Impact of Corporate Governance on the Needs of Stakeholders

 

 

 

 

Impact of Corporate Governance on the Needs of Stakeholders

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23rd July 2011

Table of Contents

Executive Summary

Corporate governance entails the regulations with which companies emulate their management policies. The involvement of shareholders in the operations of any given company is important. In this regard, firms have emulated the shareholder model which seeks to maximize the shareholders’ returns. In order to ensure the high profits and growth of the company, executives and non-executive board members should ensure a strong team work ethic among all the stakeholders. This calls for the adoption of the stakeholder’s model which seeks to create a strong relationship among all the stakeholders.

Being a major grocery and retail shop in the international market, Tesco, a UK-based firm, has an effective corporate governance structure that has made it successful. For example, the Tesco executives have listed the company in the London Stock Exchange. This has ensured adequate security for the shareholders’ investment as well as public confidence. In the same way, the company has attracted various investors with the aim of strengthening its capital base. Some of the major investors include Fidelity Intl Ltd, Barclays Bank, Capital Group Companies as well as Legal and General Group Plc. One of the major aspects which made Tesco acquire a competitive position is the acquisition strategy. Having formed a joint venture with Singapore Metro Holdings, the company expects to increase its dividends by more than 45% in 2011. This will be achieved through the contract it has acquired in developing shopping malls in China. The return on equity of Tesco is 15.35% while the gross profit ratio’s percentage is 6.255%. These figures indicate the strong financial background which has made the shareholders enjoy higher dividends as compared to the competitors.

In order to create strong public confidence and the shareholders’ trust, it is crucial for executives, and especially the CEOs, to adopt effective management strategies. These include: annual and emergency general meeting; proper financial reports; shareholders involvement; and, updating the shareholders on the progress of the company.

Introduction

Corporate governance entails the set of policies and processes as well as the regulations which determine the way an organization is administered or managed (Holton & Glyn, 2006). In addition, corporate governance covers the relationship which exists among the various stakeholders of a company including the shareholder, the management team, the employees, as well as the customers. Other external stakeholders include the debtors, suppliers, and other members of the community. Due to the increasing trend in the collapse of local and international companies, organization and government authorities have taken various initiatives in order to maintain a strong corporate governance. One of the notable regulations which were passed in 2002 was the Sarbanes-Oxley Act. This regulation which was passed by the US federal government, focused on maintaining a strong public confidence in corporate governance. In order to ensure public confidence in the corporate governance, large firms such as Tesco maintain a large number of items which makes up the entire corporate governance. However, the large aspects of corporate governance have been narrowed into five categories. These include: ownership structure; corporate responsibility; auditing; management; board structure; and, financial responsibility. This paper will provide an intensive data analysis which shows the impact of corporate governance on the needs of the stakeholders, especially the shareholders. In addition, the paper will provide data analysis indicating the implications of corporate governance on Tesco.

Effects of corporate governance on stakeholders

Generally, corporate governance affects the growth, development and functions of capital markets and has a very big influence on the allocation of resources. It has a general effect on the industrial competitiveness and the economies of its member countries. Good corporate governance is hard to find and the systems have their strengths, weaknesses, and different economic implications. The effect of corporate governance is influenced by the differences in various countries’ legal and regulatory frameworks, and historical factors (Monks et al, 2004).

The boundaries of corporate governance vary widely and its impact on the economic performance brings about two models of the corporation which are the shareholder model and the stakeholder model. Corporate governance uses the shareholder model to describe the formal system of accountability of senior management to shareholders and, in a wider sense, the network of formal and informal relations involving the corporation can be described by the stakeholder model. Approaching the stakeholder model, it generally emphasises contributions by stakeholders that has contributed to the good performance of the firm and the shareholder value for a very long time. The shareholder approach reveals that for the corporation to be successful in the long term, business ethics and stakeholder relations must be put forward and practiced (Franks and Mayer, 1996). Thus, corporate governance has a large impact on the reputation and the performance of stakeholders. Having a clear understanding of the models will help us to understand the impact that corporate governance has on stakeholders and shareholders and will help us appreciate the different sides of this paper.

