Evaluation of Abbots Group Plc of Its Compliance with the Combined Code of Corporate Governance - Assignment Example

i) Evaluation of Abbots group plc of its compliance or other wise with the combined code of corporate governance. Introduction In choosing a listed UK company I have chosen Abbots Group plc to evaluate whether its corporate governance principles and practices are complied with the combined code of corporate governance or whether it departs from it in some respects because of its unique circumstances. I have chosen this company because its operations are global and its main line of business is in the energy industry and its importance in the current macroeconomic climate world wide and the current global concerns of the issues of global warming and environmental issues, which is recognized by political leadership, by the community at large and by UN agencies as well by the majority of the scientific community and by groups of investors. Combined code of Corporate Governance and the flexibility to depart from the code In general the combined code of corporate governance best practice is only a guidance and the listed companies can differ in its corporate governance processes and policies if the shareholders insists or if the circumstances of the company in regards to its size, operation and complexity requires a different corporate governance practice from the combined code and it must be spelt out in the Annual report the reasons for the departure or the full compliance of the code by UK listed companies. As mentioned above to evaluate whether Abbots Group plc complied with the combined code as set out in section 1 one can examine the annual Report published recently. In UK Listed companies has to have a statement in relation whether they have complied with the combine code of corporate governance or if they have departed from the code the reasons for the departure from the code of best corporate governance provisions. In critically perusing the Annual report for Abbots Group plc 2006 page 31 to page 35 which contains the information of corporate governance practices in relation to directors, chairman, non-executive directors duties, board meetings, director’s appointment procedures, non-executive directors appointment procedures, performance evaluation procedures, independence of non-executive directors, setting up of Audit committee, Nomination committee, Remuneration committee, reporting of board meetings in the Annual report, relationship with shareholders, performance evaluation of directors and chief executive and the board itself and processes of internal control and risk management by risk management committee and their independence shows that in general Abbots Group plc has complied with the combined code of corporate governance setout in section 1 because in general the provisions of the code is applied in all the areas of the corporate governance as mentioned above. As well, the director’s report regarding the statement in the Annual Report in relation to the compliance of the code states that it has complied generally through out the year 2006 with the code. However, the statement also states that the Chairman of the board and the chief executive officer of the company work in association and according to the code Chief Executive must not act as chairman. The reason they work together as per the opinion of the board is that the chairman has substantial shareholdings in the company and they believe that the chairman’s interest is aligned with the other shareholders. As well the chairman has certain strategic responsibilities given the shareholding interest it is reasonable the chairman works with the Chief Executive officer. In my view this reason is rational as the company shareholding of chairman is substantial and if it aligns with other shareholders he may act in the best interest of shareholders and also may motivate the executive to make decisions which will maximize shareholders value in the long-term as a going concern and also minimize his decision making and behavior to maximize his own self interest and not acting in the best interest f the company due to the fiduciary situation of the directors in UK in particular as the agency theory is to some extent applicable given the theory of firm is embedded on the agency theory in UK historically. In addition, in the annual Report 2006 of Abbots Group plc the remuneration of executive and non executive directors are monitored and it depends on their objective evaluation of their performance and also the remuneration packages are designed so that the directors and non executive directors do not act to prepare financial statements and other estimates and application of accounting principles and accounting methods to manipulate the performance to cover the actual economic performance of the company and a short-term view of the company’s strategic direction. This satisfies generally to a greater extent the combine code relating to the determination of directors remuneration and the remuneration to non-executive directors of the company and can be argued the company has complied with the code relating to directors and non-executive directors remuneration which is not excessive compared with other companies and also linked with the performance evaluation on a regular basis having rigorous objective criteria. The main objective and the purpose of the combined code of corporate governance best practice is to have a board which acts in the best interest of the company as a whole and manage risks and have sufficient processes and systems to protect the assets of the company and to have a trusting relationship with shareholders and above all to maximize the shareholders wealth in the long-term as the company being a going concern in the future. That is in other words the board must act in the best interest of the company and not maximizing rents for themselves in the same time eroding the value of the company in the long-term and not maximizing shareholders wealth particularly in UK as the