CORPORATE GOVERNANCE ANALYSIS ON SAINSBURY'S

1 Definition of Corporate Governance:

Buck et al. (2005, 42) mentioned that corporate governance in a firm means where
stakeholders control the decisions take by the senior management of the company. They
clarified that this is the senior managers who will take the decision of the company but there
is a board and regulators like committee will be to observe on the decisions. Buck et al.
(2005, 42) mentioned the stakeholders can include shareholders, employees, executive
directions but not customers, suppliers, creditors, competitors and government. Pedersen
(1999, 45) supported this definition of corporate governance this is a control mechanism
where the key decisions of the top management are controlled and directed. Pedersen (1999,
45) further opined that this is a complex issue where owner and managers relations is
important. Corporate governance is the about the key stakeholders influencing, checking and
controlling the final decision about capital structure of the company, affecting and related
company law, compensation of the management, structure of the board and key pattern on
practices relationship between managers and owners, with the stakeholders and many are the
subjects of corporate governance. Fort (2000, 829) concluded in his study about corporate
governance as the process where top management manages and mediates value creation in
the decision making by having proper accountability to the stakeholders. So it can be said that
there is interventions by different stakeholders in the management decision but there is limit
to it. For example it also can take part in influencing the decision of a company. However,
they can only guide and give a certain rule and regulation to be within. Similarly the
shareholders do not take part in day to day decision making process however the key issues
and sensitive issues are always discussed in the annual general meeting for votes, board of the
company is always there to discuss with the top management. Some recent studies shows that
corporate governance sometimes is too focus on the power of the top management and
sometimes may have the intention to share those control. However, the key issue of corporate
governance is guiding the top management so that they are balanced and management takes
proper decision for the company. Too much focus of power to the top management may not
generate positive result in every situation. Thus a rein on that may have extra view and
discuss, analyse the situation from different angle. Tran (2004) mentioned that this is the case
of Enron failure, too much focus on power of the top management. In this article there will be
discussion on the evolution of corporate governance, and its necessity or key purpose. In
addition there will be brief discussion about example of a situation in Sainsburys about
corporate governance.

2. Evolution of Corporate governance

Corporate governance is thought to be very important in deciding the structure and

relationship with the performance of the directors and their relationship with the key
stakeholders. The central body of corporate governance of every company is the board of
directors. They are very critical as well. This is for the sake of the company and create
additional value in the decision making process. Sometimes in many cases in the final and top
decision making process there are some involvement of the employees, suppliers, creditors,
customers and other related parties. Mainly corporate governance of any company depends
on the structure of the company, legal requirement and practices of the company. Any legal
requirement only can guide what to do but it is on the company to decide how the key activity
will be performed and who will have how much authority and responsibility in decision
making, taking ownership and share of the responsibility. Sometimes, corporate governance
depends on the ethical practice of the community. How much the top management wants to
and prepared to listen from whom depends on the attitude of the top management and culture
of the company. It is said that 20 th century can be viewed as the era of the management
however it is changing in the recent and upcoming centuries and becoming the age of
corporate governance, where there are listening to variety parties while making any decision.
Hawley, James (2003) mentioned that is impossible for any company to ignore the
importance of corporate governance. In the business world globalisation has affected many
things including increasing competition as well as business risk in much aspect. Thus for the
sake of every party involved in decision making and betterment of the company there has to
be good practice of the accountability and transparency. Top management of all the company
are getting more aware of this fact they are including different parties in the decision making
process where they remain accountable to the shareholders and other important stakeholders
of the organisation.

Globalization has not only significantly increasing and intensifying business risks, but also it
has compelled Indian companies to adopt international norms of transparency and good
governance. From late 70s it is noticeable in the top management of the US based companies
to be more aware of the fact to include and be accountable to different stakeholders. In the
UK the practice of running organization is also a very much subject to meeting regulation of
the government. Thus there is a common trend of caring the legal requirement in every aspect
of running the organization. Pedersen (1999, 45) found in his study that Britain is a country
of industry revolution and corporate governance practice in the UK companies are increasing.
As the economy of the UK is highly depending on the business activities of the different
firms there is a common and growing sense of accepting corporate governance in the top
management and other level of the stakeholders. Varallo, G.V. and Dreisbach, D.A. (1996b)
clarified and supported this by showing in his study that in Britain there is a trend among
corporation to follow law. However, he further mentioned that, it is common the government
do not intervene too much on the practice of the private organization as they are formed
within private contract. Only check is important here is that there is no abuse of any system.

