a) Agency problem is a conflict of interest that arises betweendifferent parties within organisation. In corporate world, this frequentlyhappens when principal (shareholders – owners of the company) hires an agent(CEO’s or manager) to represent principal’s interests and views, however agentpursues objectives that are different to the principal’s to maximize their personalgain. Agency theory (type?) is distinct to type ?problem, where shareholders owning majoritystake of an organisation will have the ability to change the board ofdirections due to their high voting power and align board of directors’objectives with their personal interest. As a result, shareholders owningsmaller proportionate stake will not be able to meet their objectives due totheir low voting power in a company.
Agencyproblem occurs due to a conflict of interests and having asymmetric informationbetween parties. Conflict of interests arises because principals will be givingobjectives that relate to organisation as a whole (maximize value of the stock)however, agents will be pursuing objectives that will benefit them for theirown personal gain (usually financial bonuses). For example, managers will beaiming to maximize revenue to receive a revenue-related bonus whilst shareholderswill want them instead to focus on increasing price of the stock (by complyingwith correct corporate governance guidelines) in order for the company to havea higher value. This shows that conflict of interest arises because managersare aiming to achieve objectives that will benefit them personally (financialbonuses), whilst shareholders want them to pursue other goals.
Asymmetricinformation is another reason why agency problem tends to occur, executives(managers) know more about the company they are running and on a daily basis lookat the performance of it, hence they will be finding ways to adjust thecompany’s performance for their own gain and shareholders might havedifficulties finding out about it, for example using creative accounting tomanipulate company’s financial statements, as a result managers will befinancially compensated with a bonus for such performance and shareholdersmight not even find out about it (asymmetric information). This is also thereason why the financial statements are regulated. In worst case, if a companyfails an external audit and use of creative accounting is spotted then thecosts (agency costs) can be very high and might result in penalties. The possiblecircumstances of agency problems occurring are: wide division of ownership andfinancial compensations of managers for achieving objectives. The ownershippercentage of shareholders will determine the separation of control in acompany; agency problem tends to occur in big enterprises where control isseparated between many investors and usually “not a single investor has a large ownership stake in a firm” (Hillier,2016). Having many investors in organisation it will be difficult formanagers to satisfy each shareholders objective, hence agency problems tend tooccur.
This also links with type ?problem, where a company will be pursuing objectives of shareholderswith the highest voting power (ownership). Managers getextra financially rewarded for achieving certain objectives, for example optimisingcompany’s revenue or/and completing the work accurately on time. A possiblescenario of agency problem occurring is when managers get financialcompensation to achieve a certain objective that does not align with objectivesof the owners, hence managers will be pursuing objectives where they can have afinancial gain. Owners (shareholders) should however extra financiallycompensate managers only when the objectives achieved align with those of theowners. For example, provide with a bonus (financial or stock) when managersoptimise profit, that may result in higher value of the company. However, thisbonus scheme can be sometimes difficult in practice.
Looking at theownership data and ways of extra remuneration of managers it can be seenwhether a company is facing type?agency problems, which may occurbecause of conflict of interests or/and asymmetric information. b) In part (a) it has been explained that companies tend to suffer fromagency problems due to wide separation of ownership and extra financialcompensation of managers for achieving particular objectives. Looking at the ownershipdata, statistics and remuneration of J.
Sainsbury PLC the board of directorsare using correct practices to avoid agency problems. According to the ownership data (Sainsbury’swebsite – last updated on 08/11/2017), Qatar Holdings LLC has 21.99%of voting rights and BlackRock Inc. has 5.
01% in J. Sainsbury PLC. The rest ofthe company is owned by Sainsbury family, Lord Sainsbury owns 4.99% (Wikipedia) of the business andSainsbury’s family owns the other 15% of the company. However, looking at a different source (Amadeus – last updated 10/2017)BlackRock Inc. owns 3.79% of the company (different to Sainsbury’swebsite), this shows that when a company goes public(eligible for anyone to have a stake in a company) the ownership can change quicklyand sold on to anyone.
