a) Agency problem is a conflict of interest that arises between
different parties within organisation. In corporate world, this frequently
happens when principal (shareholders – owners of the company) hires an agent
(CEO’s or manager) to represent principal’s interests and views, however agent
pursues objectives that are different to the principal’s to maximize their personal
gain. Agency theory (type?) is distinct to type ?problem, where shareholders owning majority
stake of an organisation will have the ability to change the board of
directions due to their high voting power and align board of directors’
objectives with their personal interest. As a result, shareholders owning
smaller proportionate stake will not be able to meet their objectives due to
their low voting power in a company.

 

Agency
problem occurs due to a conflict of interests and having asymmetric information
between parties. Conflict of interests arises because principals will be giving
objectives that relate to organisation as a whole (maximize value of the stock)
however, agents will be pursuing objectives that will benefit them for their
own personal gain (usually financial bonuses). For example, managers will be
aiming to maximize revenue to receive a revenue-related bonus whilst shareholders
will want them instead to focus on increasing price of the stock (by complying
with correct corporate governance guidelines) in order for the company to have
a higher value. This shows that conflict of interest arises because managers
are aiming to achieve objectives that will benefit them personally (financial
bonuses), whilst shareholders want them to pursue other goals.

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Asymmetric
information is another reason why agency problem tends to occur, executives
(managers) know more about the company they are running and on a daily basis look
at the performance of it, hence they will be finding ways to adjust the
company’s performance for their own gain and shareholders might have
difficulties finding out about it, for example using creative accounting to
manipulate company’s financial statements, as a result managers will be
financially compensated with a bonus for such performance and shareholders
might not even find out about it (asymmetric information). This is also the
reason why the financial statements are regulated. In worst case, if a company
fails an external audit and use of creative accounting is spotted then the
costs (agency costs) can be very high and might result in penalties.

 

The possible
circumstances of agency problems occurring are: wide division of ownership and
financial compensations of managers for achieving objectives. The ownership
percentage of shareholders will determine the separation of control in a
company; agency problem tends to occur in big enterprises where control is
separated 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 for
managers to satisfy each shareholders objective, hence agency problems tend to
occur. This also links with type ?problem, where a company will be pursuing objectives of shareholders
with the highest voting power (ownership).

 

Managers get
extra financially rewarded for achieving certain objectives, for example optimising
company’s revenue or/and completing the work accurately on time. A possible
scenario of agency problem occurring is when managers get financial
compensation to achieve a certain objective that does not align with objectives
of the owners, hence managers will be pursuing objectives where they can have a
financial gain. Owners (shareholders) should however extra financially
compensate managers only when the objectives achieved align with those of the
owners. For example, provide with a bonus (financial or stock) when managers
optimise profit, that may result in higher value of the company. However, this
bonus scheme can be sometimes difficult in practice.

 

Looking at the
ownership data and ways of extra remuneration of managers it can be seen
whether a company is facing type?agency problems, which may occur
because of conflict of interests or/and asymmetric information.

 

 

 

 

b) In part (a) it has been explained that companies tend to suffer from
agency problems due to wide separation of ownership and extra financial
compensation of managers for achieving particular objectives. Looking at the ownership
data, statistics and remuneration of J. Sainsbury PLC the board of directors
are using correct practices to avoid agency problems.

 

According to the ownership data (Sainsbury’s
website – 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 of
the company is owned by Sainsbury family, Lord Sainsbury owns 4.99% (Wikipedia) of the business and
Sainsbury’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’s
website), this shows that when a company goes public
(eligible for anyone to have a stake in a company) the ownership can change quickly
and sold on to anyone. Moreover, on Sainsbury’s website it isn’t written that
Credit Suisse Group AG has a 11.55% (Amadeus
– last updated 10/2017) stake means that Credit Suisse Group AG might have
sold the shares to someone by November 2017. Ownership changing quickly in such
a short time might be a potential problem for J. Sainsbury, because managers will
constantly have to align with new shareholders objectives, as a result agency
problems may occur where managers will be pursuing objectives that will benefit
them personally. However, having experienced Board of Directors at J. Sainsbury
this problem should not occur.