shareholders interest and as owners are paramount as opposed to other theories of corporate governance like the stakeholder theory or stewardship or information theory even though they may be relevant to some companies particularly given the size and complexity of operation and external regulation in the area of corporate governance. As discussed above on the basis that the Corporate governance practices of Abbots Group plc has sufficient monitoring of directors behavior to act in the best interest of the company and to the extent that their practices and processes enable the board to have a strategic direction to maximize shareholder wealth in the long-term and not have short-term view which jeopardize the survival of the company and growth of the company as a going concern and the objective of the combined code is similar even though the practices slightly vary from the combined code the objectives of the combined code and the governance practices of the Abbots group are similar. As well, the Annual report highlight that they have applied the code in the governance practice throughout the year 2006 highlight that Abbots group plc has to a greater extent complied with the code. As well the Abbots group has policies and practices in a strategic manner to have resources allocated to satisfy other stakeholders like the community, environmental groups, the government and legal requirements of Company law and other legal regulations, employee health and safety issues and value the employees. That is it maximizes shareholders wealth in the context of its social responsibility and in an ethical manner given its operating circumstances in terms of its size and the nature of its operations and its impact on society as a whole. On the basis of the above discussion it can be argued that the Abbots Group plc given its unique circumstances and operating environment its code of practice and corporate governance process and policies comply with the combined code of best practice even though it departs in some respects from the code as the code do not recognize other stake holders interest in formulating its strategic plan and implementation and concentrates only on the share holders interest and assumes it meets the needs of other stakeholders. ii) Evaluation of Abbots group plc Earnings Management tendencies given its corporate governance process and practices as well of its external private and public environment. The earnings management arises in the use of discretion of the management in the selection and application of accounting methods in such a way to distort the real economic performance of the company and distort earnings and there fore in effect the value of a firm. It can be the result of opportunistic behavior of management to gain advantage while sacrificing the best benefit of the company and also can arise because of unethical practices of the management not monitored by an organization and do not detect earnings management by the capital market or by the internal and external auditors. It also can arise because of the nature of ownership of a firm the power structure of the board and the independence and ethical practices of individual managers and the sub committees of organizations corporate governance practice. Abbot Group plc is in the energy industry. The environmental issues are vital for the industry due to the fact the global warming issues affect this industry than any other industries. From the Annual report 2006 it is certain that Abbot Group plc has a policy to protect the environment which is recognized by the top management and by the non-executive managers and the lower level management within the company. That is the management has a long-term view to maximize profit and not a short-term view on a strategic perspective. There fore it is not probable. that the directors or other non-executive directors will have an opportunistic way in applying the accounting standards and have estimates in a fraudulent manner and its occurrence is limited by this fact. In effect as mentioned above the corporate governance of Abbots Limited given its size, complexity of operations and its recognition of social responsibility beyond legal sanctions the management recognize ethical practice within the organization it can be argued its corporate governance is based on stakeholder theory of corporate governance than the agency theory of management. It not only recognize shareholders but also other stakeholders in planning its operations on a strategic direction of there fore there is less likely hood of earnings management and the possibility of detection of earnings management practice in a fraudulent manner or misapplication of accounting standards are very high by the internal and external auditors as discussed above. In addition, in the Annual Report 2006 the external auditors have stated in their audit report that in their view Abbots Group plc has applied accounting standards consistently and have produces estimates applying the accounting principles with sound judgment based on facts and recognizing the rigorous external auditors by the company it can be argued that the earnings management by the directors will be monitored effectively by the external auditors even if they have some tendency to embark on discretionary earnings management practices which are fraudulent and misleading in preparing financial reports. In addition, it seems the independence of auditors are rigorously assessed by the corporate governance practices there fore there is less likely hood that earnings management by the directors of the company will not be detected by its corporate governance regime. On this basis it can be said that Abbots limited probability of earnings management practices in preparing its financial report is very slim and it happens it may be detected by its corporate governance regime. As mentioned in its Annual Report 2006 Abbots Group plc has an independent audit committee, nomination committee and remuneration committee and they recognize the skill and the quality of