Shareholder model

According to Berglof (1997), the shareholder model plays a role in maximizing the wealth of shareholders through allocative, productive and dynamic efficiency, thus, ensuring maximum profits. The shareholder value is much more important in this model as it depicts the performance of the firm. Corporate governance ensures that firms are run in the interest of its shareholders through the managers and directors of the firms unless executive decision making and separation of beneficial ownership underlie the corporate governance. The separation of beneficial ownership may cause the firm’s behaviour to deviate from making maximum profits. This results from the different points of view between investors and managers when there is a separation of ownership and control. The managers may have their personal objectives such as maximizing their salaries, enlarging their shares in the market, or even attaching themselves to particular investment projects for their own benefit. They do this because they do not bear the full cost nor reap the full benefits of their contribution to the firm. Therefore, the investor’s plan of maximizing shareholder value may be affected. This is a negative effect of corporate governance, which has maintained public and political interest as its regulation.

For corporate governance framework to be considered effective, it must minimize the agency costs and resolve problems associated with the separation of ownership and control. To be able to control or align the interests and objectives between managers and shareholders, certain steps or methods must be used to help overcome problems of entrenchment and monitoring. One method is giving the shareholders the privilege to monitor management by strengthening their rights. This approach will help investors avoid exploitation by managers legally. Another method is aligning the managers’ interests with those of the shareholders directly by inducing executive compensation plans and direct monitoring by boards. This method will attempt to induce managers to carry out management efficiency. Another method is to incorporate indirect means of corporate control such as the means provided by the markets for corporate control by the managerial labour markets or by the capital markets. A critique of this model is the presumption that this model involves conflicts between strong, entrenched managers and dispersed shareholders. This will aid in the development of a corporate governance problem to resolve the monitoring and management issues in the principal-agent context with dispersed ownership. Ownership concentration is very important to be able to discern the protection of investors. However, unlike the widely held corporation where the expropriation of shareholders by the managers is high, the closely held corporation uses block holders or a majority of shareholders to control the corporation. The ownership concentration is a way of resolving the monitoring problem thus considered relevant in preventing the damaging effects on the performance of firms caused by the separation of ownership (Monks et al, 1991). For the closely held corporation, the problem of corporate governance is not primarily about general shareholder protection or monitoring issues. Instead, the problem is that of cross-shareholdings, holding companies and pyramids, or other ways that dominating shareholders use to exercise control at the expense of minority investors. The presence of large shareholders in the firm improves the supervision of management, thus, enhancing performance. However, majority shareholders or block holders may use the firm for their own personal benefit, thus, expropriating the minority shareholders and other stakeholders. Obtaining the direct evidence to measure the extent of expropriation of rents by shareholders or controlling block holders is difficult, thus, an indirect way has been devised. Controlling shares are expected to trade at a premium to serve as evidence for significant private benefits of control that may come at the expense of minority shareholders.

In surveys done by Levy (1982), they suggested that control is valued. This would not be the case if the block holders and the majority share holders received the same benefits as other investors. In the United States, large blocks of equity trade at a significant premium compared to the post-trade price of minority shares with an average trading value at a 20% premium. Levy (1982) stipulates that other countries where concentrated ownership is the norm, the expropriation of benefits by controlling block holders at the expense of minority stakeholders is a major problem. The voting premiums in these countries suggest that either the managers divert profits to themselves at the expense of non-voting shareholders or high private benefits of control as shown in the table below:

Country Voting premium (%) suggestion
Sweden 6.5 Relatively low premium and low proportion of private benefits
Israel 45.5 Average proportion of private benefits
Switzerland 20 Average proportion of private benefits
Italy 82 High private benefits of control
USA 20 Average proportion of private benefits

Source: Porta, et al, 1997

Small and illiquid markets result after the expropriation of minority shareholders by the controlling shareholders. In such countries, capital markets remain underdeveloped relative to the US and the UK as observed by la Porta et al (1997). The R&D investment is adversely affected as a result of debts in the illiquid market, thus, the R&D/GDP ratio is affected. As an example, the graph below shows findings by Gugler (1999), showing the relationship between stock market capitalization and R&D spending for some countries. The horizontal axis represents the stock market capitalization (% of GDP) in the specified countries while the vertical axis represents the R&D.

 

Source: Gugler, 1999.

Narrowness in solving the corporate governance problem is another critique of the shareholder approach. The shareholder approach to corporate governance is primarily concerned with aligning the interests of managers and shareholders together by ensuring the flow of external capital to firms. Teamwork from investors, creditors, employees and various distributors will contribute much to the ultimate success of the corporation, thus, affecting corporate governance and the economic performance.

