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Topic: Corporate Governance Type: Report Subject: Accounting and Finance

Academic Level: Masters Style: Harvard Language: English (U.K)

Number of pages: 11 (double-spaced, Times New Roman, Font 12)

Number of sources: 10

Task details

Select an annual statement for a listed company and review it in terms of Corporate Governance.

Your answer is to be presented in a report format and include an analysis of the composition of

the board of directors, compliance with recommended practice, audit report and any other aspect

you consider relevant.

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Table of Contents

Introduction 3 ...................................................................................................

Findings of the Study 4 ........................................................................................

Analysis of Finding in Relation to the UK’s Corporate Governance Code 5 ............................

The leadership principle 5 .................................................................................

The effectiveness principle 8 ..............................................................................

Accountability principle 10 ................................................................................

Remuneration Principle 11 .................................................................................

Relations with shareholders principle 12 ................................................................

Conclusion 13 ...................................................................................................

References 14..................................................................................................

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Introduction

Corporate governance is viewed as the system through which companies are directed and

controlled. ASX Corporate Governance Council (2014, p. 3) and International Finance

Corporation (2014), define corporate governance as a framework of rules, systems, relationships

and processes through and within which authority is practiced and controlled by corporations. It

is aimed at facilitating effective, entrepreneurial, as well as prudent management that delivers the

company’s long-term success. According to the Financial Reporting Council (2012, p. 1), the

respective companies’ board of directors is mandated for the governance of their companies. The

Financial Reporting Council (2012, p. 1), further states that shareholders have a role in the

management of companies as they are the ones who appoint directors and external independent

auditors to satisfy themselves that there is an appropriate governance structure. The board is

responsible for laying down their companies’ strategic aims, offering the right leadership to

pursue them, supervising the business management, and reporting their stewardship to

shareholders. In doing this, the boards are guided by laws, regulations, as well as shareholders at

the general meeting. In a nutshell, corporate governance is all that a company’s board undertakes

and how it sets the company’s values.

This paper aims at studying corporate governance issues and structure of any publicly traded

company and whose listing is at the London Stocks Exchange. This paper used simple random

sampling, convenient sampling and purposeful sampling in selecting the company for study. The

researcher, therefore, chose J Sainsbury Plc., because its securities are traded on the London

Stock Exchange.

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The incorporation of J Sainsbury Plc., took place in 1869, and it is headquartered in London, the

United Kingdom. Its core line of operation is the grocery and other related retailing activities. It

operates through three primary segments: Retailing, Property investments and financial services.

Its store formats include 1,203 convenience stores and supermarkets through which it offers

various food, as well as non-food services and products. It also operates a grocery and general

merchandise through online platforms.

Secondary sources were the primary data sources used in this study as the study was not

practically conducted in the field. This paper used the company’s recent annual financial reports,

web- based periodicals and other news about J Sainsbury Plc., which provided valuable

information for the study.

Findings of the Study

The results of the study established that J Sainsbury Plc., has a board of directors that has nine

members, in addition an operating board that has eleven members. The board of directors has

seven gentlemen and two ladies (J Sainsbury Plc. 2013, pp. 34-35). They include the chairman,

the chief executive officer, the group commercial director, the chief financial officer, and five

non-executive officers. The findings of this study established that J Sainsbury Plc.’s operating

board has eight gentlemen and three ladies. They include the retail director, general merchandise,

clothing and logistics director, property director, company secretary and corporate services

director, group development director, IT director, and the marketing director.

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Analysis of Finding in Relation to the UK’s Corporate Governance Code

According to the Chairman’s statement in the 2013 annual and financial reports (J Sainsbury

Plc., 2013, p. 38), J Sainsbury Plc., had continued to comply with all the provisions as stipulated

by the UK Corporate Governance Code.

The leadership principle

According to the Financial Reporting Council (2012, p. 8), each company must be headed by a

board that is effective and which is collectively responsible for ensuring the long-term success of

the company. The Board also ensures that the company meets its obligations to shareholders and

other stakeholders. The analysis done by this paper in the course of the study established that J

Sainsbury Plc.’s board is committed to strong governance, and it, thus, complied with the

leadership principle of the Code. According to the J Sainsbury Plc. (2013, p. 39)’s annual report,

J Sainsbury Plc., has a board comprising of five non-executive directors and three executive

directors, chaired by a chairman. The report states that the key focus of the committee was to

help in the creation of long-term sustainable value for shareholders, through a strategic

leadership, investor relations, risk management, performance management, governance and

succession planning.

