Corporate Governance in Different Theoretical Models, Vodafones Corporate Governance - Case Study Example

VODAFONE COMPANY’S GOVERNANCE IN GLOBALIZING WORLD Name Course Tutor Date Executive Summary The report is divided into three sections. The first one is introduction that gives an overview of what is to be discussed in the report. The second section is the literature review section that basically looks at what other literature have said concerning corporate governance in different theoretical models. The next section is the analysis section that discusses the company in question and also evaluates the position of the organization based on three selected issues. The last section concludes the report by giving up a closing remark on the report. Table of Contents Executive Summary 2 Table of Contents 3 Introduction 4 Literature Review 4 Corporate Governing Frameworks 4 Agency Approach 4 Stake Holder Approach 5 Selected Features of Corporate Governance 6 Board Diversity 6 Social responsibility 7 Transparency and Disclosure 7 Analysis 8 Overview of Vodafone’s Governance Framework 8 How Local and International Stakeholders are engaged by Vodafone 9 Ethical Challenges at Vodafone 10 Corporate Governance Issues in Vodafone 11 Transparency and Disclosure 11 Board Diversity 11 Social Responsibility 12 Conclusion 12 Introduction In simple terms corporate governance refers to a framework of practices as well as rules used by the board of directors to ensure accountability, transparency, and fairness in the firm’s relationship with the stakeholders. Stakeholders refer to the financers, management executive, employees, government and the community at large. Most scholarly journals have different viewpoints concerning the concept of corporate governance (Feizizadeh, 2012). Vodafone is a company that was established in 1985 in UK. The company with over 400 million customers globally has been successful in many ways. Currently, the company is spread in over 30 countries and has partnered with over 50 networks. This report evaluates the corporate governance of the company from the stand point of the globalized world. Literature Review Corporate Governing Frameworks In a layman’s language corporate governing frameworks would mean the way companies are owned and controlled. The governance frameworks can be elucidated by two major approaches; agency and stakeholder approach (Feizizadeh, 2012). Agency Approach This is the foundational approach to corporate governance (Feizizadeh, 2012). This approach places the shareholders at the top of the stakeholder preference making them an important component to the company. It really evaluates the relationship that exists between owners and directors or managers as well as agents in any given organization. When the interest of the agents is in conflict with those of the owners, the company is bound to attain is strategies and goals (Feizizadeh, 2012). Salami et al (2014) concur with ( Feizizadeh, 2012) and Van Puyvelde et al (2012) that to mitigate agency problems two factors must be addressed; first off, the risk bearing mechanism of the principle agent must be efficiently designed and secondly, the design should be evaluated or monitored through all the transactions of the organization. This of course is an assumption of the approach, since its propensity is very low (Salami et al, 2014). In this approach the shareholders have rights to vote thus are able to exercise some control on the company (Salami et al, 2014). Stake Holder Approach Stakeholders are individuals or companies that are affected by an organization’s direct and indirect decisions or activities in general (Salami et al, 2014). Salami et al (2014) argue that this group can either benefit or be harmed at the same time whenever their rights are overstepped by the organizational operations (Salami et al, 2014). In this approach the concern is that the organization should be more concerned about stakeholders’ interest when undertaking major strategic decisions (Van Puyvelde et al, 2012). At the center of this approach is the satisfaction of the stakeholders’ interests. Shareholders are also part of the stakeholder members because they are also affected by the operations of the organization and achievements (Salami et al, 2014). The other stakeholders include employees, suppliers, enterprise customers, consumers, community, government and regulators, non-governmental organizations, industry peer and the environment among others. This approach looks at the business owing special and specific duties to the shareholders and various responsibilities to the stakeholders (Salami et al, 2014). Selected Features of Corporate Governance There are many features of corporate governance. This includes; audit process, remuneration practices, transparency and disclosure, community engagement, board diversity, shareholder rights, social responsibility, and audit process among others. For the scope of this paper the three that will be discussed are Board Diversity, Social responsibility and remuneration practices Board Diversity Diversity may be described as having different people in the same or different positions. In the context of a board, it refers to the proportion of men and women as well as different races on a corporate board of any given organization (Carter et al, 2003). Diversity could be categorized along race, gender ratio, and ethnic diversity. Carter et al (2003) further argue that the major issue that faces directors, managers and shareholders in modern corporations is gender, cultural and racial