Executive
summary
This paper compares the approach taken by three
organizations in risk management and corporate governance responsibilities. The
organizations under scrutiny include Tesco plc, Titon Holdings plc and Teekay
Corporation. Tesco and Titon are listed in the London Stock Exchange in the
United Kingdom while Teekay Corporation is listed in the New York Stock
Exchange in the United States of America. The paper further moves to discuss
the regulatory frameworks in the USA and the UK in relation to their approaches
in corporate risk control.
Different organizations approach the issue of risk
management. This section compares and contrasts the approach taken by three
organizations namely: Tesco plc (London Stock exchange), Titon Holding plc
(London stock exchange) and Teekay Corporation (New York Stock exchange).
Generally, the approaches that can be taken towards risk management are
distinct (Woods, 2007). These may include avoidance where the organizations
evade the activities or areas considered to be risky; reduction, where
organizations take action to reduce the likelihood of occurrence or the impact
if the risk occurs; share or insure, where the organizations seek to transfer a
portion of the risk to other parties by financing it; and accepting, where the
organization acknowledges the risks and takes a rational decision to just let
it happen after doing a cost/ benefit analysis (Woods, 2007).
Tesco plc generally applies the principle of
reduction in their risk management activities. They start by acknowledging
risks as an unavoidable phenomenon in the business practice and outline their
key responsibility in relation to the same as the identification of the risks
and the development and monitoring of appropriate controls designed at
minimizing these risks (Tesco, 2011). Tesco’s directors’ report provides a
detailed description of the risks that the group anticipates and provides the
measures that the group intends to take or is taking in order to minimize such
risks (Tesco, 2011). This detailed approach can be seen as an effort by the
organization to ensure proper understanding of the business activities by all
stakeholders. This can be demonstrated by the manner of reporting done on the
financial risks subsection. Whereas Titon Holdings and Teekay Corporation
acknowledge financial risks as one risk, Tesco plc delves into the finer
details of financial risks and outlines how each dimension can be managed in
order to reduce the level of risk involved (Tesco, 2011; Teekay, 2011; Titon
Holdings, 2011). For instance, one the risks cited is competition and
consolidation where the group views increased competition in the relevant
industries as a threat to its market share and profitability.
To minimize this risk, the group proposes to adopt
appropriate pricing strategies and store layout designs that would enable them
to keep ahead of the competition (Tesco, 2011). Tesco plc outlines their risks
as financial strategy and group treasury risks, financial services risks,
operational threats and performance risk, competition and consolidation risks,
people capability risks, reputational risks, environmental risks, product
safety risks, health and safety risks, ethical risks, fraud and compliance,
property risks, non food risks, IT systems and infrastructure risks,
regulatory-political and economic environment, activism and terrorism, pension
risks, funding and liquidity, interest rate risk, foreign currency risk, credit
risk and insurance risk (Tesco, 2011). The wide range of risk factors may also
be attributed to the fact that the group report is applicable across a number
of businesses owned by Tesco plc. The
list of risks presented by Titon is brief when compared to the ones presented
by Tesco and Teekay. Titon considers the risk factors to be key commercial
relationships, competition, reliance on production facilities, product quality
and product breakdown, financial instrument risks, and health and safety risks
In general the approach taken by Tesco and Titon in
outlining their risks in spite of the brevity demonstrated by Titon is the
manner in which control measures are outlined at the mention of the risk. On
the other hand, Teekay Corporation merely outlines the risks, describing how
the risks can impact on their performance, and leaves the control measures to a
different section of the report (Teekay, 2011). This may prove to be cumbersome
to readers. However, the reporting style may be useful in avoiding superfluity
where different risks can be tacked using similar measures. Teekay’s approach in reporting also differs
from Titon and Tesco in the sense that, while Teekay introduces the risks with
a brief description of their likely impact on the business, Titon and Tesco
merely mention the risk. The reporting style by Teekay provides the reader with
a quick assessment of the content of the risk while in the case of the other
two organizations, the reader has of necessity to read the notes contained
under each risk in order to understand.
The approach to the reporting on corporate
governance also differs in form and content. While the two UK listed companies,
Titon and Tesco describe their corporate governance philosophies and practices
in detail, Teekay Corporation simply refers to the corporate governance practices
as outlined by the New York Stock exchange requirements (Tesco, 2011; Teekay,
2011; Titon Holdings, 2011). This seems to suggest that Teekay has not sought
to develop and implement distinct practices that can only be identified with
them and instead concentrates on adhering to the guidelines set by the
regulatory bodies. The approach taken by Titon and Tesco may be more preferable
to an average reader who may only have time to read through the report and not
be able to refer to the guidelines provided by the regulatory bodies. Moreover,
the inclusion of philosophies and principles in a report leaves no doubt as to
what the organization in question stands for. While declaring compliance with
the guidelines may be crucial in helping the domestic stakeholders identify
with the company, outlining these practices explicitly reinforces their
commitment to such principles and leaves no doubt on where their priorities lie
(Smithson and Simkins, 2005).
