Corporate Governance Practices In The Uk The Case Of Greene King Plc

Corporate Governance Practices In The UK: The Case Of Greene King Plc

Contents

TOC o “1-3” h z u HYPERLINK l “_Toc376172867” Overview of the Case Study Organisation PAGEREF _Toc376172867 h 1

HYPERLINK l “_Toc376172868” Greene King’s Compliance and Disclosure Issues PAGEREF _Toc376172868 h 1

HYPERLINK l “_Toc376172869” Shareholder Relations PAGEREF _Toc376172869 h 5

Overview of the Case Study Organisation

Greene King is a leading UK brewery located in Bury St Edmunds, Suffolk. The brewery is made up of three core businesses – retail, pub partners as well as brewing & brands. Retailing involves company operated pubs, hotels and restaurants, pub partners involves agent operated pubs while brewing & brands involves two breweries, one in Bury St Edmunds and another in Dunbar (Greene King, 2012). Currently, the brewery occupies about 2 percent of the UK beer market and is a constituent of the FTSE 250 share index and the London Stock Exchange (Euromonitor, 2010). By local standards, a 2 percent market share can be considered modest given the humble beginnings of the company – it started as a small family brewery back in 1799. Greene King’s current market share can be attributed to a series of acquisitions. Some of the most notable acquisitions include Ridley’s in 2005, Morland in 1999, Hardays and Hansons 2006 and Belhaven in 2005 (Greene King, 2012). Moreover, this modest market share can be attributed to the strong “Greene King” brand attached to a host of popular beers such as Abbot Ale, IPA Export, St Edmunds and IPA (Euromonitor, 2010).

However, the company has been involved in a number of controversies in the recent years due to its shrewd acquisition strategy. The company has been accused by consumer groups for trying to create a near monopoly by acquiring competing breweries and suspending the sale of locally brewed beers. For instance, the company was involved in a controversy with revellers of Lewes Arms pub located in Lewes, East Sussex for withdrawing the sale of a locally brewed beer (Davies, 2006). In view of this controversially successful business strategy there is need to examine how the company undertakes its core corporate governance obligations. This concern forms the major aim of this report. Specifically, the report examines the company’s disclosure and a compliance practices as well as its treatment of stakeholders. For purposes of referencing and comparability, this examination will be based on the provisions of the UK Corporate Governance Code.

Greene King’s Compliance and Disclosure IssuesThe UK has one of the most responsive corporate governance laws in the world. Governance of listed companies in the UK is regulated by the UK Corporate Governance Act firstly enacted in 1992 and as amended severally. The code is based on the principle of “comply or explain” – listed companies are expected to disclose any incidences of non-compliance stating reasons for non-compliance (Solomon, 2011). Specifically, the law stipulates best practices guiding key corporate undertakings such as composition of the executive board, shareholder relations, director remuneration, accountability, and effectiveness of the board (Mallin, 2007). Companies that fail to comply with the set governance standards are expected to give out the reasons for non-compliance and how they plan to address similar governance concerns in the future. Those who fail to do so face heavy fines as stipulated in the Listing Rules (Solomon, 2001).

Greene King commits itself in maintaining high corporate governance standards. This is because the brewery understands that high corporate governance standards are critical to the achievement of organisational goals, creation of strong shareholder value, safeguarding stakeholder interests, and delivery of business and corporate level strategies (Clarke, 2004; Solomon, 2011). Greene King believes that it complies with the UK Corporate Governance Code and the Financial Services Authority (FSA) regulations insofar as addressing of shareholder interests is concerned. Specifically, it believes that its strategies to invest in its people through popular value adding brands and long term growth through acquisitions qualify as best corporate governance practices (Greene King, 2012).

At a glance, Greene King’s compliance with the UK Corporate Governance Code can be summarised into the following key indicators: it has in place competent board made up of competitively elected persons with balanced skills and knowledge of the company activities, it employs a performance-based executive remuneration procedure, it adheres to accountability procedures such as risk management, auditing and regular financial reporting, and it has a good rapport with its shareholders (Greene King, 2012). Analytically, these corporate undertakings exemplify good principles of governance and go a long way in helping the company to achieve its long term strategy of delivering value, quality and service to its stakeholders.