composition of the board of directors (Stiglbaur, 2010). They further notice that there is a direct relationship between the firm’s value and board diversity (Carter et al, 2003). This is mainly because corporate diversity institutes understanding of the market. This is arguable due to the fact that the business world is globalizing and thus diversification of the markets as well (Stiglbaur, 2010). (Carter et al, 2003) note that it also increases innovation and creativity as the board members share the same development agendas. The directors once diversified will have diversified decisions as well. Board diversity also enables effective problem solving in the organization (Carter et al, 2003). Lastly diversity also optimizes corporate leadership as well as promotes effective global relations with the stakeholders (Carter et al, 2003). Social responsibility Better known in the academic world as corporate social responsibility (CSR) is an emerged and widely discussed topic. Jamali et al (2008) define CSR based on World Business Council for Sustainable Development’s (WBSCD) definition asserting that it is the commitment level of the business to working with employees, families and local communities, and sustainable economic development (Jamali et al, 2008; Stiglbaur, 2010). Morsing et al (2006) note the four types of CSR; economic dealing with jobs, wages and services, legal, dealing with the legal obligations and relegations’ adherence, ethical that encompasses being moral and doing what does not harm other’s rights, and discretionary that deals with philanthropic contributions (Jamali et al, 2008; Morsing et al, 2006). Social responsibility aims at solving the problems of the people who surround the business while at the same time maximizing on profits (Jamali et al, 2008). Transparency and Disclosure Commonly abbreviated as T&D by some authors, transparency and disclosure form the arsenal of a healthy corporate governance framework (Fung, 2014). Transparency refers to making available the truth for others (Fung, 2014). Fung (2014) makes an observation that in this concept the organization or party in question provides a base for the informed decision making by stakeholders, shareholders, and potential investors with reference to financial and capital allocations, all organizational transactions and financial road or performance of the organization. Transparency should be maintained in financial reporting. Financial reporting is very vital component that informs investors’ decisions (Fung, 2014; Stiglbaur, 2010). If done shoddily or with intentional and unintended errors, the company’s corporate governance may be at risk. There are five key pillars of transparency and disclosures; truthfulness, materiality in information, timeliness, completeness, and accessibility (Stiglbaur, 2010). If all these are in place then the disclosure will result into efficient and liquid markets through enabling the investors to make informed decisions. The sum total use of T&D is to promote fairness, accuracy and completeness in financial reporting as well as accountability (Fung, 2014). Strong disclosure system influences the behavior of both the company and the investor (Feizizadeh, 2012; Fung, 2014). Analysis Overview of Vodafone’s Governance Framework There is sound corporate governance at Vodafone that trickles down the group. At the top of the framework id the chairman who is charged with the duty of leadership, agenda setting and operation of the board. The second stage comprises the board of comprising of 14 directors. The key role of the board is to set the firm’s strategy and is responsible for overall business transactions of the firm. The next one is the nominations and governance committee. This group ensures that all matters of corporate governance are adhered to. At the same level is the audit and risk committee that governs the financial results, review internal and external auditors, and internal control of the group. At the same level still, falls the remuneration committee, which has the mandate of assessing and making recommendations to the board on policies for executive remuneration. Lastly, but still on the same level is the chief executive officer who manages business and implements policies and strategies. At the last level is the executive committee, tinged with the duty of overseeing the financial structure, planning, financial performance and competition, as well as the firm’s policies and succession planning. How Local and International Stakeholders are engaged by Vodafone There are various stakeholders both locally and internationally. In similar way, the Vodafone engages its stakeholders in different ways depending on which they are (Vodafone Group, 2014). The company uses feedback from external stakeholders to inform the board’s judgment about the sustainability strategy development. The major aim of engagement is to make both the firm and the stakeholders have mutual benefits (Vodafone, 2014). The stakeholders of the company include investors, suppliers, and employees who form the core and the enterprise customers and consumers who relate to the company as service providers (Vodafone Group, 2014). The company management board meets investors regularly through various events to understand their concerns (Vodafone Group, 2014). In the meetings the company is able to learn what the investors want and also explain its strategy in managing sustainability to the investors. The company also engages opinion leaders and experts through consultations so as to gain feedbacks and