Tesco plc approaches the issue by restating their
commitment to comply with combined code (Tesco, 2011). They then outline the
duties and responsibilities of the board before describing the board processes
and decision making forums such as board meetings. The membership of important
board committees such as the directors’ remuneration, nomination, and audit
committees. The section also outlines
how the board intends to resolve conflict of interest, training and development
deficiencies, risk management and internal controls and stakeholder relations
(Tesco, 2011). By acknowledging the role of directors in risk management and
internal controls, the organization sends a message on the level of importance
attached to this function. The reporting by Titon is similar to Tesco,s albeit
with a higher level of brevity in some areas while outlining the provisions of
the regulatory bodies that they find to be most applicable to their
practices. Titon only outlines the
membership of two committees: the remuneration and the audit committees unlike
Tesco which exhaustively covers all the crucial committees of the board (Titon
Holdings, 2011).
Titon’s report seems to presume that the readers are
informed parties who can deduct the operational implications of the statements
of intent outlined in their approach to risk management. On the other hand,
Tesco plc provides detailed descriptions that interpret the operational
implications of their prevailing views on risk management, placing the
responsibility for such activities at the highest possible level of an
organization’s structure, the board of directors. It also explicitly outlines
the manner in which the risks are identified and the approach to minimizing
them. The Tesco report is therefore palatable to a majority of the stakeholders
and reflects an extensive analysis of the issues at hand in relation to
corporate governance and risk management prior to the report writing.
The regulatory frameworks relating to corporate risk
control are outlined by Sarbanes-Oxley Act and the UK corporate governance code
2010 for the US A and the UK respectively. The Sarbanes-Oxley Act was designed
to protect the interest of investors through the improvement of the reliability
and accuracy of the corporate disclosures (Findlaw, 2011). It applies to
corporate organizations that are public or international organizations which
are listed in the stock markets in the United States. Non compliance may lead
to deregistration from the stock markets among other penalties that may include
millions of dollars of fines or even imprisonment of the directors in charge
(Findlaw, 2011). On the other hand, the UK Corporate Governance code 2010 was
published in May 2010 and outlines the corporate governance standards required
of listed companies in the UK (Financial Reporting Council, 2011b). This code
included certain improvements that were aimed at introducing certain best
practices in corporate governance. These include risk management, where the
risks involved in the business operations are disclosed for investors to take
informed decisions; introduction of performance related pay where directors
would be remunerated based on long term assets performance; increased
accountability requiring re-election of the directors to be done annually; and
the improvement of the practices and capabilities of the boards of directors
through the clarification of their roles and responsibilities (Financial
Reporting Council, 2011b).
These regulatory regimes were developed with the aim
of regulating corporate practices to encourage the practice of prudent
management in order to enhance economic development and growth in the two
countries. The two countries have traditionally been viewed as containing
similar standards with little focus being directed towards the differences
between these regimes (Smithson and Simkins, 2005). The prevailing principle
that stands out in both regulatory frameworks is transparency, accountability,
probity, and the focus on the long term success of the corporate organizations.
Section 404 of the Sarbanes-Oxley Act of 2002 outlines the requirements for
disclosure which compels companies filing reports to report on the
responsibility of the management to develop and control adequate internal
control over the companies’ performance as well as the effectiveness of such
controls (Findlaw, 2011). The regulatory framework in the US requiring
disclosure is merely a part of the regulation which outlines various other
measures that are considered as part of good governance to be adopted by
organizations (Spira and Gowthorpe, 2008). On the other hand, the UK regulation
mainly focuses on disclosure and leaves the rest of the practices to be
determined by the individual organizations (Barker, 2008).