Moreover, the company discloses a number of non-compliance incidences. In respect to the UK Corporate Governance Code and the Financial Services Authority (FSA), Greene King discloses the following non-compliance incidences during the 2012 financial year as related to B.7.1 and C.3.1 requirements of the Code (Greene King, 2012). B.7.1 of the Code requires companies forming the FTSE index to subject their directors to annual election by shareholders while on the other hand, regulation C.3.1 of the Code requires listed companies to include at least three directors and all non-executive directors (Mallin, 2007).

In regards to the first non-compliance, the company discloses that it did not subject its directors to the required annual shareholder re-election exercise because there was a clear indicator that a majority of institutional shareholders were not in favour of this requirement. Moreover, it discloses that the decision not to subject its directors to the annual shareholder re-election was as a result of specific circumstances. These specific circumstances included the fact at the time there were only five serving directors, three of whom were re-elected in 2010 and the other two were re-elected in 2011 AGM as well as two new ones who joined the company in 2011 (Greene King, 2012).

On the other hand, the company discloses that it did not meet the minimum requirement regarding the composition of the audit committee membership between 2 May and 26 July 2011. This is because during this time, the audit committee comprised of only two members. However, the company rectified this glitch by appointing Mike Coupe to the committee in the capacity of an independent non-executive director (Greene King, 2012).

These two disclosures underscore the company’s commitment to enhancing corporate integrity. According to Bowen (2008), governance integrity from an Anglo-American model of corporate governance entails fulfilling of shareholders’ interests. Specifically, E.1 and E.2, B.7, C.1 and C.3 regulations of the Code regarding shareholder relations, re-election of board members and transparency require listed companies to hold dialogue with shareholders and to fulfil their interests at all times. This should be enhanced through shareholder participation during AGM and election of board members (Cadbury, 1992). A company that believes in corporate integrity should allow monitoring by large institutional shareholders, should peg director remuneration to their performance, should spread powers among board members – the president should not be the treasurer, should encourage monitoring from the board members and should institute sound internal auditing procedures (Mallin, 2007). In respect to these controls and in view of the foregoing non-compliance disclosures, it is arguable that Greene King’s leadership practices meet the minimum governance integrity threshold. Specifically, the disclosure underscores the integrity of the company’s governance particularly in regards to the composition and effectiveness of its board – though it did not subject its directors to the annual shareholder re-election the current directors are equally qualified to execute their mandate in a professional and unbiased manner.

Nevertheless, the extent to which Green King governance meets the minimum integrity requirements is questionable. One major incidence that puts the integrity of Greene King’s corporate governance practices to question is the Lewes Arms pub stalemate where the company’s decision to withdrawal a popular local beer (Harvey’s Sussex Best Bitter ale), from sale in the pub caused year-long crisis with the pub’s regulars (Davies, 2006). The company was forced to change its policy and to relieve one of its Directors, Mark Angela of his duties following what reports termed as a major corporate climb-down (Minogue, 2007). Based on the overarching notion that one of the core aims of corporate governance is to mitigate stakeholder conflicts and to enhance cohesion among stakeholders (OECD, 2004), it is arguable that Greene King decision to pull down Harvey’s from Lewes Arms shelves was done in complete disregard to stakeholders needs. Specifically, the Code requires the company to develop and implement policies that take into considerations the needs of the internal and external stakeholders. The foregoing disclosures notwithstanding, the Lewes Arms controversy as well as a host of other questionable acquisitions undermines Greene King’s corporate integrity threshold.

These controversies lower the company’s integrity threshold. According to the Anglo-American corporate governance model espoused in the Code, listed companies should roll out business strategies that take into consideration the local communities interests – though the business of any for-profit entity is to make profit, companies should not implement strategies that disrupt the lives of the locals but rather should aim at adding value to the lives of the local communities (Madura, 2009). Specifically, as part of its social corporate responsibilities, Greene King is expected to align its businesses to the local cultural values including availing for sale beer brands such as Harvey’s that have deep meaning to the lives of the communities (Haidar, 2009). Yet the pub has earned a name among revellers in the UK as an aloof brewery interested in enhancing its corporate position in the local beer market, that has lost focus of the local beer tastes and that will not hesitate to close a pub if it feels Overall, any attempt to deprive the local communities of their closely held cultural values is as good as to bad governance.