Stakeholder model

As described by Mayer (1996), the stakeholder model takes a broader view of the firm. Gugler (1999), depicts that companies should consider the interests of their stakeholders first when designing their corporate strategies. In this perspective, stakeholders are people or constituencies that contribute voluntarily or involuntarily to its wealth-creating capacity and activities, therefore termed as potential beneficiaries of the firm (Post, et al., 2002). This model provides a convincing theoretical framework for analyzing the relationship between company and society and it is directly related to the literature of corporate sustainability and corporate social responsibility. With regard to corporate governance, the stakeholder model has affected various aspects of aspects of the conventional shareholder-wealth-maximizing firm. However, given the potential impact of corporate governance on economic performance, the notion that corporations have responsibilities to other parties, aside from the shareholders, merits consideration. The most important thing is the impact that various stakeholders can have on the behaviour and performance of the firms and on economic growth. Any assessment on the implications of corporate governance on economic performance must consider the incentives and disincentives faced by all participants who potentially contribute to the firms’ performance. The latest stakeholder model, as compared to the traditional one, specifically defines stakeholders as those who have contributed to a firm with specific assets (Blair, 1995). The new stakeholder model, as a natural extension of the shareholder model, defines best firms as the ones with dedicated and committed customers, suppliers and employees. For example, performance of a firm will depend on the contributions made by various resource providers of human and physical capital whenever specific investments by the firm need to be made. Shareholders need to take account of other stakeholders with interest. They should also work hard to promote the development of long term relations, trust and commitments between the different stakeholders (Mayer, 1996). Corporate governance, thus, becomes a problem of finding mechanisms that elicit firm specific investments on the part of various stakeholders.

Mayer (1996) stipulates that underinvestment is a major consequence of opportunistic behaviour. He further states that underinvestment in the stakeholder model would include investments by employees, suppliers and other investors. If employees are unable to share in the returns of their investment, they most probably would be unwilling to invest in firm specific human capital. However, they will have to bear the opportunity costs associated with making those investments. Employees may choose to leave the firm once they are endowed with increased human capital because of the incurred costs of the firm. Corporate governance becomes a problem of finding mechanisms that reduce the scope of expropriation and opportunism. This happens when suppliers and distributors underinvest in firm specific investments such as customized components and distribution networks. The stakeholder model describes corporate governance as being primarily concerned with how effective the different systems of government are in lifting the standards of long term investments and the commitment of various stakeholders to the firm (La Porta et al., 1999).

Blair (1985) argues that corporate governance should be viewed in a broader context as the set of institutional arrangements for governing the relationships among all of the stakeholders that contribute firm specific assets. Blair (1995) states that one downside of this model is the fact that the managers or directors may use a stakeholder’s reasons to justify their poor performance in the firm. One of the benefits of the shareholder model is that it provides guidance in helping managers set priorities and come up with proper mechanisms for measuring the efficiency of the firms’ management team. Underinvestment is another issue that the stakeholder model emphasizes on overcoming, thus, encouraging active co-operation amongst stakeholders to ensure maximum profits of the corporation for a very long time.

It becomes very difficult to develop corporate governance frameworks and mechanisms that elicit the socially efficient levels of investment by all stakeholders when maintaining the performance accountability aspects provided by the shareholder model. How the firm should attain stakeholder objectives and how to effectively monitor performance will be determined will need to be clearly defined.

The perspectives of the stakeholder and shareholder model differ in one way or another as an impact of corporate governance. This is shown in the table below.

  Shareholder perspective Stakeholder perspective
Purpose Maximizing shareholder wealth Ensure multiple objectives of parties with different interests
Governance structure Principal-agent model where managers are agents of shareholders Team production model
Governance process Control Coordination, cooperation and conflict resolution
Performance metrics Investor commitment depends on the shareholder value Multiple stakeholders commitment depends on fair distribution of value created
Residual risk holder Shareholders All stakeholders

Source: Blair, 1995.

As discussed above, the stakeholder and shareholder theory suggest legitimacy and good response in the different firms. As classified by Blair (1995), various stakeholders, including the shareholders, are classified as consubstantial, contractual and contextual.

