The corporate governance practices of Kingfisher PLC.
The corporate governance practices of Kingfisher PLC.
Introduction
Kingfisher PLC is a multinational home improvement retailer with headquarters in United Kingdom. It is the largest home improvement retailer group in Europe with over 1000 outlets in eight countries in Europe and in Asia (Kingfisher plc, 2012). The main retails brands for this company are B&Q, Screwfix, Castorama, Brico Dépôt, Koctas and Hornbach. It is currently the third-larest in the global market behind the Home Depot and Lowe’s. It was established in 1982 in UK as part of FW Woolworth Company which was later dissolved. It started to expand internationally through establishment of outlets in foreign countries and through acquiring foreign companies. By 2012, this company had acquired five million square metres of selling space with more than 90,000 employees. Lately, this business serves over six million customers every week and has been generating annual sales amounting to £11 (Kingfisher plc, 2012). Generally, Kingfisher PLC can be said to be successful in its venture. There are various factors that are attributable to the successful performance of any business organization. One of these is a strong commitment by an organization’s board to high standards of corporate governance. As FRC (2010, p. 4) describes, Corporate governance is key in determining how well a business is able to deliver its strategies and achieve set goals while safe-guarding long-term interests of shareholders and generating value for their investment. In this view, the purpose of this paper is to provide a critical evaluation of corporate governance practices of Kingfisher PLC to determine whether they maximize shareholder’s wealth.
Evaluation of corporate governance of Kingfisher PLC
According to Kingfisher PLC (2012), good corporate governance is one of the key drivers for the long-term successful performance of Kingfisher PLC. It is highly compliance to the UK Corporate Cord and other sources of principles that guide corporate governance practices. To start with, the board of this company comprises of a non-executive chairman, six independent non-executive directors and two executive directors. As described in the UK Corporate Cord, such a size is sufficient to enable it meet the requirements of the business and of the right composition to ensure that executive views do not dominate the board’s decision making (FRC, 2010, p. 11). According to Kingfisher PLC (2011), the board members have appropriate balance of knowledge, skills and experience which enable them to discharge their responsibilities and duties effectively. The board has put in place a formal, transparent and rigorous procedure for appointing new directors. The appointment is conducted by a nomination committee and is done on merit and against objective criteria. The diversity of the board is also observed. The directors are re-elected annually by the shareholders subject to continued satisfactory performance (FRC, 2010, p. 12).
The UK Corporate Code requires that the board should consider the independence of all non-executive directors, annually to determine they have formed any relationships or circumstances have occurred that may affect their independent judgement (FRC, 2010, p. 12). In compliance with this requirement, the board of Kingfisher PLC evaluates the independence of each of the non-executive directors every year and includes the findings in the annual report.
According to Kingfisher PLC (2011), the board members allocate sufficient time to this corporation to discharge their duties effectively. The directors are rarely absent in the meetings that they are required to attend. The board performs annual evaluation of its performance, of committees and of individual directors. The chairman acts on the results of the evaluation by determining the strengths and weaknesses of the board and the board members and where necessary, seeking resignation of some of the directors and arranging for the appointment of new ones. It also presents a balanced and understandable assessment of the corporation’s position and prospects. According to Kingfisher PLC (2012), the board has also established and maintained sound internal control and risk management systems. It has put in place a formal and transparent arrangement for the application of corporate reporting and internal control and risk management principles and for maintaining good and appropriate relationship with the corporation’s auditor.
In regard to remuneration, the directors are compensated sufficiently enough to motivate them. However, the company avoids paying them more than necessary or to a level that would lead to dissatisfaction of the shareholders (Kingfisher PLC (2011). Unlike in most corporations, Kingfisher PLC engages in constructive dialogue with institutional shareholders to discuss matter relating to remuneration packages of the directors. Where necessary, the remuneration packages for the directors are revised in accordance with the wishes of investors. Generally, the board of directors of Kingfisher PLC is effective in discharging its responsibilities as required by the standards that guide the conduct and practices of directors. The effective corporate governance system in this company helps in maximizing shareholder’s wealth.
