Businesses or corporation can be separated into three types which are sole trader, partnership and limited liability firms. A Sole trader company is a company in which a single individual owns the shares and at the same time controls the firm. Moreover, if a sole trader business suffers from high debt the losses will be gained into his own account. The next type is the partnership corporation which simply means that partners control and own the business with the only difference that they separate their responsibilities during the existence of the company. However, higher confidence should be gain between the people who control the business because higher debts will result in the loss of money in the partnership. Furthermore, there are plenty of reasons why people decide to form limited liability companies and basically the main reason is that the ownership and control are separated. If the firm experiences high debt, owners won’t be responsible for that event. What does the limited company simply is to protect the shareholders for gaining unlimited losses. Moving forward, this essay will differentiate between the two types of companies that are currently in existence, scilicet private and public. The difference between the two types is that public companies have shares, which are traded on the stock exchange market whereas private companies are owned and traded privately, in many cases between precisely selected investors. Public companies have a separation of management and ownership which results in many problems because of interest between the two groups. The case study of this essay will look at Sainsbury’s data, discussing whether it is expected to suffer from the type ‘I agency problem’ and what is meant by the particular term. Prior to that will evaluate whether the example company complies with the UK Corporate Governance Code. The essay will also focus on is it good for investors to invest in Sainsbury and is going to be profitable for them in the long term of the company.
Companies can face serious problems during their lifetime. Most commentators agree that if a problem arises in a firm it is surely going to be connected with the Agency Problem I. After the firm is listed on the stock exchange many complications begin to emerge. The separation of the ownership and control may result in not as good relationship. Managers are this type of people who control the company: they work every single day in order to increase the value of the shareholders. Owners or
shareholders are this part of the business which invests capital in return of shares. Moreover, shareholders gain profits when the firm makes money with the increase of the prices. On the contrary, managers are these who are responsible for the daily operation of the company and they are the people who work on behalf of shareholders. Managers maximize their own value instead of maximizing shareholders’ value. Simply the reason, which stands beside that is interest. Managers will always seek to increase their profits first. The conflict can arise between what managers try to do and what shareholders actually want to be done. Different types of problems are employing members who are part of the family of the ongoing managers, rather than seek for competent employees on the labour market. These people may lack the necessary skills to contribute to the company and meet the expectations of the shareholders. This creates a loophole that can benefit managers but be detrimental to shareholders. In regard to that, this problem might be solved partly if managers receive shares of the company as bonuses, which will encourage them to work even harder to increase the firm’s share price. Other type of solution is the compliance with the corporate governance code which states that the company should have independent board of directors which don’t know or do not have any close relationships with the CEO of the company.
Besides agency problem I, it is possible for the company to face the agency problem II and a detailed description will be provided regarding the relationship between the two problems. In addition, Agency problem II can be described as a dominance of the bigger shareholders over the smaller once. Larger shareholders have bigger power than smaller shareholders in the firm, using their power gives them the chance to obtain private benefits at the expense of smaller shareholders.” If, on the other hand, the large shareholder is an individual or a family, it has greater incentives for both expropriation and monitoring, which are thereby likely to lead Agency Problem II to overshadow Agency Problem I.” (Villalonga and Amit, 2016) Following the provided information, agency problem I and agency problem II can both be referred as a conflict of interests between the company’s management team and the same company’s stockholders.
Looking at the ownership data of Sainsbury you can distinguish that the firm has long-term plans to diversify all of the board of the directors. As David Tyler, the chairman of Sainsbury has mentioned: “We want to be ‘the most inclusive retailer’. We will achieve this aspiration by recruiting, retaining and developing diverse and talented people and creating an inclusive environment where everyone can be the best they can be and where diverse views are listened to.” (Sainsbury, 2017). This is a key point to be outlined by shareholders, because it will give them more confidence and inspiration to invest in independently combined board of directors. Other key feature is the bonuses, which are given in shares to directors by the remuneration committee. These two features can be seen as precise motivators for investors to benefit from. The idea for diversification, agreed by the committee, will influence the board of directors to work hard towards contribution and performance of the company as well as to increase the value of the shareholders, because they will be ‘treated’ as a part of them. If the company is doing well, directors will also ‘get a piece’ of these increases in share prices. One more benefit for the shareholders is the engagement with ‘Argos’ and the acquisition of its owner. “We are pleased with the pace of integration and the opportunities that Argos is providing. We are now a multi-channel, multiproduct retailer with a market-leading digital offer and nationwide fast-track delivery capabilities.”-as mentioned in the annual reports of Sainsbury’s by David Tyler, chairman of Sainsbury (Sainsbury’s, 2017). Additionally, after the completion of the acquisition, Sainsbury’s board of directors has made some important changes to the executive team, which will give them more diversity and more internationally balanced team that will provide the most affordable and hard-working team for the shareholders. The Corporate Responsibility and Sustainability committee gives us a broad view that the company makes independent key stakeholder meetings attended by “representatives from the Government, industry, non-governmental organisations and key suppliers, joined us to discuss issues that relate to our values.”- as mentioned by Jean Tomlin, chairman, heading the Corporate Responsibility and Sustainability Committee (Sainsbury, 2017). The Audit committee is also an independent, reliable team, which gives a positive outline of the companies passed year. David Keens, who is the Chairman of the Audit committee has included monitoring on all of the key big assets of the company. Irrevocably, he ‘draws the line’ and gives a positive feedback to the company. Having all of this mentioned and secured, gives us a combination of a reliable company to invest in with serious board of directors, all of them from different backgrounds and well-structured Remuneration committee, which gives fair prices to directors and decreases the sight of the appearance of agency problem I.