 

As per 11/2017 J. Sainsbury having only
two investors owning large stakes at the company, it should not suffer from any
agency problems because these two shareholders are likely to compromise when it
comes to strategic implementation and devising future plans. There are however
other small investors, such as Invesco Ltd that owns 2.13% and Schroders PLC
owning 1.99% (Amadeus – last updated
10/2017) of the firm. In this case, type ?problem may occur, where Invesco Ltd and Schroders PLC won’t be
able to have their objectives being met, because of having such little voting
power.

 

In the annual report of Sainsbury,
the chairman’s letter is given as: “Our primary responsibility as a Board is to
create 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 not
face any conflict of interests, which shouldn’t result in having any agency
problems nor have any agency costs associated with it. Moreover, agents at Sainsbury are not likely to
exploit advantages of asymmetric information, because all the information for
shareholders is provided in the annual report that is available to the public
and it shows that the company is ‘transparent’ (has nothing to hide).

 

The other possible reason why Sainsbury might face agency problems is
due to incorrect financial compensation of managers. The agency problems
usually occur depending on “how closely management goals are aligned with
shareholders goals” (Hillier, 2016) and how much compensation do managers get
to act in shareholder interests. Looking at remuneration of executives at J.
Sainsbury PLC, there are bonus schemes available to executives for achieving
certain objectives. For example, possible ways of financial bonuses include:
stock grant, cash bonus, stock option and profit sharing. According to
statistics, the average stock bonus is £8,183 (up to £12,000) and profit sharing
averaging £2000 (up to £3000) (Glassdoor
24/9/2017).  This shows that
executives at Sainsbury are correctly compensated, because it will meet the
goal of the organisation “we are well placed to create value for
shareholders” (2017 Annual Report). Such
financial compensation works well, because it reduces the chances of agency
problems happening and keeps executives motivated to meet shareholder’s
objectives (maximize shareholder’s wealth). It can be said that management at J. Sainsbury PLC is
correctly and effectively compensated to meet shareholder’s objectives and
should not result in any agency problems.

 

The data has been taken from wide range of sources to improve the
reliability of information and hence reach a more informed conclusion. In
conclusion, narrow separation of ownerships between major shareholders (Qatar
Holdings LLC and BlackRock Inc.) and correct remuneration of executives,
Sainsbury should not suffer from agency problems such as conflict of interest
and disputes between internal stakeholders.

 

c) Corporate governance code “sets out standards of good practice for
listed companies on board composition, development, remuneration, shareholder
relations, accountability and audit” (ICAEW
2016). UK corporate governance code is published by Financial Reporting
Council (FRC), and highlights practices the board should follow and how it
distinguishes the values of the company. The purpose of the code is to set out
effective, considerable and entrepreneurial management to ensure long-term
success of the company. There are five main principles (sections) provided in
the report: “Leadership, effectiveness, accountability, remuneration and relations
with shareholders” (UK Corporate
Governance Code 2016), these sections provide guidelines on ownership and
stewardship of any listed company in the UK.

 

Looking at the Sainsbury’s website, it is clear that it complies with the
UK Corporate governance code; “we’re committed to high standards of corporate governance”
(Sainsbury’s website). Sainsbury has
to follow the guidelines set out in the code in order to prevent fraud, scandals
and criminal activities. Responsibilities of individuals in the board at
Sainsbury are clearly written out to provide better direction for the company.
The responsibilities of the Board in J. Sainsbury are to deliver long-term
success of the company by devising appropriate business strategies aligning it
with relevant risk appetite and monitoring performance of the company to “ensure
effective corporate governance” (Sainsbury’s
website).