Theory
Corporate governance is based on Agency theory which explains how best the relationship between principals and agents can be tapped to form governance that can help an organization to realize its goals. Some entrepreneurs accumulate a lot of capital but they do not have enough time or requisite expertise to run their own expertises (Organisation for Economic Co-operation and Development, 2011, p. 261). At the same time, there are managers who have excess of ideas to use that capital effectively. The owners of capital (principals) hand over their enterprises to managers (agents) for control. In this relationship, principals (or shareholders) have a duty to safeguard their investment by selecting and putting in place the most suitable governors (directors) to ensure that effective governance system is implemented. The Agents are then given the responsibility for managing and controlling the enterprise in the most efficient way. As (Organisation for Economic Co-operation and Development, 2011, p. 262) explains, all corporations are exposed to agency problems which may ruin their performance if not effectively dealt with. The board of directors’ major role is to develop action plans to develop with these problems in to ensure that the interests of the principals are safeguarded. A corporation’s board of directors is also accountable to non-shareholder stakeholders that have an interest to see that a corporation is well governed such as customers, partners, suppliers, employees and the surrounding community (Organisation for Economic Co-operation and Development, 2011, p. 261). Therefore, the board of directors of Kingfisher PLC is expected to discharge its duties in line with these requirements in order to maximize shareholders’ wealth and to protect the interests of non-shareholder stakeholders.
Relation between performance and corporate governance
There is a strong positive relationship between corporate governance and performance in all corporate organizations. A well functioning corporate governance system helps in generating investors’ confidence and goodwill. As Smith (2010, p. 21) explains, good corporate governance helps an organization to investors and to raise funds necessary for organization’s strong performance. Good corporate governance focuses on enhancing efficiency and increasing profitability of an organization. This helps to increase employment opportunities with better terms of work and to create wealth and other benefits for the shareholders. Transparency, probity and accountability of corporate organizations make stakeholders to accept them as responsible, caring, legitimate and honest wealth creating organs. This helps to enhance organizational image, market standing and reputation (Smith, 2010, p. 22). This helps to attract local and foreign investors and to assure them that their investment will be well managed and secure and will generate wealth to them. Thus, a corporate organization with good corporate governance is able to attract funding and to shield it self from financial distress. Moreover, such an organization is able to record successful overall performance over time (Smith, 2010, p. 22).
On the contrary, poor corporate governance makes an organization vulnerable to future financial distress in the future. As Frederikslust et al (2008, p. 75) explains, a weak corporate framework leads to poor performance of an organization, risky financing patterns and non-conducive macroeconomic crises. Poor governance leads to loss of investor confidence which results into insufficient funding. Without investment, corporate organizations will stagnate and collapse. Therefore, good corporate governance is crucial to the overall performance of Kingfisher PLC (Frederikslust et al, 2008, p. 75). Therefore, good corporate governance is a key factor in facilitating long-term successful performance of Kingfisher PLC.
Conclusion
In conclusion, effective corporate governance of Kingfisher PLC has been a key factor in facilitating the successful performance of this company and hence it has played a great role in maximizing shareholder’s wealth. The conduct and operations of the board are highly compliant to the principles that guide corporate governance practices in listed companies, including the UK Corporate Cord. The agency theory clearly explains the principal-agent relationship that exists between shareholders and directors and obligations of each of the parties. As noted, there is a positive relationship between corporate governance and the performance of a corporate organization.
Recommendation for the company
As observed, the board of this corporation has discharged its obligations effectively and highly complied with the laid standards and principles governing the conduct and practices of directors of listed companies. Based on the above analysis of Kingfisher PLC, it is essential for this corporation to work on any loophole that might may arise and lead the board to be perceived as not discharging its obligations effectively.
References
FRC. 2010. ‘The UK Corporate Governance Code,’ Accessed 21st December 2012 from, HYPERLINK “http://www.frc.org.uk/documents/pagemanager/corporate_governance/uk%20corp%20gov%20code%20june%202010.pdf”http://www.frc.org.uk/documents/pagemanager/corporate_governance/uk%20corp%20gov%20code%20june%202010.pdf
Frederikslust, R A I V & Ang, J S. 2008. Corporate Governance and Corporate Finance: A European Perspective, Taylor & Francis, London.
Kingfisher plc. 2011.‘Annual Report and Accounts 2011/12’ Accessed 21st December 2012
from, HYPERLINK “http://www.kingfisher.com/files/reports/annual_report_2012/files/pdf/annual_report_2012.pdf” http://www.kingfisher.com/files/reports/annual_report_2012/files/pdf/annual_report_2012.pdf
Kingfisher plc. 2012. ‘Company overview.’ Accessed 21st December 2012 from,
http://www.kingfisher.com/index.asp?pageid=15
Organisation for Economic Co-operation and Development (OECD). 2011. Corporate Governance Board Practices: Incentives and Governing Risks, OECD Publishing, Paris.
Smith, H. 2010. ‘Corporate Governance: Status Report,’ Accessed 21st December 2012 from, HYPERLINK “http://www.herbertsmith.com/NR/rdonlyres/4070E00E-CB33-436D-9934-C0D02470EF7A/0/8734StatusReport_d3.pdf” http://www.herbertsmith.com/NR/rdonlyres/4070E00E-CB33-436D-9934-C0D02470EF7A/0/8734StatusReport_d3.pdf