It is also clear that corporate governance has a very great effect on the development and functioning of capital markets. For instance, it influences the allocation of resources in different firms. This paper further develops the understanding of corporate governance and its effect on corporate performance and economic performance in different countries. This is to address most of the underlying factors and solutions that ensure or promote efficient corporate governance.

Data analysis showing the impact of corporate governance on Tesco

Tesco Plc is one of the globally renowned general merchandise and grocery store chain with its headquarters in Cheshunt, UK. The firm is the third largest grocery and retail shop after Carrefour from France and Wal-Mart from the United States in terms of annual sales revenues. Tesco Plc is the third best company in terms of revenue shares among retail segments and second largest in terms of net income. The firm has more than 13 retails shops in North America, Europe and the Asian continent. In the UK, Tesco is the grocery market leader with an approximate 30% of the market share and is one of the few retail shops which are listed in the London Stock Exchange (LSE). Originally, the company specialized only in food but it has, since then, diversified to other areas such as clothes, consumer electronics, selling and renting, financial services, consumer telecoms, internet services, among others, all in an effort to diversify its market niche. Despite the strong competition being faced by the company due to reduced barriers of entry as well as improved technological advances, the firm has remained as one of the most profitable firms (Robert, 2008).

Impact of corporate governance on shareholders

It is clear that the provisions of corporate governance affect the firm’s market value as well as its long term performance. It is mainly quantified by the effect of governance votes through the study of the results of the votes on shareholders’ meetings. Due to the fact that proposals which fall around the majority vote’s threshold are mostly uncertain, this makes it hard for investors to clearly predict the direction of the firm. Kevin (2009) stipulates that on average, markets react to the passage of governance related to shareholders’ proposals with a positive abnormal return of about 1.3% of votes. Actual implied increases in the market value of implementing a single proposal are approximated to be 2.8% (Paliwoda, 2007). Further, the effects on market values are more pronounced in firms having concentrated ownerships, high pre-existing anti-takeover provisions, as well as high research and development expenditures. The agencies view of corporate governance depicts that shareholders mainly forgo their decisions making rights and controls and, rather, trust the managers to act in the shareholders’ best interests. Corporate governance mechanism includes systems of control which are intended to align the managers’ incentives to those of the shareholders. Agency concerns are lower for the controlling shareholders (MacLaurin, 1999). For Tesco Plc, the impact of shareholders on corporate governance has been evident in the recent past. For example, in the recent annual general meeting held in Nottingham on 1st July 2011, 3.3% of the investors refused to back the company’s remuneration report. This was a clean break which followed the recent move by the firm to radically alter remuneration policy for the top executives. This has forced Tesco to remove executive share options from the director’s pay packets replacing them with performance share awards. This is a clear indication that the impact of shareholders in any firm cannot be underrated, thus, making it vital for managers to fully act in the interest of the shareholders. Generally, corporate governance affects major areas such as the market share, type of investors, share prices, dividend allocations, and cash flow, among other aspects, which are vital for investors.

Investors in Tesco Plc

Due to its recommendable growth especially in the foreign markets such as Asia, northern America and Latin America, Tesco has attracted many types of investors. This has, in turn, increased the profitability of the firm to approximately £2.66 billion with a sales revenue of £60.92 billion during the fiscal year 2010. Fidelity Intl Ltd, a major Tesco shareholder, has invested 106,803,580 shares amounting to over 2.1% of the share holdings in the firm. The table below indicates a list of other major global companies who have invested in Tesco Plc and their respective shareholdings in the company.

Name of the Company Number of shares in Tesco Plc The percentage shareholding
FRM Corp 289698967 3.02
Legal and General Group PLC 315905160 4.00
Barclays 300460802 3.79
Capital Group Companies 290054075 3.66

Source: Nash, 2011.

From the table above, it is evident that Tesco Plc has greatly won the confidence of major global firms such as Barclays, among others, making a considerable investment in the company in the last decade.

Share prices at the London Stock Exchange

As indicated above, Tesco Plc is one of the few retail and grocery stores which are listed on the LSE. The high level of profitability of the firm despite the recent financial crises, causing a reduction in the profitability of many retail firms across the globe, has boosted the investors’ confidence. This has made the company shares to trade at a high of US$490 within the last year. Hausman (2005) indicates that an increase in value of shares on the stock exchange is driven by the high demand for shares as compared to the available supply. On this note, it is clear that less investors are willing to sell their ownership of the company. This has driven the decrease in the supply of shares resulting to the increased price of shares on London Stock Exchange, among others. The table below indicates the prices of the share prices of the firm for the last year.