Moreover, on Sainsbury’s website it isn’t written thatCredit Suisse Group AG has a 11.55% (Amadeus- last updated 10/2017) stake means that Credit Suisse Group AG might havesold the shares to someone by November 2017. Ownership changing quickly in sucha short time might be a potential problem for J. Sainsbury, because managers willconstantly have to align with new shareholders objectives, as a result agencyproblems may occur where managers will be pursuing objectives that will benefitthem personally. However, having experienced Board of Directors at J. Sainsburythis problem should not occur. As per 11/2017 J. Sainsbury having onlytwo investors owning large stakes at the company, it should not suffer from anyagency problems because these two shareholders are likely to compromise when itcomes to strategic implementation and devising future plans.
There are howeverother small investors, such as Invesco Ltd that owns 2.13% and Schroders PLCowning 1.99% (Amadeus – last updated10/2017) of the firm. In this case, type ?problem may occur, where Invesco Ltd and Schroders PLC won’t beable to have their objectives being met, because of having such little votingpower.
In the annual report of Sainsbury,the chairman’s letter is given as: “Our primary responsibility as a Board is tocreate value for shareholders in a sustainable way.” (2017 Annual Report). This shows that the agent’s (executives)objectives match with principal’s (shareholders), so the company should notface any conflict of interests, which shouldn’t result in having any agencyproblems nor have any agency costs associated with it. Moreover, agents at Sainsbury are not likely toexploit advantages of asymmetric information, because all the information forshareholders is provided in the annual report that is available to the publicand it shows that the company is ‘transparent’ (has nothing to hide). The other possible reason why Sainsbury might face agency problems isdue to incorrect financial compensation of managers. The agency problemsusually occur depending on “how closely management goals are aligned withshareholders goals” (Hillier, 2016) and how much compensation do managers getto act in shareholder interests. Looking at remuneration of executives at J.Sainsbury PLC, there are bonus schemes available to executives for achievingcertain objectives.
For example, possible ways of financial bonuses include:stock grant, cash bonus, stock option and profit sharing. According tostatistics, the average stock bonus is £8,183 (up to £12,000) and profit sharingaveraging £2000 (up to £3000) (Glassdoor24/9/2017). This shows thatexecutives at Sainsbury are correctly compensated, because it will meet thegoal of the organisation “we are well placed to create value forshareholders” (2017 Annual Report). Suchfinancial compensation works well, because it reduces the chances of agencyproblems happening and keeps executives motivated to meet shareholder’sobjectives (maximize shareholder’s wealth).
It can be said that management at J. Sainsbury PLC iscorrectly and effectively compensated to meet shareholder’s objectives andshould not result in any agency problems. The data has been taken from wide range of sources to improve thereliability of information and hence reach a more informed conclusion. Inconclusion, narrow separation of ownerships between major shareholders (QatarHoldings LLC and BlackRock Inc.) and correct remuneration of executives,Sainsbury should not suffer from agency problems such as conflict of interestand disputes between internal stakeholders. c) Corporate governance code “sets out standards of good practice forlisted companies on board composition, development, remuneration, shareholderrelations, accountability and audit” (ICAEW2016). UK corporate governance code is published by Financial ReportingCouncil (FRC), and highlights practices the board should follow and how itdistinguishes the values of the company. The purpose of the code is to set outeffective, considerable and entrepreneurial management to ensure long-termsuccess of the company.
There are five main principles (sections) provided inthe report: “Leadership, effectiveness, accountability, remuneration and relationswith shareholders” (UK CorporateGovernance Code 2016), these sections provide guidelines on ownership andstewardship of any listed company in the UK. Looking at the Sainsbury’s website, it is clear that it complies with theUK Corporate governance code; “we’re committed to high standards of corporate governance”(Sainsbury’s website). Sainsbury hasto follow the guidelines set out in the code in order to prevent fraud, scandalsand criminal activities.
Responsibilities of individuals in the board atSainsbury are clearly written out to provide better direction for the company.The responsibilities of the Board in J. Sainsbury are to deliver long-termsuccess of the company by devising appropriate business strategies aligning itwith relevant risk appetite and monitoring performance of the company to “ensureeffective corporate governance” (Sainsbury’swebsite). There are nineteen people in theboard of J. Sainsbury PLC, sevenof them being in Nomination Committee, four in Audit Committee, four inRemuneration Committee, three in CSRC (Corporate Responsibility andSustainability Committee) and eight of them are shareholders of the company. Thereare four different committees present in Sainsbury, each committee havingspecific tasks and responsibilities (as laid out in the code), which shouldensure effective management and operation of the firm.
