governance model to include both traditional and contemporary leadership philosophy. In a stakeholder environment where sentiment about Board of Director activities is often scrutinizing and negative, Sainsbury found brand positioning opportunities by emphasizing the activities of the board and publicising their successes in transformational governance philosophy. 4. The investment potential at Sainsbury In order for a corporate governance system to be effective, it must maintain three distinct characteristics. It must establish clear and adequate control systems in order to guarantee safeguarding of capital and human-capital assets (Mallin 2010). It must also establish distinctions between power resources to ensure no singular individual has too much authority in the organisation (Mallin). Further, the board must encourage recurrent transparency and accountability in order to reduce shareholder risk and provide trust in the organisation and its leadership (Mallin). Sainsbury maintains all of these success factors in its governance model, in fact superseding these foundational criteria in a somewhat revolutionary model of governance with much executive and line management involvement. Based on this fundamental definition of a successful corporate governance model, Sainsbury exceeds best practice. In many corporate boards, there is a phenomenon known as groupthink, where individuals will often avoid defying the majority beliefs and norms of the board group, making impractical decisions simply to satisfy the social order (Mallin 2010). Sainsbury, by diversifying governance responsibilities and activities in a variety of sub-committees with differing agendas, it prevents groupthink and thus provides a more reliable basket of strategic conceptions from board members. Research did not uncover any evidence or industry-generated critiques of Sainsbury that would indicate ineffective group judgments associated with groupthink phenomenon. Rather, it would seem that Sainsbury achieves significant results in CSR, employee development and fair business practices, and establishment of multiple authority ranks that prevent unbalanced allocation of power throughout the organisation. In every detail, in terms of board sustainability and effectiveness, the board structure and analyses methodologies exceed industry norms and continue to bring significant brand value to Sainsbury in its key international and domestic markets. In most large organisations sustaining a corporate governance board, it is not normal practice for board members to actually develop policies or procedures used in line management or executive-level job practices (Tricker 2009). Sainsbury, however, due to the integrated nature of multiple strategic imperatives related to the company brand reputation, cannot necessarily segregate these functions and allocate them solely to management. This, however, seems to have significant strengths in effectiveness and relationship development that is an imperative of cultural development at the organisation. Though revolutionary and somewhat outside of industry norms for governance systems, there is virtually no evidence available in research that illustrates this integrated system has created negative sentiment from managers seeking more authority or diminished the company’s brand and generalised market position. This fully holistic system of inter-dependencies between board and management/executives takes stewardship philosophy to a new, positive level that could be modelled by other organisations seeking better relationship development internally and externally. Many investors may be satisfied and less risk averse to invest in a company if the board prescribes to agency theory, or the establishment of more transparent controls of managers and executives. Why is this? Such transparency in rigid control-based management guarantees compliance, thus giving investors more security in a bureaucratic environment. However, Sainsbury recognises that profit and investment revenues do not only hinge on the opinion and attitude of shareholders, thus more focus on a broader stakeholder market must be established. Even though control system philosophy at Sainsbury is a bit more loose than other more transactional board systems, the advantages of cultural efficiency and dedication to goal attainment provides much more revenue-based security for shareholders. This proven model of governance has given the organisation a positive brand personality in a market environment that is dramatically dependent on consumer-based revenues to sustain its market position or expand into more diverse international markets. After comparing Sainsbury’s model to theoretical models of effective and potentially ineffective governance of the organisation, Sainsbury represents a quality investment opportunity. Power is effectively shared throughout multiple authority ranks in the organisation, thus providing a broader and more diverse basket of ideas and conceptions that give the business a strong and proven market position. If Sainsbury prescribed to agency theory in which control systems are a priority and imperative of board function, it is likely Sainsbury would not, today, be experiencing the positive outcomes of years of transformation that has occurred internally. The investor should, then, be satisfied that Sainsbury maintains a competent governance system that will continue to provide the business brand with continued stakeholder loyalty and trust that will ultimately lead to better share value and differentiation among competition. 5. Conclusion and recommendation for Sainsbury In most industries, analyses reveal many different opportunities for improvement in governance structure and focus. In the case of Sainsbury, however, research evidence did not provide any notable deficiencies in governance development and execution that would mandate a series of improvement recommendations. Sainsbury, based on market strength, share value, brand reputation in key markets, and success in the transformational leadership model related to the HR function, is a benchmark organisation for successful, evolutionary and modern board structure and responsibility. The only recommendation for Sainsbury, based on qualitative analysis of research findings, would be to consider the depth of diversification occurring within the current governance model. Having multiple steering groups linked to governance systems could allocate authority inappropriately between different steering group Chairs, somewhat conflicting the data analysis portion of steering group research findings when presented to primary authoritative board members. In essence, placing too many responsibilities on the board to assess human resources-based activities, as one example, could impact the ability of the board to focus on more important key financial considerations or strategic imperatives. In a structure where board meetings are annual or bi-annual, there is a need to maximise time management to ensure proper focus is being considered and executed. Periodic efficiency audits of sub-committee development and practice would assist in providing quantitative data about whether the return on investment is actually worth the vast volume of board-related activities. Though only a potential risk, rejecting or accepting this recommendation would not appear to have significant long-term consequences that would deplete the many positive and evolutionary gains in governance that has been achieved by Sainsbury in the last ten to 15 years. Sainsbury is a model of effective corporate governance. If the business continues with its transformational structure that genuinely values employee relationship development and sustaining a powerful brand reputation dedicated to corporate social responsibility, Sainsbury will have significant investment potential in the next decade and beyond. There is ample evidence that board and executive leadership at Sainsbury understand how to properly align senior-level analysis to legitimate market and consumer-based issues to achieve competitive and comparative advantage in key market environments. It is recommended to invest in this organisation immediately to achieve positive return on investment. References Fairholm, M. 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