Month Year Share price in US$
June 2010 280.40
August 2010 340.78
October 2010 297.23
December 2010 326.40
February 2011 430.69
March 2011 480.50
May 2011 388.67
July 2011 392.39

Source: Nash, 2011.

This information is also represented by the graph below:

500

                 
                   

450

                 
                   

400

                 
                   

350

                 
                   

300

                 
  June August October December February March May July    

                 
                   
                 

In the last month, the share prices have been on a decrease compared to the other months. This can be attributed to the change in management as David Reid, the current chairman, is retiring on November this year. He will be replaced by Sir Richard Broadbent, the current deputy chairman of Barclays PLC. Many potential investors fear that the chairman will employ some of the austerity measures being applied by financial institutions to reduce the company’s operational costs. The table below indicates the share prices of Tesco PLC as compared to close competitors in the European market.

Company Average share values in 2006 Average share values in 2007 Average share values in 2008 Average share values in 2009 Average share values in 2010
Tesco 331 352 358 366 411
Asda 39 46 55 48 55
Sainsbury 293 302 299 302 381
Morrison’s 221 253 268 251 262

Source: Humby, 2006.

The above data can be analyzed in a graph as indicated below:

From the above graph it can be deduced that Tesco is one the most stable companies among the three close competitors, thus, resulting in higher share prices in the LSE.

Dividends

The main aim as to why shareholders invest in any given company is to benefit from dividends. Usually in the form of cash payments to the shareholder, dividends are mostly paid on a quarterly basis. When the performance of dividend paying stock is compared to the non-dividend paying stocks, the difference of total return perspectives, mainly capital appreciation added to the dividend, is quiet surprising. Buerkle (2009) stipulates that due to the prevailing hard economic times, most companies, especially in the developed countries, keep all profits in order to invest back, thus, not giving any dividend. This has been brought about by the increase in fuel prices in the international markets and reduced buying power among customers resulting to higher operation costs. To most potential shareholders and other investors, they consider investing in firms which includes dividend paying stocks in their portfolios. Due to the attractive returns offered by Tesco Plc, the company is considered stable as compared to other companies which do not pay dividends. Further, this has reduced the volatility of stock prices, favourable tax treatments by governments in which the company operates, increasing yields, among other advantages. The table below indicates the amount of dividends per share paid by Tesco Plc in the last five years:

Year Divided paid per share in £ Percentage increase
2007 0.1064 9.34
2008 0.1196 12.40
2009 0.1305 9.11
2010 0.1445 10.73
2011 (est.) 0.2133 47.61

Source: Nash, 2011.

From the above table, it is evident that Tesco Plc has remained profitable, thus, being able to allocate dividends to its shareholders. In the fiscal year 2011, the company hopes to increase its dividends’ allocations by over 45% as profit is expected to rise by a similar percentage due to the acquisitions and alliances being made by the company in the Asian continent. For example, on the 28th of February 2011, Tesco announced that it had signed an agreement for a joint venture in developing shopping malls in China. Half of the joint venture is to be owned by a consortium of investors from the Asian continent which includes Singapore Metro Holdings. Tesco will contribute over GBP 25 million in terms of equity. The final dividend for the fiscal year 2010 was paid on July 2011 to all the shareholders who registered at the close of business on the 3rd of May 2011. Generally, it is important for a business to offer dividends to its shareholders as this is a clear indication that the business has grown to another stage where retaining all the earned capital is not encouraged. Nash (2011) indicates that paying out of dividends helps generate interest from other potential investors willing to invest in the firm and, thus, receive the dividends.