its directors an non-executive directors and rigorously apply an objective criteria in appointment of its directors and non-executive directors and they rewarded on the basis of their performance in meeting the company objectives and the remuneration packages are designed so that it give incentives for management not to embark on short term profit maximization but a long term view of the company. Given the skill and quality of non-executive director’s ethical behavior in audit and other committees it can be argued that earnings management in preparing financial report is very unlikely and even if they do there is more likely hood given the quality of audit committees and risk management practices will detect the earnings management practices by the directors and managers. In UK the Company law is enforced effectively and there fore there is a strong deterrence for the directors of Abbot Group plc not to act in the best interest of shareholders as a whole and in the current environment institutional shareholders pay a major role in public company shareholdings in UK. Given these external financial regulation and enforcement there is less likely hood of earnings management practice which is fraudulent and misleading is very unlikely. In addition the listing rules of public companies are very stringent and they are enforced effectively for public companies. This is also another factor which has the effect of minimizing earnings management practices by public companies in UK in general. Literature review on earnings management Laing, D and Weir, C.M in a Research essay “Governance Structures, size and corporate performance in UK firms” has highlighted that the number of non-executives in the board will not improve corporate performance but the skill and quality of non-executive directors will improve corporate performance of UK firms in all types of firms whether they are small or listed public companies in UK firms. In addition, the skilled non-executive directors in audit committees and other committees have the potential to improve corporate performance of UK firms. As well, this article also highlighted that the entrepreneur leadership of the directors also will enhance corporate performance of UK firms. This suggests that if the skill of non-executives in the corporate governance structure is good quality then the likely hood of earnings management will be less as argued above. Cartwright, W & Craig, J. L in an article about sustainability and the relationship between sustainability and corporate governance and business processes highlighted that the corporate governance based on more than shareholder interest but take in to consideration earth also as a stakeholder will enhance sustainability in an environmental perspective and also maximize shareholder welfare in the long –term and the business processes will not be on the basis of short-term decision making and strategic direction of the firm. That is it can be argued if Abbots Group incorporate sustainability in its corporate policy its short-term planning of earnings profits will be less and there fore less likely hood of earnings management by Abbots group. This substantiates by earlier argument based on the facts of Abbots groups’ Annual report 2006 corporate governance report. In summary Abbots Group plc has an effective corporate governance practice which consider its unique environment taking in to consideration, quality of its directors and non-executive directors, independent directors in the board, rigorous training of non-executive directors to upgrade their skills to meet challenges faced by the company, best practice of corporate governance prescribed by the combined code of corporate governance, effective audit, nomination, remuneration committees which are independent and mostly avoid conflict of interest, non-executive directors in the board to monitor directors performance regularly and have a trusting relationship with all shareholders and particularly with institutional shareholders, have a remuneration package that encourage to make decision by the directors on a long-term basis. Ethical practices encouraged by the top management and monitored by audit and other committees which are independent, corporate governance which recognize environmental issue and social responsibility beyond the legal requirements and a culture within all levels of management and given the UK company law regulation and enforcement as agued above based on logical basis based on facts it can be argued that earnings management practices by directors and by other managers are very unlikely in preparing its financial report in general and the earnings reported by the management Bibliography Abbots Group plc,., 2006. Annual Report and financial statements 2006. [online]. Abbots Group plc. Available at : http://miranda.hemscott.com/ir/abg/ar_2006/download/pdf/ar2006.pdf [accessed 21 March 2008]. Cartwright, W & Craig, J. L., 2006. Sustainability: aligning corporate governance, strategy and operations with the planet. Business Process Management Journal,12(6), p.741-750 Crowther, D. & Sukhadia, R. M. J. L. Agency Theory: A Case of Failure in Corporate Goveranace, London Metropolitan University, UK and University of India Publication. [article] ESRC Centre for Business Research, University of Cambridge. (1999). THE DEVELOPMENT OF ETHICAL ISSUES FACING BOARD OF DIRECTORS: AMODEL WITH IMPLICATIONS, Working paper 151, [working paper] Laing, D. & Weir, C. M. (1999) Governance structures, size and corporate performance in UK firms, Management Decision, 37(5), p. 457-464 Lancaster University, Management School, 2001. Board monitoring and earnings Management: Do outside Directors Influence Abnormal Accruals?. Working paper 016 [working paper] Luo, Y., 2007. Global dimensions of corporate governance, Malden, MA: Blakwell Publication Mallin, C. A., 2004. Corporate governance, Oxford:: Oxford University Press Swedish School of Economics and Business Administration, 2005. Essays on Earnings Management, Nr 153, 2005 ed. [Essays] Read More