The board is required to have sufficient regular meetings to discharge its duties effectively. In

this respect, J Sainsbury Plc.’s board has a programme of meetings that has been forward

scheduled to ensure that it allocates sufficient time in every critical area of its function. This

enables the J Sainsbury Plc.’s board to plan board and committee meetings appropriately and use

its time most effectively. Heir programme is also sufficiently flexible to allow some specific

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items to be enjoined to any particular agenda. This ensures that the board concentrates on critical

issues relating to the business at the right time (J Sainsbury Plc. 2013, p. 39).

Among the items included in the board’s scheduled forward programme and some of which are

considered at every meeting while other are periodically reviewed throughout the year, include;

annual budget, dividend policy and recommendations, corporate plan, committee reports,

pensions, customer insights, project updates, treasury, investor relations, CEO report and trading

updates, financial items, strategic items, preliminary and interim results, governance, safety

reports, annual reports, risk management, board evaluation inter alia. Further findings of this

paper on the analysis of J Sainsbury Plc.'s leadership established that the Board convene to a

number of informal meetings, which makes it possible for all directors to spend more time

together, discussing specific areas of the business. Through its annual board evaluation exercise,

J Sainsbury Plc.'s Board reviews whether its meetings are structured in such a way that their

focus is on critical matters facing the company.

The Financial Reporting Council (2012, p. 8), Faure-Grimaud et al., (2005,p. 3) and Grant

Thornton UK LLP., (2013, p. 15), require duties to be clearly divided among board members,

especially in relation to the executive functions and the conduct of the board. The board’s

chairman is responsible for setting the board’s agenda and ensuring the availability of adequate

time for discussion of all agenda items, among them; strategic issues. The chairman is also

responsible for promoting a culture of debate and openness by facilitating the practical

contributions made by non-executive directors and ensuring the cordial relationship between the

executive and non-executive directors. Additionally, the chairman must ensure that directors

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receive accurate, precise and timely information. The chairman should also provide an adequate

communication platform with shareholders.

From this study’s analysis of J Sainsbury Plc.’s division of responsibilities as required by the UK

Corporate Governance Code on the leadership principle, there is a clear division of duties

between the Chief Executive and Chairman and is set out in writing, approved by the board (J

Sainsbury Plc., 2013, p. 40). The chairman is responsible for the board’s leadership, ensuring

board’s effectiveness and setting its agenda to guide it in fulfilling all aspects of its role. The J

Sainsbury Plc.’s board chairman also ensures effective communication with shareholders, as well

as making the board conversant with the major shareholders' views. As per the requirement of

the Corporate Governance Code, the chairman of J Sainsbury Plc.'s board facilitates non-

executive directors' contributions via a culture of openness and debate, in addition to promoting a

strong relationship between directors. On the other hand, the Chief executive officer's role is to

manage the firm daily and execute the agreed upon strategies.

According to the Financial Reporting Council (2012, p. 11), non-executive board members'

primary role is to facilitate the development of proposals for the strategies. They should

scrutinise the management's performance in meeting the agreed upon objectives and goals, in

addition to monitoring the reporting of performance. According to the Financial Reporting

Council (2012, p. 11), non-executive directors should satisfy themselves on the financial

information’s integrity and that financial controls, as well as risk management systems, are

robust and defensible (Harris, 2014). It is also their role to determine an appropriate level of

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remuneration of executive directors. They also play a role in the appointment and removal of

executive directors.

The effectiveness principle

This principle requires that the Board possess the appropriate balance of knowledge, skills,

experience and independence to discharge their respective responsibilities and duties (Financial

Reporting Council, 2012, p. 11; Grant Thornton UK LLP., 2013, p. 16). The board should also be

of sufficient size that can be managed without undue disruption. The effectiveness is also

achieved by having both the executive and non-executive members of the board ensure that none

of them dominates the board’s decision making. The effectiveness principle further requires that

non-executive directors, considered to be independent, should be identified by the Board in the

annual report. After the study and analysis of J Sainsbury Plc.’s board, this paper found out that

the board has both executive and non-executive directors. According to J Sainsbury Plc. (2013, p.

