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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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