Corporate governance is a field in economics that investigates how to secure/motivate the efficient management of corporations by the use of incentive mechanisms, such as contracts, organizational designs, and legislation. This is often limited to the question of improving financial performance, for example, how the corporate owners can secure/motivate that the corporate managers will deliver a competitive rate of return.
It can also be defined as the combination of mechanisms, which ensure that the management (the agent) runs the firm for the benefit of one or several stakeholders (principals). Such stakeholders may cover shareholders, creditors, suppliers, clients, employees and other parties with whom the firm conducts its business.
It deals with the conflicts of interests between the providers of finance and the managers; the shareholders and the stakeholders; different types of shareholders (mainly the large shareholder and the minority shareholders); and the prevention or mitigation of these conflicts of interests. The principles of Corporate Governance are as follows:
- Shareholder Recognition- it is a vital component in maintaining a company’s stock price. Good corporate governance seeks to ensure that all shareholders (both small and major shareholders) get the opportunity to participate and raise their opinions at the general meetings.
- Stakeholder Interests- they should be recognized by the good corporate governance. This develops a positive relationship with the community.
- Board responsibilities must be clearly outlined to the shareholders. All board members should be aware of the main vision and mission of the organization and should unite to achieve it efficiently and effectively.
- Ethical behavior should be maintained and followed by all the board members, as the violations can negatively impact the company’s image and recognition.
- Business transparency is an essential feature in promoting shareholder trust. All the financial records and reports should be clearly stated and exaggerations should be avoided.
The main purpose of these principles is primarily to clarify and explain the rights and responsibilities of the owners, the Board of Directors, the company’s management and other governing bodies, with reference to the company’s policies and rules, regulations and legislative framework. Thus, effective corporate governance is required by a business so that it is able to set and meet its strategic goals efficiently. A corporate governance structure combines controls, policies and guidelines that motivate the organization towards its objectives while satisfying the needs of the stakeholders.
It refers to a combination of various mechanisms. These mechanisms include: Internal and External Mechanisms.
The internal mechanisms are the most important sets of controls that monitor the progress and activities of the organization and take corrective measures when required. They tend to assist the internal objectives of the corporation and its internal stakeholders, such as the employees, managers, and the owners. These objectives primarily include the tasks to be performed and their reporting lines, along with the performance measurement systems. So, the internal mechanisms include supervision of management, independent internal audits, structure of the board of directors into levels of responsibility, segregation of control and policy development.
These mechanisms are controlled by the external or outside entities of the organizations, serving to their objectives. These external entities include regulators, governments, trade unions and financial institutions. Their objectives mainly refer to adequate debt management and legal compliance. The external stakeholders impose these mechanisms in the form of union contracts or regulatory guidelines. Finally, companies report the status and compliance of external corporate governance mechanisms to the external stakeholders.
The good corporate governance of an organization is depicted through the market share. So, the market share index is presented in the Financial Times Stock Exchange (FTSE). The FTSE 100 refers to a share index of the 100 companies listed on the London Stock Exchange, having the highest market capitalization. It serves the purpose of a tool for measuring the success and prosperity of the businesses regulated by the UK company law. From among the 100 companies, one of the companies that we will be analyzing is Unilever.
Unilever is a company, well known for the useful everyday products that it produces. Its vision is stated, as “Unilever is a unique company, with a proud history and a bright future. We have ambitious plans for sustainable growth and an intense sense of social purpose.” Their main purpose is to make a sustainable living. They aim to create a better future every day, with brands and services that help people feel good, look good and get more out of life. Most of the Unilever brands contain ethically and sustainable sourced ingredients that are independently certified. Around half of their raw materials are from agriculture and forestry, so they work towards making their key products 100% sustainable.
Unilever ensures good corporate governance and behavior. The Code of Business Principles represents the standard of conduct that each Unilever employee is expected to follow in their performance. A copy of this code has been presented in the document “Unilever’s Code of Business Principles.” The main components of this document includes: Ethical guidelines, Employees, Shareholders, Customers, Law and Regulations, Business Partners, Competition, Public activities, Compliance to the rules, monitoring them with the required and then reporting the final results. It also caters to the rights and responsibilities of the stakeholders. This document aids the employees in understanding what the organization expects from them and how they can all struggle towards achieving the organizational main goals and objectives.
Unilever focuses to corporate governance requirements in the Netherlands, the UK and as a foreign private issuer in the US. They constantly review their corporate governance arrangements and present it in the annual report. They conduct their operations according to the internationally accepted principles of good governance and best practice, also ensuring compliance with the corporate governance requirements applicable in the countries in which they operate, therefore catering to both national and international requirements.
The corporate governance of Unilever has been portrayed annually. Similarly, the Annual Report 2014 has been divided into two parts:
- Strategic Report- it contains information about the organization, how the operations are conducted and how is the money earned. It includes the strategy, business model, markets and Key Performance Indicators as well as the approaches to sustainability and risk.
- Governance and Financial Report– it contains detailed corporate governance information, how risk is mitigated, the committee reports and how hey remunerate the directors, also the financial statements and notes.
As mentioned earlier, the corporate governance includes two mechanisms- internal and external. Internally, a Board of Directors Committee is present to analyze and evaluate the performance of employees, to make organizational decisions and review the progress towards achieving those goals. The management of the company is committed to good corporate governance and complying with the best practices. The Directors are expected to present the financial statements, keeping in view the cash flows, analyzing the position and pattern of shareholders, discussing the annual board meetings and evaluating the results, further presenting it in the form of the report.
Unilever pays importance to their shareholders. It values open, constructive and effective communication with their shareholders. They are provided an opportunity to raise issues directly with the Chairman and, if required, the Vice-Chairman/Senior Independent Director. They are supported by the Investor Relations department, which organizes presentations for analysts and investors. The meetings and information processed in the meetings are announced via teleconferencing and can also be accessible by telephone or via their website. The company through a frequent dialogue welcomes feedback from shareholders. The Chairman, Executive Directors and Chairmen of the Committees answer the questions put forward by the shareholders at the Annual General Meetings (AGMs) each year. This depicts the idea that the company appreciates the interests and opinions of the shareholders, with fulfilling towards the accomplishment of the desirable opinions.
The Annual General Meetings (AGMs) are conducted each year, where the Chairman presents his thoughts on the governance aspects of the preceding year and the CEO of the company provides a detailed review of the Company’s performance throughout the year. Shareholders are encouraged to attend these meetings and ask questions at or in advance of the meeting. Indeed, the question and answer session forms an important part of each meeting. The external auditors are welcomed to the Annual General Meetings and are entitled to address them.
The external mechanism of Unilever includes the financial institutions that provide loans and financial assistance to the production and then marketing of the products produced.
Risk Management is an important aspect that provides support to the internal stakeholders by assuring a comfort zone in the company. Every business face risks at various levels, but effective management is what differentiates a successful company from the least successful one. Likewise in Unilever, the Boards, advised by the Committees, regularly review the significant risks and decisions that could have a material impact on Unilever. These reviews consider the level of risk that Unilever is prepared to take in pursuit of the business strategy and the effectiveness of the management controls in place to mitigate the risk exposure.