Quality of Directors at Sainsburys - Case Study Example

Corporate Governance Issues: A Case of Quality of Directors at Sainsbury’s Name Institution Course Date Corporate Governance Issues: A Case of Quality of Directors at Sainsbury’s The Telegraph, 2004. Hampton's Shopping list. Viewdd 14 March 2016 http://www.telegraph.co.uk/finance/2897895/Hamptons-shopping-list.html Introduction The idea of corporate governance has been gaining more and more interest both in the past and in the current times. The increased attention on corporate governance has actually been set off by increased shareholder awareness as well as demand from the executives. In addition, the increased focus on corporate governance has been sparked by the numerous cases of corporate scandals which rock enterprises. What is corporate governance? Corporate governance basically refers to the system which is utilized in managing companies and businesses (Kadre and Alexander 2011). This idea actually applies to each and every business sector that exists in the world, for instance financial companies, banking institutions and other kinds of businesses like the trading sector. Quality of directors, to be specific, is regarded as one of the main corporate governance issues which have turned into a common scenario in most companies of today (GNDI Principles, 2014). According to various researches, the issue of poor quality of directors who make up an incompetent board arises when the members of the board are not equipped with the necessary skills and tools needed in doing what they are needed to do for the company. A company is usually run by its board, and thus the board is any company’s backbone; if it is inefficient and ineffective because of the poor quality of directors, then the company automatically fails (Kay 2005). Sainsbury’s is one of the companies that is faced with corporate governance issues, poor quality directors to be specific, which eventually result to the company’s poor performance when compared to its competition (Lasher 2016). This essay shall start by giving a summary of the article reporting why the board of governance of Sainsbury’s is said to have poor quality of directors. It shall then carry on discussing the corporate governance issues raised and then elaborating why this particular issue has been raised in the media. Finally, this paper shall conclude by giving a brief summary of the issues raised and recommend some measures that need to be adopted by the company so as to progress. Sainsbury’s: Company Background Among the largest chains of supermarkets in the United Kingdom, Sainsbury’s is ranked as the second largest having a share of 16.9% in the United Kingdom supermarket division (Lasher 2016). The supermarket began as a shop in Drury Lane, London back in 1869. It was founded by John James Sainsbury and his wife, and by 1922, the company was already the largest grocery seller in the UK. The company has two main competitions, Tesco and Asda (Lasher 2016). Tesco surpassed Sainsbury’s in 1995 and became the market kingpin, and in 2003, Asda became the second largest in the chains of supermarkets. Sainsbury’s dropped to position three for quite some time until 2014 when it regained its initial position in the chains of supermarkets; position two. The holding company, J Sainsbury’s plc is actually divided into three categories; they are Sainsbury’s Supermarkets limited, Sainsbury’s Convenience Stores Limited, and finally Sainsbury’s Bank (Watson and Head 2010). The head office the group is located at the Sainsbury’s Store Support Centre in the City of London at a place called Holborn Circus. Apart from being grocery vendors, the group also has interests in other items like home equipment, clothing apparel, beauty products, and general goods. The largest Sainsbury shareholders by May 2011 were Lord Sainsbury of Turville having shares amounting to 4.99%. Lord Sainsbury is then followed by Judith Portrait who has shares amounting to 3.92%. However, the greatest overall shareholder of the company is actually the Qatar sovereign wealth fund, Qatar Investment Authority, which owns 25.999% of the company (Lasher 2016). By March 2004, statistics revealed that the company operated more than 583 supermarkets and also runs fifty banking centers that are housed within the retail stores themselves. As an outcome, the labor force has grown to approximately 153,000 individuals (Hughes and Merton 2002). Quality of directors at Sainsbury’s Sainsbury’s Board of Directors comprises of ten directors; two are executive members while six are nonexecutive members. Even though the non-executive directors are independent from the other board members, they are still capable of contributing their skills as well as their knowledge in the course of the Board discussions (Watson and Head 2010). The Board of Directors is the one in charge of taking care of the operations, assets, and also the stakeholders of the company (GNDI Principles, 2014). In his very first important interview as J Sainsbury’s chairman, Philip Hampton tells James Hall that he actually not intends to restock the shelves of the supermarket, but also the board. When Hampton resumed his position as the chairperson of J Sainsbury, the struggling chain of supermarkets was going through one of the most stressful periods since its inception (Lasher 2016). According to the new chief executive, Justice King, the main cause of the recent challenges faced by the company is not its positioning, but instead the company’s execution. Whereas King struggles with rehabilitation of the company, Hampton’s main priority as the chairman of the company is to gain city confidence and support through rebuilding the board of the company. In addition, he also intends to put in place a new plan for incentivizing Sainsbury’s beleaguered personnel (Lasher 2016). Investors have been surprised by Sainsbury’s supposed shambolic governance. The harsh boardroom fight regarding the 2.6 million Euros payoffs to Davis concluded in corporate high shambles. Hampton was quite sure that Sainsbury had to ultimately pay up and finish the cheap affair, however, Levene, an ex-mayor of London, did not agree to this and was eager to battle the case in court. The farce also restarted claims that in the company’s non-executive directors in the past had failed to effectively challenge Davis during his time as the chief executive (Lasher 2016). Various investors have demanded that the number of directors on the board should be increased. Hampton also mentions that he needs to employ a transparent personnel incentive plan as soon as he can. Having defined a strong recovery plan, King and Hampton should now deliver on their promise of actually “Making Sainsbury’s great again.” Corporate governance issue being raised: Quality of directors The quality of directors is the main corporate governance issue that is being raised in this particular article. The company’s board of directors is held responsible for making sure that the organization itself always has the most appropriate business performance as well as corporate governance (Dandy 2001, GNDI Principles, 2014). There are, however, numerous issues which relate to the board. One of such an issue is actually in terms of the care and competence that every director