 

There are nineteen people in the
board of J. Sainsbury PLC, seven
of them being in Nomination Committee, four in Audit Committee, four in
Remuneration Committee, three in CSRC (Corporate Responsibility and
Sustainability Committee) and eight of them are shareholders of the company. There
are four different committees present in Sainsbury, each committee having
specific tasks and responsibilities (as laid out in the code), which should
ensure effective management and operation of the firm. For example, “Mr Matthew
John Brittin, Mr Brian Jude Cassin, Mr David W Keens and Mr Timothy Fallowfield”
(Amadeus 2017) are
all in Audit committee in J. Sainsbury. The audit committee is made up of only
non-executive directors and responsibilities (as outlined per UK Corporate
Governance Code 2016 in the accountability section of) include “corporate
reporting of financial statements, monitoring internal controls and communicating
with external auditors.” It is important for audit committee to perform its
roles and duties in order to have a sustained operation of the firm and ensure
management aren’t using creative accounting practices to manipulate financial
statements. It is important for the audit committee to correctly comply with UK
Corporate Governance Code because doing tasks such as financial reporting will
help individual shareholders to have trust in the company (financial statements
presented with “true and fair view”), as well as it will reduce the
possibilities of fraud happening in the organisation.

 

Mr David Allan Tyler is currently the chairman of J. Sainsbury PLC (since
01/11/2009), who is responsible for “leadership of the board, and for ensuring
that directors (executive and non-executive) receive accurate, timely and clear
information” (UK Corporate Governance
Code 2016). According to the leadership section, the chairman also has to “construct
relations between directors in a company and ensure communication with
shareholders is effective” (UK Corporate
Governance Code 2016). I personally think it’s important for chairman (David
Tyler) to follow guidelines provided in the code, because knowing and
understanding his responsibilities he will have effective communication, direction
and control of the company. Individual shareholders (including my family
member) should benefit from David Tyler complying with the code, because
“shareholders will be able to contribute towards strategic aims and have a good
understanding of the company’s objectives” (UK Corporate Governance Code 2016 – relations with shareholders
section).

 

Executive directors in Sainsbury’s
board are also important to the organization. “Mr Michael Andrew Coupe” (Amadeus 2017) is a chief executive director at J. Sainsbury
PLC and is employed full-time to manage daily operations of the firm. The main
distinction between non-executives and executives directors is that executives
directors are involved in day-to-day operational management of the firm in
comparison to non-executives that do not run the company but contribute towards
strategic aims and assess major risks company faces.

 

In J. Sainsbury PLC both executives (Michael Andrew Coupe and
Paul John Rogers) and
non-executives directors (David Allan Tyler and Mary Elaine Harris) are
shareholders of the company, I think it is important because it will be easier
for shareholder’s objectives to align with management practices of the board. UK
Corporate Governance code also
provides guidelines on correct remuneration of executives and highlights the
importance of presence of executives at all meetings. Sainsbury has to follow
these rules to keep non-executives, shareholders and the management team happy.

 

J. Sainsbury PLC does comply with correct guidelines of Corporate
Governance by disclosing accurate information about the company, for example
Sainsbury provides information that is available to everyone about “financial
position, corporate objectives, main shareholders, board of directors and their
salaries (including bonuses), major risks facing the firm’s operations and
policies of the company” (Sainsbury’s
website). Having all of that information, J. Sainsbury complies with
correct guidelines of UK corporate governance code by providing appropriate
information (for example, financial statements complying with correct International
Financial Reporting standards), which should help individual shareholders to
meet their objectives. For example, shareholders aiming to maximize their wealth
will only be investing in companies that can be trusted, shareholders know that
the 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 acts
in the best interests of shareholders and financial statements are accurate
with “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, and
companies (including Sainsbury) are well aware that shareholders don’t want
their wealth in companies that break the laws.

 

Doing a lot of research about the UK Governance code and how J. Sainsbury
PLC 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 there
have not been any recently penalties for Sainsbury not complying with the code.
Following correct guidelines set in the code is important for individual
shareholders (including my family member), because it develops a sense of trust
and prevents internal conflicts. I think where possible every company should
attempt to comply with the UK Corporate Governance code in order to have an
effective management and succeed in the long-run.