40)’s annual report, the presence of non-executive directors in the board brings an extensive and

varied commercial experience. The chairman of J Sainsbury Plc.’s board certified in the annual

financial report that its non-executive directors were independent as per the provisions of the

code.

The effectiveness principle requires that a formal, rigorous, as well as transparent procedure, be

used when appointing new directors (Financial Reporting Council, 2012, p. 12; Grant Thornton

UK LLP., 2013, p. 17). They should be appointed on merit and diversity, including gender. The

board should maintain necessary plans for an orderly succession (Deloitte, 2013), to maintain an

appropriate balance of experience and skills by the company's board. A nomination committee,

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the majority who are independent non-executive directors, must be in place, mandated by the

process for board appointments. On this note, this analysis established that at J Sainsbury Plc.,

the succession planning is taken seriously by the board for both members of the board and senior

management. Further findings confirmed that its nomination committee had all of the non-

executive directors as members (J Sainsbury Plc., 2013, p. 39). During the evaluation exercise,

the balance, skills, as well as the diversity of J Sainsbury Plc.’s board is considered. The

nomination committee also evaluates the succession planning and reviews it to establish whether

it is working properly.

According to the Financial Reporting Council (2012, p. 13), all directors are expected to show

commitment by allocating sufficient time to the company so that they can effectively discharge

their responsibilities. The findings of this study confirmed that J Sainsbury Plc.'s board satisfies

this by requiring that during appointments, the board members must prove that they have enough

time available to effectively discharge their duties (J Sainsbury Plc., 2013, p. 40).

On joining the Board, Financial Reporting Council (2012, p. 14) states that all directors receive

induction with a regular update and refreshment of their skills and knowledge. The board’s

chairman ensures that other leaders are offered with refresher courses to update their knowledge,

as well as skills necessary to meet their roles. In fact, the newly appointed directors should

receive an induction that is full, formal and tailored. After the analysis of the code’s requirement

in relation to J Sainsbury Plc.’s practices, this paper established that J Sainsbury Plc., has a

programme for meeting the training and development of its directors (J Sainsbury Plc. 2013, p.

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41). This is mainly meant for the newly appointed members of the board and who lack previous

experience of a public company at board level. They are provided with a detailed training on

their roles and responsibilities. The new directors take part in a comprehensive, as well as

tailored induction programme. Subsequent training is also offered on an ongoing basis to meet

any particular needs.

Another dimension of effectiveness is an evaluation of the board’s performance through a formal

and rigorous annual evaluation. Evaluation is also done for individual directors and committees

(Financial Reporting Council, 2012, p. 15). The board’s evaluation should take into account the

experience, the balance of skills, independence, diversity and other factors pertinent to its

effectiveness. The findings of this study established that J Sainsbury Plc. conducts annual

evaluation exercise. For instance, in the year 2011, the evaluation was done by an external

reviewer, but the company secretary performed this task in the year 2012 and 2013. All these

reviewers' reports to the Board concluded that J Sainsbury Plc.’s board was working effectively

across various dimensions (J Sainsbury Plc., 2013, p. 41).

Accountability principle

This is the third principle of the UK Corporate Governance Code and requires that the

company’s board present the company’s position and prospects in a fair, balanced and

understandable manner. It should show this in its interim and price sensitive public reports and

those required by statutory bodies. The code stipulates that the directors explain in the annual

financial reports their responsibilities for their preparation (Grant Thornton UK LLP. 2013, p.

11). They should also state that the annual reports and accounts have been prepared in a fair,

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balanced and understandable manner and offers the necessary information for various

stakeholders to assess the performance, business and strategies of the company (Financial

Reporting Council, 2012, p. 17).

The code also holds responsible the Board for the risk management and internal control

measures. It should determine the nature and the extent of risk it is ready to take in pursuing its

strategic objectives. A sound risk management, as well as internal controls, should be

maintained, and its effectiveness reviewed at least annually (Harris, 2014; Financial Reporting

Council, 2014). The board should also ensure that an audit committee and auditors are in place,

which assists in corporate reporting by monitoring the financial statement’s integrity and

reviewing significant financial reporting judgements, risk management and internal controls.

