Marks and Spencer's Compliance with the Cadbury Code
Reasons for Cadbury Code
When the company is doing well, the investors usually do not spend much time thinking about corporate procedures. However, in the bad times everyone wonders how they could have ignored commonsense checks and balances. The Committee on the Financial Aspects of Corporate Governance, chaired by Sir Adrian Cadbury, carried out a code which will help to increase the efficiency of the companies with the proposals advising how to contribute positively to the promotion of good corporate governance (i.e., system by which companies are directed and controlled) as a whole. By adhering to the Code, listed companies will strengthen their control over their businesses, clarify responsibilities of directors and therefore their public accountability. The London Stock Exchange requires that all listed companies registered in UK to state whether they are complying with the Code and give reasons if not. This will enable the shareholders to know where the companies stand in relation to the Code.
The Committee's recommendations
All parties concerned with corporate governance should use their influence to encourage compliance with the Code
Role of directors
(i) Board of Directors
The board of directors should meet regularly, retain control over the company and monitor the executive management. The responsibilities should be divided, which will ensure a balance of power and authority, such that no one has unfettered power of decision. Where the chairman is also the chief executive, it is essential that there should be a strong and independent element on board, with a recognized senior member.
The board should include non-executive directors for their views, it should have a formal schedule of matters to ensure that the direction and control of the company is done.
There should be an agreed procedure for directors in the furtherance of their duties to take independent professional advice if necessary, at the company's expense. All directors should be able to get advice from the company secretary, who is responsible to the board for ensuring that board procedures are followed and rules and regulations are complied with. Removal of secretary should be a matter for the board as a whole.
(ii) Non-Executive Directors
Non-executive directors should bring independent judgment of strategy, performance, resources, etc. The majority should be independent of management and business or other relationship which could interfere with the judgment. Their fees should reflect the time which they commit to the company.
Non-executive directors should be appointed for specified terms and reappointment should not be automatic. They should be selected formally by a board.
(iii) Executive Directors
Directors should report on the effectiveness of their system of internal control, the directors' service contracts should not exceed three years without shareholders' approval.
There should be full and clear disclosure of directors' pay and those of the chairman and highest-paid UK director, including pension contributions and stock options. Separate figures should be given for salary and performance elements and the basis on which performance is measured should be explained.
Executive directors' pay should be subject to the recommendations of a remuneration committee made up wholly or mainly of non-executive directors.
(iv) Reporting and Controls
Directors should state in the report and accounts that the business is a going concern, with supporting assumptions or qualifications as necessary, and the auditors should report on this statement. The question of legislation to support the recommendations on additional reports on internal control systems and going concern should be decided in the light of experience.
The balanced and understandable assessment of the company's position should be presented. The board should ensure that an objective and professional relationship is maintained with the auditors and establish an audit committee of at least 3 non-executive directors.
The directors should explain their responsibility for preparing the accounts next to a statement by the auditors about their reporting responsibilities. They should report on the effectiveness of the company's system of internal control.
Role of Auditors
There is the obligation set by the London Stock Exchange that listed companies should make statement of compliance and have it reviewed by the auditors before publication. The review should cover only those parts of the compliance statement which relate to provisions of the Code where compliance can be objectively verified. The auditors should not be required to report if they are satisfied, however, if they identify an area of non-compliance , they should comment on it in their report on the financial statement. The recommendation is that the Auditing Practices Board should consider guidance for auditors accordingly.
Companies should include also balance sheet in their interim reports. These reports should be reviewed by the auditors and the Auditing Practices Board should develop appropriate guidance and clarify the accounting rules which companies should follow. The inclusion of cash flow should be considered.
The code recommends that all listed companies should establish an Audit Committee membership should be confined to non-executive directors a majority of who should be independent. It is emphasized however that the ultimate responsibility of the board for reviewing and approving the annual report and accounts and the half-year accounts remains undiminished by the appointment of an Audit Committee.