3. Puprose of Corporate Governance

Business and corporation run their activities in the society and in an internal and external
environment. Thus there is pressure of certain issues and challenges by the business
community to face. In this regard Sundaramurthy et al. (1996) mentioned that it is the tasks of
the companies to prove themselves in excellence in doing things and centre of best practices
in any environment. Rubach, M.J. and Sebora, T.C. (1998) noticed that though sometimes
management may think they are rational and proper in any decision making still there is a
chance that things can be against the law of the country or ethical practice of the community.
Thus there is need of cross supervision and involving of various parties. Though the
involvement is not regular and in every case. This is only for the serious and decision which
can impact the activities of the whole organization. In this regard it can be mentioned that in
case of day to day operation there are many decisions to take place to run the company. It is
not possible for any management to involve everyone in those decisions. However, they
operate within a set guideline. The guideline is set and finalized the stakeholders with respect
of the abiding the laws of the country. In every organisation in every country differentiation
in the decision making between shareholders or key stakeholders of the company and top
management may result in turbulence in running operation and may not have a positive result
in operation in the long run. Thus is it is always important to have proper practice of
corporate governance in the company. There can be differentiation in decision making by the
top management and shareholders in many decision but at one point there has to be
agreement and common ground of acceptance of the decisions. Scullion (1994) mentioned
about British firms that there can be hardly any true and independent international top
management. Corporate governance is also important for the social and cultural trend of the
country or region.

4. Model of Corporate Governance- The Formal Independence of Two-Tier Boards

One-tier board model used to be a popular model of corporate governance. However due to
some limitations of that model the new two tier board model has evolved. This model clearly
differentiates the task of executive management from supervisory directors. Tricker (1984)
and Cadbury (1995) mentioned that this model shows a broad structure of the board which
represent three design strategies. The three design strategy mainly says about board
leadership, composition and structure of the organisation. The three design strategies says
that chairman and CEO will be different, there will be separate board of directors and
supervisory committee, there will be formal independent oversight board committee, there
will be appointment of non-formerly executive directors. In the tow tier board model there
will be two tiers in the board where one layer will supervise and other layer will perform the
executive function. Sheridan and Kendall (1992) mentioned that the separation of the
supervisory layer of the board increases transparency in the operating of the top management.
The upper layer of the two-tier board model is the supervisory level will be fully comprised
of non-executive supervisory directors. Demb and Neubauer (1992) mentioned that beauty of
this model is separation of CEO and chairman which is must for many different types of
organisation. The details of the two tier board model are shown in the figure below:
Figure 1: Two tier board model of corporate governance

5. Example of a Corporate Governance of Sainsburys:

Sainsburys follows strong code of governance practice which follows the section 1 of the
UK Combined Code on Corporate Governance June 2008 (the Code). In Here below are
examples of some practices which are adopted by Sainsburys. Sainsburys theoretically
follows two tier board model as described above. They have division of responsibilities
between CEO and chairman. In Sainsburys there are independent non-executive directors.
The Chairman makes sure and satisfies that the appointment of the non-executive directors is
followed with the provision of Code. Their Board has separate power and responsibilities.
The board delegates certain responsibilities and tasks to the principal committee. There is an
audit committee which ensures that there is proper control and risk management in the
organisation. There is a remuneration committee, nomination committee and spate committee
for looking after the corporate responsibilities (CR).

6. Case Study:

In 1990 there was a pressure from the investors so that the company
takes care o corporate social responsibility (CSR). Along with this pressure
and from other stakeholders and environmental agencies Sainsburys
realizes that there has to be some firm action. They have agreed up to the
board level to set up some activities to develop the CSR activities and
decided that there will be major activities for promoting CSR. It is also
decided in the board that there will not be any activity against CSR
policies of the company. There was a formal CSR committee where there
will be involvement of Chairman. Since the CSR activities started by
Sainsburys it can claim that it is caring for the environment, society,
community and for other related issues which matters to the customers,
investors and other stakeholders. Proper corporate governance in
Sainsburys helps to ensure that there is optimum level of CSR activities
remain in place.

7. Conclusion:

In explaining importance of the corporate governance it can be clearly mentioned that there
are different parties included in the stakeholders. The entire have their own interest point of
view. Thus while any management decides to do anything it cannot be against of the interest
of the stakeholders. It is arguable that this is not necessarily possible to satisfy all the
condition and interest of everyone at one single point however there should not be any
decision which can negatively impact interest of any stakeholders. For example, customers
are more aware of environment and ethical practices of the organizations thus companies
must clarify if there is any issue which may have the chance to raise any doubt in anyones
mind. Business organisation should not take undue advantage from the customers, whereas
customers are able to provide feedback in effective manner. Corporations are careful for the
environment and ethical standpoint of the community as well. British law supports the fact
that board of directors has all the rights to decide on their own as long there is no chance of
abusing in any point.
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