From this analysis, J Sainsbury Plc.’s board reviews the company’s principal risks annually. It

also receives regular updates on risk management, as well as internal controls from its audit

committee’s chairman after every board meeting (J Sainsbury Plc. 2013, p. 39). Additionally, it

receives annual updates on all matters related to safety.

Remuneration Principle

This principle requires that the remuneration level set by the board be sufficient to attract, retain,

as well as motivate them. The remuneration should be performance based for executive directors

while that of non-executive directors should be based on their time commitment and

responsibilities (Financial Reporting Council 2012, p. 21). The policy on the remuneration

should be developed through a formal and transparent procedure (Harris 2014). The

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remuneration committee should seek chairman's and chief executive's views about their

proposals on compensation levels. The chairman should also inform shareholders about the

remuneration to the directors.

From the findings of this study, J Sainsbury Plc., remuneration principle is aimed at balancing

reward with the performance (J Sainsbury Plc., 2013, p. 54). J Sainsbury Plc. ensures that a

sufficient weighting on variable pay is in place. Its structure is that it can reward short-term

financial, as well as operating performance in the form of an annual bonus, value creation for

shareholders over the longer term, and sustainable business development through deferred share

award (Thomson Reuters 2014; Financial Reporting Council 2014).

Relations with shareholders principle

According to the Financial Reporting Council (2012, p. 24), the UK Corporate Governance Code

requires that a company’s board ensure that there is a dialogue with shareholders, based on a

mutual understanding of the objectives. The chairman should discuss strategies and governance

with shareholders and communicate shareholders' views to the rest of the board members. The

Board should also disclose their steps they took towards understanding shareholders' views. The

Code also states that it is through the AGMs that the board should communicate with investors in

order to encourage their participation. The findings of this paper on J Sainsbury Plc.'s relation

with its shareholders and investors established that J Sainsbury Plc.'s Board is dedicated to

maintaining good communications with investors. There are regular meetings between the board

and large investors, especially after the announcements of J Sainsbury Plc.’s interim and full

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annual results, and trading statements (J Sainsbury Plc. 2013, p. 42). During its meetings, the

board reviews the feedback on major investors’ views. In addition, the investors get an

opportunity to question the board at the AGM any issues they would like clarifications, where

they are provided with a detailed explanation of each issue.

Conclusion

The corporate governance issues have received a lot of attention in the modern corporate arena.

This paper sought to select any publicly trading company on the London Stock Exchange and

discuss its corporate governance structure. It also sought to analyse its adherence to the UK

Corporate Governance Code. This paper purposefully selected J Sainsbury Plc. the findings of

this study established that J Sainsbury Plc. has a board of directors that has nine members and an

operating board that has eleven members. Among them are both non-executive and executive

directors.

This study established that J Sainsbury Plc. complied with all the provisions as stipulated by the

UK Corporate Governance Code. In respect to the leadership principle, J Sainsbury Plc., has a

board composed of five non-executive directors and three executive directors and chaired by a

chairman. The board holds sufficient regular meetings so as to discharge its duties effectively.

According to the requirement of the Corporate Governance Code, the chairman of J Sainsbury

Plc.’s board facilitates the non-executive directors’ contributions via a culture of openness and

debate, in addition to promoting a constructive relationship between executive and non-executive

directors.

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This paper further established that for effectiveness, J Sainsbury Plc. has a board and whose

appointment is based on the need for balance, skills as well as diversity. Its succession planning

is taken seriously by the board for both members of the board and senior management. Further

findings indicated that the newly appointed members of the board are provided with a detailed

training on their roles and responsibilities. It was also established that J Sainsbury Plc.'s Board

ensures that the annual reports and accounts have been prepared in a fair, balanced and

understandable manner and offers the necessary information for the various stakeholders to

assess the performance, business and strategies of the company. J Sainsbury Plc.’s remuneration

is carried out by a remuneration committee and is aimed at balancing reward with the

performance. In addition, this paper found that J Sainsbury Plc. is dedicated to maintaining good

communications with investors, particularly at the AGMs where investors get detailed

explanations on issues they would like to seek clarifications on.

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References

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