Fees paid to audit firms for non-audit work should be fully disclosed. The disclosure should enable the assessment of the company's audit and non-audit fees. The 1991 Regulations under the Companies Act should be reviewed.
Auditors should have the possibility to freely report reasonable suspicion of fraud (government legislation).
There are problems with ensuring objectivity and effectiveness of auditors and also lack of understanding of the auditor’s role. However steps have been taken to strengthen the audit system through the Financial Reporting Council and its associated bodies. All auditors should satisfy a supervisory body and be subject to regular monitoring.
The Audit Committee is responsible for:
• Reviewing and advising the Council's Accounting Officer, and through him, the Board on:
i. The procedures and processes for ensuring the effectiveness of the financial and other control systems - including those for ensuring the proper protection of assets - within the Council itself and institutions.
ii. The scope and effectiveness of the work carried out by the Council's Audit Service, including value for money studies. In this respect the committee will be concerned with the planning, operation and follow-up work arising from the Council Audit Service's annual report.
iii. The criteria for the selection and appointment of the Council's audit service, including assessing the adequacy of the resources available for the work required.
iv. Any reports from the National Audit Office and the DfEE Audit Service, including the response to any Management Letters.
v. The remuneration of the National Audit Office for the audit work undertaken on the Council's annual accounts.
• Providing advice to the Board on such financial issues as the Board requests from time to time.
• Providing an annual report of the Committee's work to the Board.
The Audit Committee is authorized by the Board to:
• Investigate any activity within its terms of reference. It is authorized to seek any information it requires from any employee and all employees are directed to co-operate with any request made by the Committee.
• b. Obtain outside legal or other independent professional advice and to secure the attendance of outsiders with relevant experience and expertise if it considers this necessary.
Marks & Spencer – Corporate Governance
As per the annual report of 2001 – Marks & Spencer is committed to high standards of corporate governance and has applied the Combined Code principles.
The Board of Directors comprises of 12 directors, from that 7 are non-executive. (Note: Accomplished the Code requirement of at least 3 non-executives in the board). Since September 2000 Mr. Luc Vandevelde has headed the Board as Chairman and Chief Executive. The Board recognises that this is to address current business needs and has balanced the power by:
• Appointing Roger Holmes to the Board as Managing Director of UK Retail;
• Appointing two new non-executive directors, Tony Ball and Kevin Lomax;
• Having a majority of non-executive directors on the Board, with a wide range of experience and expertise, who bring an independent judgement on issues of strategy, performance and resources;
• Retaining 100% non-executive membership of the principal Corporate Governance Committees (Audit, Remuneration and Nomination).
(Note: One of the most obvious threats to good governance is the concentration of power in the hands of a single dominant executive. The Committee's recommendation that, in principle, the roles of chairman and chief executive should be split remains but, where the roles are combined, the Committee now recommends that there should be a strong and independent element on the board with a recognised senior member. This represents a dilution from the recommendation in the earlier draft which too closely aligned non-executive directors with the interests of shareholders. Even though Marks & Spencer has one person working as Chairman and Chief Executive, they are still in compliance with the Code by appointing the above members and non-executives and splitting the power)
As the Senior Independent Director retired, the non-executive directors nominated Brian Baldock for this position. Sir David Sieff is not considered independent for the purposes of the Combined Code because of his previously held executive position in the Group. (Note: non-executives should not be elected automatically but according to the board decision)
All directors have access to the advice and services of the Company Secretary (Note: as recommended by the Code), Graham Oakley, who ensures that the Board, which meets at least eight times per year, receives appropriate and timely information for its decision making, that Board procedures are followed and that statutory and regulatory requirements are met. He also assists the Chairman in ensuring that all directors are properly briefed on issues arising at Board meetings. Directors receive appropriate induction training when they join the Group and coaching to develop individual skills as required.