Insofar as the agency problem is concerned, Greene King’s B.7 and C.3 disclosures amount to good principles of governance. According to Solomon (2011), the agency problem posits that while the manager (agent) is tasked with the core responsibility of safeguarding the shareholders (principals) interests, most of the times managers act out of self interest to maximise their overall returns at the expense of their principals. Some of the most evident ways that managers act in conflict with the shareholder interest is approving unrealistic remuneration packages for directors while declaring low dividends for the shareholders (Madura, 2009). While acknowledging the reality that it is very hard for a company to completely eliminate the agency problem, it is arguable that Greene King fares relatively well insofar as reducing the agency problem is concerns. It achieves this by pursuing a performance-based compensation approach for its directors that allows a direct shareholder influence through AGM and voting. The two disclosures show that the company is committed to giving shareholders the opportunity to determine the composition and hence the effectiveness of the board of directors (Haidar, 2009). Moreover, they show that the company is committed to accountability in reporting to the shareholders the annual performance as well as the projected growth (Solomon, 2001).

From a different front, the two foregoing disclosures underscore Greene King’s commitment to identifying and managing organisational risks brought about by moral hazards and adverse selection. According to Arcot, Bruno and Faure-Grimaud (2005), OECD (2004) and Solomon (2011), company’s can mitigate potential risks by streamlining their boards – only selecting highly experienced, knowledgeable, and committed directors with a clear understanding of the company’s activities. To this effect, Greene King selects directs based on merit – only qualified candidates are shortlisted for approval by the shareholders.

Through the audit committee whose composition forms part of the C.3 non-compliance disclosure discussed above, the company’s competent board manages potential risks by scrutinising the viability of its long term strategies, their impact on shareholders’ interests. Since a competitively elected board is not only capable of achieving its objectives, working as a team, and optimising the utility of key organisational resources such as time, finance, and human capital (Haidar, 2009), it is arguable that Greene King governance practices are capable of mitigating risks such as agency problem. This is true since the board is responsible for the approval of long term strategies and their implementation, approving budgets and financial statements, approving acquisitions and disposals, and overseeing the overall operations of the company as per the set strategic paths (Greene King, 2012).

Moreover, Greene King reduces risks through

Shareholder RelationsAs a leading brewery in the UK, Greene King’s has many stakeholders. These include shareholders, suppliers, customers, government, competitors, trade partners, communities, creditors, debt holders, board members, executives, and normal employees. However, some of these stakeholders are not significant enough to warrant major concern from the day-to-day execution of company strategies (Aglietta & Rebérioux, 2005). For instance, the company is not under any obligations to fulfil the needs of its competitors and business partners. However, other stakeholders such as the government and shareholders warrant much attention. While drawing on the Anglo-American corporate governance model as described by Mallin (2007) and Solomon (2011), these stakeholders can be broadly grouped into two broad categories depending on their position in the company’s corporate governance chart. The two broad categories are external and internal stakeholders. Board members, executive managers, and normal employees fall in the internal category while the other stakeholders fall in the external category.

From an Anglo-American corporate governance model standpoint, it is arguable that the company should be more concerned with the external stakeholders than internal ones. This argument draws from contemporary business practices in the EU and the United States where bulk of shareholders are made of large institutional investors with ownership and controlling powers (Madura, 2009). As a matter of fact, the composition of boards of large multinational companies operating in the EU is purely based on shareholders’ interests – companies create boards that have a clear understanding of their activities, their market, their industry, and their long term customer dynamics (Clarke, 2004; Clarke & Chanlat, 2009). Greene King’s non-compliance disclosure of the B.7 and C.3 underscores this argument – it listened to its institutional investors in its decision not to subject its board of directors from the annual shareholder re-election.