is expected to have, most importantly the non-executive directors. According to the Telegraph (2004), Philip Hampton tells James Hall that he actually not intends to restock the shelves of the supermarket, but also the board. It is quite often the director with minimal accounting knowledge whose common sense might direct him into questioning what those with great accounting knowledge might leave to pass. The accountings concerns with regards to which some make analysis were almost all that entailed almost no accounting intricacy. What was suitable and what was not ought to have been clear to any sensible director equipped with the necessary facts and who reasonably used his mind in the issue (Fernie and Pierrel 2000). In majority of the cases, the directors that chose to take on the accounting were in a much better position compared to the auditors in establishing if the treatment implemented was appropriate or not. Those particular directors therefore did have the right to of suspending their own personal judgment and depending on the facts which the auditors failed to stop them from taking on an improper course. With reference to the new chief executive, Justice King, the main cause of the recent challenges faced by the company is not its positioning, but instead the company’s execution (The Telegraph 2004). Another problem that is related with the board is based on insufficient financial data. For instance, in accordance to the Telegraph (2004) the harsh boardroom fight regarding the 2.6 million Euros payoffs to Davis concluded in corporate high shambles. There exists times whereby some of the board members, never organized or even handed out to the board any kind of management accounts or consolidated budgets that united the budgets as well as the results of each and every division in the group (Fernie and Pierrel 2000). The lack of consolidated management account systems enhanced the practice of improper year conclusion alterations being made by the accountant directors, not known by majority of the other board members, to come up with additional reported revenues. In the past few years, the first time that the board actually got to know of the results that were to be published was when the interim pronouncement became circulated ‘for data’ at the conclusion of the board meeting which took place a day before the big announcement (Hughes and Merton 2002). In effect to this, the board has actually never talked about the details of the outcomes or even their basis. The lack of an understanding by the board regarding the makeup of the reported outcomes was actually a surprising state of affairs that should not have been tolerated by any director. In accordance to the article (The Telegraph 2004), various investors have demanded that the number of directors on the board should be increased. Hampton also mentions that he needs to employ a transparent personnel incentive plan as soon as he can. Reasons this Corporate Governance Issue Was Discussed in the Media Media generally occupies a very important position in the society. First and foremost, the media is of great significance to the society since it gives the public information regarding what is actually going on around them (Islam 2002). Without the presence of the media, there would be a lot of things that individuals could not have known of at all. Presently, however, with the presence of digital media, data can be conveyed quite easily and rapidly to different people in different parts of the world. The media also plays a very important role on educating individuals (Islam 2002). It is via the media that people actually get to learn about new things, some of which are quite important. Thus, the corporate governance issue that has been spoken of above was discussed in various media platforms so as to keep people informed on what was actually going on in Sainsbury’s. The board of directors at Sainsbury’s was not doing quite a good job, particularly in the financial sector. Apart from the issues in the financial sector, some of the directors in the board were not equipped with the necessary skills and knowledge required for their positions (The Telegraph 2004). The issues were therefore discussed in the media so as to inform the company’s clients as well as other members of the board of what is really taking place. This explains the reason behind the company’s poor performance at times. The poor quality of the directors is brought to light and everyone gets to know about what is really happening with the company Secondly, the issues were actually discussed by the media as a way shaming Sainsbury’s and particularly it’s the company’s board of directors. It was just by exposing the real actions of the Sainsbury’s board of directors that Sainsbury realized that something ought to be done regarding the board. Necessary arrangements to correct this situation were initiated by Hampton (The Telegraph 2004). Hampton realized that the board needed to be stocked by new members. Conclusion Corporate governance has turned into an area of interested focus in the current times. However, as displayed in this particular paper, the quality of directors is a corporate governance issue that requires a lot of attention (GNDI Principles, 2014). If the directors of a company are of poor quality, then this translates to most of the decisions made by the company. In the case of Sainsbury’s the directors were not well equipped with the necessary tools needed in their positions. This clearly translated in some of the poor decisions made by the board directors, mostly in regards to finances. Corporate governance is actually one of the most aspects that should be considered in any company (Kay 2005). It is thus recommended that Sainsbury’s should establish the most efficient and appropriate corporate governance structure as well as approach in order to make sure that the business shall stick to all its legal and ethical aspects. The company should also be able to align its corporate governance approach with its own organizational objectives. References Dandy, J 2001 “Jonathan Dandy interviews Terry Wells, director of Customer Service, J. Sainsbury plc”, Managing Service Quality, Vol. 6,No. 3, pp.16-22. Fernie, J & Pierrel, F 2000, “Own branding in UK and French grocery markets” Journal of Product and Brand Management, Vol. 5,No. 3, pp.48-59. GNDI Principles 2014, Guiding Principles of Good Governance, Australian Institute of Company Directors. Hughes, D & Merton I 2002, “‘Partnership in produce’: the J Sainsbury approach to managing the fresh produce supply chain”, Supply Chain Management: An International Journal, Vol. 1, No. 2, pp. 4-6. Islam, R 2002, The right to tell the role of mass media in economic development, Washington, D.C: World Bank. Kadre, S & Alexander, P 2011, Going corporate a geek's guide, New York, N.Y: Apress. Kay, J 2005, “Can There Be a Science of Business?”, The Business of Economics, pp. 26-33. Lasher, W 2016, Practical financial management, New York, Cengage Learning. The Telegraph 2004, Hampton's Shopping list. Viewed 14 March 2016 http://www.telegraph.co.uk/finance/2897895/Hamptons-shopping-list.html Watson, D & Head, A 2010, Corporate finance : principles and practice, Harlow, England New York, Financial Times/Prentice Hall. Read More