Cash flow

Although most of the businesses exist in order to make profits, it is important to note that many shareholders are highly interested in the way the cash flow is managed by the companies they have invested in. Kevin (2009) indicates that the more the cash flows within the business, the higher the profitability of the firm provided other factors such as economic and political stability are kept constant. Cash flow refers to the amount of money that is paid out and received by a firm. It is the variation of receipts and payments being added to reserves by a company. For organisations to remain profitable both in the short and long run, it is essential for them to have a substantial amount of cash flow as compared to accounts receivable. Nash (2011) stipulates that cash flow for any given company should be at least 10% of the annual sales revenues. This is due to the fact that adequate cash flow helps in catering to the current obligations of the firm such as paying for the staff, minor acquisitions and alliances, and payment of creditors, among other duties. In this regard, shareholders should thoroughly investigate the cash flow of a firm prior to making any notable investment. This is further aggravated by the current economic times where lenders, including the banks, are reluctant to offer short term loans to companies due to the fear of financial non-performance of firms especially in the European and American continents. This calls for the business to be financially sound by having adequate cash flow to cater for the above duties. Companies which manage their cash flow in the right ways tend to have sustainable growth in dividend payout over time. These successful growth of earnings mostly attract new investors as it results to increased share prices. In the fiscal year 2010, Tesco Plc had an impressive cash flow of £3.833 billion as compared to its closest competitors such as Morrison’s who had less than half of this figure.

Price earnings ratio on shares

This is the price of shares divided by annual earnings per unit share. From its P/E ratio on shares, it is clear that Tesco Plc has one of the highest values among close competitors both in the domestic and international market. In 2010, the P/E value was 14.3. In 2009 and 2008, P/E value was 13.5 and 12.8, respectively. This is recommendable since Wal-mart, the leading retail and grocery chain in the world, had a P /E value of 14.6 and 13.2 in 2009 and 2008, respectively (Nash, 2011).

Market share

Tesco Plc is the market leader in terms of market share as compared to other close competitors. The table below indicates the market dominance of Tesco among four main companies in the year 2008 and 2009.

Company Percentage Market share in 2009 Percentage Market share in 2008 Percentage change
Tesco 30.4 30.3 0.1
Asda 16.8 16.7 0.1
Sainsbury 16.2 16.0 0.2
Morrison’s 12.2 11.7 0.5

Source: Joshi, 2005.

From the above, it is evident that Tesco Plc is the market leader in the UK grocery and retail segment. The management team of the company has invested heavily in the healthy management of retail shops in the UK and overseas markets. The enormous market share of Tesco in the domestic market has attracted many people to invest in the firm, thus, resulting in a remarkable growth.

Return on equity (ROE)

ROE is a vital tool in measuring the profitability of a firm. It reveals the amount of profit earned by a business in comparison to the total amount of the shareholder’s equity. Nash (2011) indicates that a firm that has a high ROE is more capable of generating cash internally to run its operations.

Return on Equity = (Net Profit /Average stockholders Equity)*100 (Robert, 2008)

The Average Stockholders Equity = (Beginning stockholder Equity + Ending stockholder Equity) /2 (Robert, 2008).

ROE= (2,970,000,000/4,752,332,000)*100

=15.35%

From the above figures, it is clear that Tesco Plc has maintained a recommendable ROE as compared to other close competitors such as Morrison’s and Asda, among other retail shops operating in the UK market. This results in being able to attract more investors as compared to the other firms.

Return on investments

Return on investments measure the returns on a proprietors’ investment in a firm. It provides a quantitative basis from which companies can make decisions. ROI also provides frameworks to determine the way investments can be made profitable. This can be achieved by lowering the cost of investment or by speeding up the magnitude at which gains are recognized by a firm.

R.O.I = (profit after tax/ Total share capital plus reserves) * 100

ROI = (2,970,000,000/ 3,174,296,996) * 100

= 9.35 %

Gross profit ratio

This is ratio indicating margins of sales compared to buy or the factory costs.

Gross profit ratio = (Gross profit/sales) * 100 (Simms, 2010).

Gross profit ratio for FY2010

Gross profit ratio = (3.811/60.92) * 100 = 6.255%

Profit margin

The profit margin is obtained by dividing the net income by the revenue generated. According to Tesco’s profit and loss account, the net income for the fiscal year 2010 was £2.66 billion while annual sales were £60.92 billion.

Profit margin = (profits after interests and taxations/ sales) *100

Profit margin for FY 2010

Profit margin= (2.66/ 60.92) * 100

= 4.37%

It is clear that for each pound Tesco gets from sales, the firm keeps approximately 4 cents. Although this is not a recommendable figure for many of the investors and shareholders, it indicates that the firm is still profitable as it can keep some funds to cater to other activities. In the fiscal year 2009, the company had a profit margin of 6.76% (Humby, 2006).