The company has made detailed report in which everything concerning the shareholders is included. Sainsbury has a positive feedback from all of the committees (Remuneration committee, Audit committee, Nomination committee and the Corporate Responsibility and Sustainability committee). The board of directors also plays a crucial role in the long- term strategy of the company along with the compliance with the corporate governance.
The Audit committee gives a true and fair view of the work, which is done in the company and reports it to the shareholders. As stated in the annual report by the Chairman of the audit committee, David Keens, he gives his positive feedback about the audit work and positive insights for the following year.
The corporate governance code from 2016 contains principles and provisions which affect shareholders decisions. Companies should comply with the code, although that it is not necessary for every single one. If they don’t comply they should provide explanation about what is the reason of non-compliance and report it to the shareholders. Nonetheless, the company may also be successful and profitable regardless of whether or not complies with the Corporate Governance Code 2016.
Sainsbury is a company which complies with the Corporate governance code as David Tyler (Chairman) stated: “As a Board, we take governance very seriously and we regularly discuss and review our ways of working and our effectiveness.” (Sainsbury, 2017).
The compliance statement gives us a fair view that the company complies with the corporate governance code and gives shareholders complete information for the whole movement of the company.
If the company does not accord to the Corporate Governance Code 2016, the company’s director could be seriously affected by the shareholders. An interesting fact is that when directors decide that they will not comply with the code they must explain the reason for this to the shareholders. If they do not like that, they are in their full right to make a vote by which they can overthrow the current director. In the event that the shareholders are not strong enough and united to vote for the removal of the current director, they could exert pressure on the board of directors through which directors could change their decision.
On the other hand, it is good for companies to operate according to the Corporate Governance Code 2016 because it gives more security and confidence to shareholders that directors are there actually to do what they are aimed to do – namely to work on behalf of their shareholders and increase their profits.
From the bright side the company looks stable and well maintained but we should also include some information which might be a drawback for the shareholders. Mergers and acquisitions most of the time are pleasant for the upcoming shareholders and not as great for the present shareholders. When the management plans to pursue acquisitions this might be beneficial for them but not as good for the shareholders. It is all about a conflict of interest between both of the parties. The explanation, which stands behind this statement is the increasing rate of unexperienced staff in the company which will put stakeholders under pressure. Mergers and Acquisitions which are similar to the acquisition of Argos might make different fluctuations in the return which shareholders receive, depending on whether it is a positive acquirer or a negative one. Other forthcoming downturn for the shareholders may be the percentage paid of the acquired net assets. It will be better for stakeholders when the company gain a smaller acquisition instead of a bigger one. Following that, if the size of the acquisition is way too big, this may be seen as an arising problem for shareholders and a following decision for reducing the size of the acquired assets can be a challenging option, which can end unsuccessful (Garrow,2016).
In summary, many companies suffer from agency problem I. Ownership and control are difficult to be combined because of the decision regarding which managers have to increase their value. Some projects could be beneficial from managers’ point of view, but they could adversely affect shareholders’ value, which would then automatically turn the situation between the two parties into a problem. Despite of that, problems could be avoided with some changes being made by the board of the directors which will result in reconciliation between the parties. As I have covered the information in the essay, the remuneration committee should give bonuses to the company in the form of shares because this will be the basis on which directors will be forced to work harder to raise the share price in order to increase their own value. On the other hand, if bonuses are in the form of cash, the managers will not pay much attention to the job, which will lead to a reduction in contribution and irresponsible work behaviour which they will be performing on behalf of the shareholders. But if we have to look at the side of Sainsbury, we can see that the company has tried to eliminate this problem in part. Also, the board of directors is divided into different ethnic groups, making it even more diverse and appealing to investors. The recent acquisition of Sainsbury’s also takes seriously the eyes of investors and makes them wonder whether Argos will bring future profits to the company. In addition, this is a complicated issue to which investors may be able to find out the answers in the near future. It seems that the company has been able to ‘stick up to’ the Corporate Governance Code 2016 as it is mentioned by the Chairman of Sainsbury, David Tyler in the annual report. Concluding all of the information provided, the company seems stable, really responsible and attached to its shareholders. This gives a good reputation and a chance for an even greater development, additionally this provides an opportunity for a perspective looking at new and more stable incomes for shareholders.