Nevertheless, not all external stakeholders are significant to Greene King’s operations within the UK. According to Clarke and Dela-Rama (2008), the business of for-profit organisations is to maximise returns by leveraging its core competencies and resources. This argument suggests that for-profit organisations are only obligated to serving their customers, abiding by the set regulatory frameworks, and giving back to the local communities through sponsorships and environment-friendly practices. To this effect, Green King should put its emphasis on shareholders, government agencies, and local communities. The nature of the beer UK industry demands breweries to closely monitor customers’ tastes and dutifully respond to any changes thereof. As a matter of fact, Davies (2006) and Minogue (2007) point out that beer drinking is not only a matter of getting tipsy but rather catching up on local issues such as sports, politics, healthcare, and business matters. It is assumed serving its shareholders amounts to serving the local communities (customers) – Greene King’s customers are its shareholders too. This arguments draws from the evidence that customers will tend to buy from company they have invested in (Aglietta & Rebérioux, 2005). Moreover, the company cannot however serve its customers well without honouring its corporate governance obligations as stipulated in the Code and as required by the FSA. Overall, serving shareholders, government agencies and local communities (customers) should be perceived as a single obligation. Of course the company should ensure that it has an effective board of directors so as to better serve its shareholders, government agencies, and the local communities. Since the Code requires the company to put in place an effective board of directors (Clarke & Chanlat, 2009), it is only fair to assert that such board is meant to safeguard the interests of the shareholders, government agencies, and local communities.

Currently, Greene King has very little respect for the local communities. The Lewes Arms pub stalemate highlighted above show that the company gives little emphasis to its regular consumers’ beer tastes and other social values. As a matter of fact, Minogue (2007) point out that Greene King as well as other big beer companies are on the verge of possessing all major beer outlets and converting them into other businesses such as such as restaurants or even residential flats to maximise on profits at the expense of the role such pubs plays in the local communities. It should be noted that the beer industry in the UK is much more of a social industry than a commercial one insofar as customer loyalty and the taste for new products is concerned (Davies, 2006; Minogue, 2007). The Lewes Arms pub, for example, hosts many local activities including sports which are coordinated by the revellers and not by the management. Moreover, some of the pub’s customers are renowned persons while others have been regulars since 1970s (Minogue, 2007). It is therefore ironical for Greene King to withdraw a popular beer with a huge socio-economic connotation without seeking the approval of the regulars.

Overall, the Lewes Arms stalemate taints Greene King’s corporate standing. Greene King has been accused of monopolising the beer market through controversial acquisitions some of which are not approved by its shareholders or even by the local communities (Minogue, 2007). Interestingly, the company does not disclose this major governance weakness as part of the C.2 requirement regarding risk management and internal control. Actually, it reports in its website that it fulfils the risk management and internal control requirement when undertaking its acquisition and expansion strategies (Greene King, 2012). To some extent, this is not true especially when the Lewes Arms stalemate and other acquisitions-related controversies are taken into consideration. Analytically, these actions underscore the argument that the company is yet to accept the contemporary corporate governance practices within the Anglo-American region that put shareholders at the prime position among all other company stakeholders.

Conclusion

Corporate governance from an Anglo-American perspective is all about giving emphasis to shareholder interests. Large corporations such as Greene King are expected by the Code to put in place competitively elected boards, employ performance-based remuneration system for its directors, conform to conventional accountability practices, cultivate sustainable shareholder relations, and subscribe to ethical business practices such as giving back to the community and partnering with community-based groups in addressing climate change concerns. In the event a company does not achieve any of the above feats, it must make a disclosure to that effect and how it is planning to address the non-compliance. Green King fares relatively well insofar as abiding by fulfilling its corporate governance obligations are concerned. It even discloses where it feels it has not fulfilled the regulations. However, the company needs to work closely with the local communities (customers) to reduce incidences of stakeholder conflicts such as the Lewes Arms stalemate. Given the social nature of the UK beer industry, Greene King should work closely with the regulars as part of its long term strategy to create value, quality, and service.

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