Recommendations

Due to the increased need to diversify their investment portfolios, the CEOs of major companies, including Tesco, should hold regular meetings with the non-executive members of the board. During such meetings, executive board members and the CEOs should not present. In this way, the non-executive members will air their views regarding the performance of the top executives. I also recommend the involvement of shareholders’ representative’ in such meetings in order to give the views of other shareholders. Due to the great interest that majority of shareholders have regarding the daily operations of firms, it is prudent for the CEOs to be clear with the process of compiling the profit and earning figures of the company. In this way, the public confidence and the shareholders’ trust will be enhanced. The disclosure of annual reports, especially through the websites, is another essential aspect which local and international companies should emulate. In this way, shareholders will be updated on the financial performance of the companies. Due to the corruption and ineffective management practises, many firms have collapsed. It is, therefore, vital for executives to initiate proper regulations to avoid loopholes which may lead to financial scandals (Joshi, 2005).

The interest of the shareholders is to have a high return and security of their investments. It is fundamental for companies to diversify their investment portfolio so as to increase their income and spread the investment risks. I also recommend that the annual audit of the executive and non-executive board members be carried out in order to evaluate their performance. After the audit, an appraisal should be carried out that should be disclosed to the shareholders during the annual general meetings.

Conclusion

As discussed above, corporate governance is a detrimental aspect which companies cannot overlook. Due to the stiff competition in the business arena, it is important for large companies such as Tesco to initiate a positive relationship among the stakeholders in order to remain competitive. Based on the fact that shareholders are the major stakeholders in any public company, it is essential to involve them in any strategy that is undertaken by the company and which may affect the investments of the shareholders. This means that executives should ensure that annual and emergency general meetings are held in order to update the shareholders of the progress of the company. Positive relationships between the employees, shareholders and the managers is very crucial for the progress of any company. It is vital for firms to initiate seminars and forums where employees can freely intermingle with other stakeholders. This will not only motivate the employees but it will also make the stakeholders feel part and parcel of the company.

References

Berglof, E., 1997. Reforming corporate governance: Redirecting the European agenda. Economic policy, pg.93-123.

Blair, M., 1995. Ownership and control: Rethinking corporate governance for the twenty-first century. Washington DC: Brookings Institution.

Buerkle, T., 2009. $10 billion gamble in U.K. doubles its international business: Wal-Mart takes big leap into Europe. London: Oxford University Press.

Franks, J. & Mayer, C., 1996. Hostile takeovers and the correction of managerial failure. Journal of financial economics, 40, pp.163-181.

Gugler, K., 1999. Corporate governance and economic performance: A survey. Mimeo: University of Vienna.

Hausman, J., 2005.Consumer benefits from increased competition in shopping outlets: Measuring the effect of Tesco company. Leeds: Massachusetts Institute of Technology.

Holton & Glyn, A., 2006. Investor Suffrage Movement. Financial analysis journal, 62 (6), 15-2.

Humby, C., 2006. Scoring points: How Tesco continues to win customer loyalty. The Guardian(London).Philadelphia: Kogan Page.

Joshi, R., 2005. International marketing. New Delhi: Oxford University Press.

Kevin, L., 2009. A Framework for marketing management. Pearson: Prentice Hall.

La Porta, R., Lopez-De-Silanes & Shleifer, A., 1999. Corporate ownership around the world. The Journal of finance, 54 (2): 471-517.

Levy, H., 1982. Economic evaluation of voting power of common stock. Journal of finance, 38, pp.79-93.

MacLaurin, S., 1999. Tiger by the tail: A life in business from Tesco to test cricket. London: Pan Books.

Mayer, C., 1996. Corporate governance, competition and performance. OECD Economic Studies, 27, pp.7-34.

Monks, Robert, A.G. & Minow, N., 1991. Power and accountability. Pearson: Prentice Hall.

Monks, Robert A.G. & Minow, N., 2004. Corporate governance. Pearson: Prentice Hall.

Nash, B. 2011. Fair trade and the growth of ethical consumerism within the mainstream: An investigation into the Tesco consumer. Leeds: University of Leeds.

Paliwoda, S., 2007. Back to first principles.International marketing: Modern and classic. Paris Pearson Prentice Hall.

Robert, W., 2008. Price-earnings ratio (P/E Ratio). New York: McGraw-Hill.

Simms, A., 2010. Tescopoly: How one shop came out on top and why it matters. London: Harvard University Press.

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