There is an established procedure whereby any director, wishing to do so in the furtherance of his or her duties, may take independent professional advice at the Group’ s expense (Note: as recommended by the Code). Under the Company's Articles of Association, the nearest number to but not exceeding one third of the Board shall retire each year by rotation. The Board has resolved that all directors are required to offer themselves for re-election at least every three years and the Articles will be amended to reflect this practice when they are next revised.
Committees
The Board has delegated certain responsibilities to Board Committees, which operate within defined terms of reference, reporting regularly to the Board and include:
Audit Committee: assists the Board in fulfilling its overview responsibilities, primarily reviewing the reporting of financial and non-financial information to shareholders, the systems of internal control and risk management, and the audit process. It comprises all the non-executive directors and also keeps under review the independence and objectivity of the external auditors.
Remuneration Committee: ensures the executive directors and senior management are appropriately rewarded. It comprises all the non-executive directors. (Note:All the remuneration data are published in the Annual Report as recommended by the Code)
Nomination Committee: keeps under review the Board structure, size and composition; selects and proposes to the Board suitable candidates for appointment as directors of the Group. It comprises all the non-executive directors.
Corporate Social Responsibility Committee: provides the Board with an overview of the social and ethical impact of the Group’ s activities including community involvement, environmental management and ethical trading. It comprises two executive directors, one non-executive director and three divisional directors.
Evaluation of the Compliance
According too my opinion, the company complies with the requirements of the Code of Best Practice. The directors confirm that for the year ended 31 March 2001 the Group complied with all the Code provisions and also the auditors did not comment on non-compliance of the Company, therefore I find the Company in full compliance with the Code of Best Practice.
The Internal Audit
In Marks & Spencer the overall responsibility for the internal control belongs to The Board. This includes reviewing financial, operational and compliance controls and risk management procedures. The role of executive management is to implement the Board’s policies on risk and control and present assurance on compliance with these policies.
Further independent assurance of quality control is provided by an internal audit function, which operates across the Company. All employees are accountable for operating within these policies. Because of the limitations that are inherent in any system of internal control, this system is designed to manage, rather than eliminate, the risk of failure to achieve corporate objectives. Accordingly, it can only provide reasonable but not absolute assurance against material misstatement or loss.
The Board has put in place an organizational structure with formally defined lines of responsibility and delegation of authority. There are also established procedures for planning, capital expenditure, information and reporting systems, and for monitoring the company’s businesses and their performances. The treasury policies are regularly reviewed by the Treasury Committee and any changes are approved by the Board. The Corporate Social Responsibility ('CSR') Committee co-ordinates the Group's CSR strategy including community involvement, environmental management, ethical trading, health and safety and employment policy. Any significant findings or identified risks are closely examined so that appropriate action can be taken.
The work of the internal audit department is focused on areas of priority as identified by risk analysis and in accordance with an annual audit plan approved each year by the Audit Committee and by the Board. The Board receives a full report from the Chief Internal Auditor each year on the department's work and findings and regular interim updates on specific issues.
One of main theme of the Code is a system of checks and balances intended to safeguard against an unhealthy concentration of power in the hands of few people. This is primarily to be achieved by increasing the role of non-executive directors. Boards now need a minimum of three non-executive directors, the majority of whom must be independent (their only connection with the company being their fees), to comply with the Code's requirements. The Code emphasizes the collective responsibility of the board for governance.
Once a system of internal controls is in place and the company has published statements of compliance it will be more difficult for an executive or group within the board either to abuse their position or to reverse the move towards good corporate governance. The burden for ensuring that internal controls are effective, through their presence on the audit sub-committee and their responsibility (as members of the board) for the directors' report that the business is a going concern, will remain with non-executive directors long after the good times have returned and interest in corporate governance has become less fashionable.
The External Audit
The external auditors are engaged to express an opinion on the financial statements. They review and test the systems of internal financial control and the data contained in the financial statements to the extent necessary to express their audit opinion. They discuss with management the reporting of operational results and the financial condition of the Group and present their findings to the Audit Committee. If they find any reason or way the company is not complying with the Code, they are obliged to report on it.
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