The UK framework requires the organizations to
approach the issue of transparency through explicit description of their
internal processes. On the other hand, the Sarbanes-Oxley Act 2002 seems to be
oriented towards defensive compliance rather than focus on transparency. The
prevailing philosophy governing corporate governance in the UK is ‘comply or
explain’ (Beasley, Pagach and Warr, 2008). Observers view this approach as
crucial in giving the executives the latitude to disclose as much information
as they deem necessary to ensure that the stakeholders fully understand the
issues affecting the organizations. The end result is that the UK organizations
tend to provide an in-depth disclosure that focuses both on the internal
practices and the market forces. The approach to risk management in the UK
focuses more on risk awareness than in the US with the UK emphasizing a broader
interpretation of internal controls. The Sarbanes-Oxley Act 2002 seems to
concentrate on the auditing functions as the primary approach to enhancing
internal controls as opposed to the UK systems which broadly focus on internal
controls through the concentration of a wide range of practices within the
organizations (Spira and Gowthorpe, 2008).
The Sarbanes-Oxley Act seeks to ensure the validity
of the financial statement presented by companies through the introduction of
new requirements relating to internal control processes. Accordingly, this
regulatory framework mainly focuses on areas that have a direct impact on the
integrity of the organizations’ financial reports. It also requires that the final
reports include an assessment of the effectiveness of the controls put in place
by the organizations. The impact of these different emphases to regulation is a
shaping of the thinking of business executives in the US and the UK. While the
US view internal controls as an inevitable cost whose benefits cannot be
verified, the UK executives focus on aligning their internal controls with
established norms of risk management which in turn provides them with the
assurance that such controls are bound to provide the expected benefits.
However, these subtle differences cannot override the similarity witnessed in
the approach to ensure that the standards of corporate governance are raised in
both countries. The underlying principle in both regulatory regimes is the
concepts of accountability, transparency, and reliability of information
presented.
Risk management is crucial to the well being of any
organization. The disclosure of the risks faced by businesses is even more
important in order to ensure that investors make informed decisions when
investing in such organizations. It is this investor interest that has informed
the creation of legislation in the US and the UK to ensure relevant information
is disclosed to guarantee the integrity of the financial reports and for the
benefit of existing and prospective investors.
Tesco,
2011. Tesco PLC Annual Report and
Financial Statements 2010. (Online) Available at: http://ar2010.tescoplc.com/~/media/Files/T/Tesco-Annual-Report-2009/Attachments/pdf/tesco-annualreport.pdf
(Accessed 12 May 2011)
Financial
Reporting Council, 2011a. The UK
Corporate Governance Act 2010. (Online) Available at: http://www.frc.org.uk/documents/pagemanager/Corporate_Governance/UK%20Corp%20Gov%20Code%20June%202010.pdf
(Accessed 11 May 2011)
Financial
Reporting Council, 2011b. The Financial Reporting Council issues new Governance Standards for
Listed Companies. (Online)
Available at: http://www.frc.org.uk/press/pub2282.html
(Accessed 12 May 2011)
Teekay,
2011. Teekay Corporation Annual Report
and Financial Statements 2010. (Online) Available at: http://www.teekay.com/documents_root/News%20Releases/TKC%2020-F%20Dec10%20%28FINAL%29.pdf
(Accessed 13 May 2011)
Titon
Holdings, 2011. Titon Holdings PLC Annual
Report and Financial Statements 2010. (Online) Available at: http://www.titonholdings.com/pdf/holdings_report_accounts_2010.pdf
(Accessed 12 May 2011)
Findlaw,
2011. The Sarbanes – Oxley Act of 2002. (Online) Available at: http://news.findlaw.com/cnn/docs/gwbush/sarbanesoxley072302.pdf
(Accessed 12 May 2011)
Spira,
F.L., Gowthorpe, C., 2008. Reporting on
Internal Control in the UK and the US: Insights from the Turnbull and
Sarbanes-Oxley Consultations. (Online) Available at: http://www.icas.org.uk/site/cms/download/res_spira_gowthorpe_Report.pdf
(Accessed 11 May 2011)
Barker,
R., 2008. The UK Model of Corporate Governance: An Assessment from the Midst of a
Financial Crisis. (Online) Available at: http://www.iod.com/MainWebSite/Resources/Document/policy_publication_The_UK_Model_of_Corporate_Governance.pdf
(Accessed 13 May 2011)
Beasley,
M.S., Pagach, D., Warr, R., 2008. Information conveyed in hiring announcements
of senior executives overseeing enterprise-wide risk management processes. Journal
of Accounting, Auditing and Finance, 28(3), pp.311-332
Smithson,
C., Simkins, B.J., 2005. Does risk management add value? A survey of the
evidence. Journal of Applied Corporate Finance, 17(3), pp..8-17
Woods,
M., 2007. Linking risk management to strategic controls: A case study of Tesco
plc. International Journal of Risk Assessment and Management, 7(8),
pp.1074-1088
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