For example, “Mr MatthewJohn Brittin, Mr Brian Jude Cassin, Mr David W Keens and Mr Timothy Fallowfield”(Amadeus 2017) areall in Audit committee in J. Sainsbury. The audit committee is made up of onlynon-executive directors and responsibilities (as outlined per UK CorporateGovernance Code 2016 in the accountability section of) include “corporatereporting of financial statements, monitoring internal controls and communicatingwith external auditors.
” It is important for audit committee to perform itsroles and duties in order to have a sustained operation of the firm and ensuremanagement aren’t using creative accounting practices to manipulate financialstatements. It is important for the audit committee to correctly comply with UKCorporate Governance Code because doing tasks such as financial reporting willhelp individual shareholders to have trust in the company (financial statementspresented with “true and fair view”), as well as it will reduce thepossibilities of fraud happening in the organisation. Mr David Allan Tyler is currently the chairman of J. Sainsbury PLC (since01/11/2009), who is responsible for “leadership of the board, and for ensuringthat directors (executive and non-executive) receive accurate, timely and clearinformation” (UK Corporate GovernanceCode 2016). According to the leadership section, the chairman also has to “constructrelations between directors in a company and ensure communication withshareholders is effective” (UK CorporateGovernance Code 2016). I personally think it’s important for chairman (DavidTyler) to follow guidelines provided in the code, because knowing andunderstanding his responsibilities he will have effective communication, directionand control of the company. Individual shareholders (including my familymember) should benefit from David Tyler complying with the code, because”shareholders will be able to contribute towards strategic aims and have a goodunderstanding of the company’s objectives” (UK Corporate Governance Code 2016 – relations with shareholderssection). Executive directors in Sainsbury’sboard are also important to the organization.
“Mr Michael Andrew Coupe” (Amadeus 2017) is a chief executive director at J. SainsburyPLC and is employed full-time to manage daily operations of the firm. The maindistinction between non-executives and executives directors is that executivesdirectors are involved in day-to-day operational management of the firm incomparison to non-executives that do not run the company but contribute towardsstrategic aims and assess major risks company faces.
In J. Sainsbury PLC both executives (Michael Andrew Coupe andPaul John Rogers) andnon-executives directors (David Allan Tyler and Mary Elaine Harris) areshareholders of the company, I think it is important because it will be easierfor shareholder’s objectives to align with management practices of the board. UKCorporate Governance code alsoprovides guidelines on correct remuneration of executives and highlights theimportance of presence of executives at all meetings. Sainsbury has to followthese rules to keep non-executives, shareholders and the management team happy.
J. Sainsbury PLC does comply with correct guidelines of CorporateGovernance by disclosing accurate information about the company, for exampleSainsbury provides information that is available to everyone about “financialposition, corporate objectives, main shareholders, board of directors and theirsalaries (including bonuses), major risks facing the firm’s operations andpolicies of the company” (Sainsbury’swebsite). Having all of that information, J. Sainsbury complies withcorrect guidelines of UK corporate governance code by providing appropriateinformation (for example, financial statements complying with correct InternationalFinancial Reporting standards), which should help individual shareholders tomeet their objectives. For example, shareholders aiming to maximize their wealthwill only be investing in companies that can be trusted, shareholders know thatthe if the company is complying with correct Corporate Governance code it is ‘transparent'(not hiding anything by having information available to the public), the board actsin the best interests of shareholders and financial statements are accuratewith “true and fair” view.
Therefore, the company is a worthy investment. If,however Sainsbury does not comply with provided guideless as given in the code,it will receive penalties or sometimes even lead to a criminal prosecution, andcompanies (including Sainsbury) are well aware that shareholders don’t wanttheir wealth in companies that break the laws. Doing a lot of research about the UK Governance code and how J. SainsburyPLC complies with it, by relying on information I found I can say that ‘J.Sainsbury PLC does comply with correct UK Corporate Governance code’ and therehave not been any recently penalties for Sainsbury not complying with the code.
Following correct guidelines set in the code is important for individualshareholders (including my family member), because it develops a sense of trustand prevents internal conflicts. I think where possible every company shouldattempt to comply with the UK Corporate Governance code in order to have aneffective management and succeed in the long-run.