inform the strategy on sustainability (Vodafone Group, 2014). The company has a Sustainability Expert Advisory Panel established in 2007 for the same purpose. The company also consults with the Non-Governmental Organizations (NGOs) whenever there is a campaign related to the firm (Vodafone Group, 2014). This is majorly done through seminars and meetings. The company partners with enterprise customers that deliver the products. For the consumers the company has contact centers, retail outlets, and customer research so as to understand the attitude of the customer towards sustainability issues (Vodafone Group, 2014). The company also engages its industry peers through industry forums touching on sustainability. The company consults with the local communities so as to address their concerns and has a transformational solution plan for communities all over the world. This includes increasing energy supply to remote areas (Vodafone Group, 2014). For the employees there are feedback systems such as questionnaires and interviews. Additionally, the employees also meet their managers and have internal communication channels to air their concerns. The company also consults with government and regulators (Vodafone Group, 2014). There is also a close relationship with the suppliers to ensure that they supply high standard materials. This is made possible through assessments and workshops. Ethical Challenges at Vodafone Any successful company must have ethical challenges that it has to continuously deal with. Some of the common challenges include corruption and bribery, health and safety issues, employee downsizing, and conflict of interest among others (Arnaud et al, 2012). It is arguably true that Vodafone has the same ethical challenges in its system. In addition to the ones stated some of the ethical challenges at Vodafone include data protection, environment health and safety, political contributions as well as transparency and lobbying (Vodafone, 2014). The company has principles and mechanisms in place to mitigate such occurrences that affect the moral good and the reputation of any organization that allows such. The principles include trainings and team briefings and induction material (Vodafone, 2014). The employees are also encouraged to report any ethical or potential ethical breach to the human resource management for proactive actions (Vodafone, 2014). The latter can also be done via the group audit director. Another ethical challenge the company faces is the sustainable climate management. Corporate Governance Issues in Vodafone Transparency and Disclosure Vodafone has various ways of reporting all its transactions. These come in form of reports, the most common one being annual report, corporate report and sustainability report. In the annual reports there are tax disclosures as well as other disclosures (Vodafone, 2010). The tax disclosure reports on capital investments, direct employment, and direct revenue contributions among others (Vodafone, 2010). The other information that is also disclosed by the company includes its environmental footprint, human rights, diversity and inclusion of various individuals, privacy and security issues among others (Vodafone, 2010; Vodafone, 2014). The financial statements are also transparently reported in the annual reports. To ensure accuracy in financial reporting the group has an internal auditor as well as an external auditor that oversees the accuracy and completeness of the reporting. For disclosures there is a disclosure committee in place for the same purpose (Vodafone, 2010). Board Diversity The board at Vodafone is very much diversified demographically. The board comprises of diversity based on tenure in the company (Vodafone, 2014). For example those with about 2 year’s tenure are 23%, 3-6years are 39%, and 7-9 years are also 39% (Vodafone, 2010; Vodafone, 2014). The composition of males and females is not well diversified since men represent 85% while females 15% (Vodafone, 2010). Based on rank, those who hold management positions and are on the board, represent 23% while non-executive board members represent 77% (Vodafone, 2014). As evident in all other reports that are released on annual basis, the board is completely diversified. Social Responsibility Vodafone shows commitment to the world around it. This is made possible through minimizing the negative impacts to the community, of the products yet maximizing the profit of the firm (Vodafone, 2005). The company has committed some of its resources to propagate CSR. The company has a Vodafone foundation that is a charity funding program. This takes care of the philanthropic extension of the firm (Vodafone, 2005). The company also addresses the challenge of climate change through solutions such as the green agenda and working with Vodafone to help the environment campaigns (Vodafone, 2014). The company also makes known its products and networks to the community and extends this to various community support programs (Vodafone, 2005). The company also researches about customers with special needs and addresses them amicably. Conclusion Corporate governance is a wide concept that has a lot of tenets under it. With effective corporate governance an organization is able to relate well with the stakeholders, shareholders and the principles or owners of the organization. Within every organization there must be an array of ethical issues that pose a challenge and have to be eradicated for the organization to ensure its sustainability. 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