Effective Governance and Accountability

Evaluation of the corporate governance arrangements for Pollywell Limited

 The corporate governance structure for Pollywell shows an arrangement that we hedged on the power of Paul Lennon as the major shareholder. As the major shareholder, Paul Lennon has the corporative governance under his control since he has the right to choose the board of director's members, make the major decision in investment operations. This gives him the ultimate power over the major corporate decisions that would be made in Pollywell Limited, and especially which would favor his investment preference.  While the concentration of power of voting on the board of directors can negate corporate governance discipline, reduced power for the board in making decisions can result in poor performance of the firm.  The structure of Pollywell Limited corporate governance lacks clear boundaries in the duties and roles of board members which mean that their decision making is weak, while they have to dance to the tune of Paul Lennon as the major shareholder. The corporate structure of this company is a shareholder model whose main aim is the maximization of profits for the shareholder.

In this case, all the directors are implicitly obligated to ensure that a company is run in the majority shareholder's interest.  The directors of the company are not independent since the major shareholder makes the major investment decisions. The independence of directors is determined by the major shareholder and this means that there is an incentive for the directors to tow the line of Paul Lennon controlling wishes.  This can also explain the retention of the long stay of the directors in their respective positions in the company.  Lack of an independent board of directors means that members will serve the interest of the controlling major shareholder; and this makes them an ineffective tool to be used in vetting conflict that may arise in decision making (Bebchuk & Hamdani, 2016).  In case a firm that has a major shareholder in control, a major corporate governance concern will be the possible conflict of interest between public investors and the aforementioned controller (Bebchuk & Hamdani, 2016).  The current arrangement of the Pollywell corporate governance weakens the role of the board of directors as an oversight body.  

To a large extent, this corporate governance arrangement contravenes the established UK code that stipulates the good practice standards for a firm that wants to be listed for public purchase of shares. This relates to the development and composition of the board, shareholder relation, and remuneration. The code touches on the various functions of a company whose shares are traded on a public platform and these should be looked into before the IPO process kicks off. A strategy should be adopted by the board that involves imparting corporate governance of high standards in the entire areas of the company's operations and this will help in building the value of potential shareholder once the IPO is issued (Bebchuk & Hamdani, 2016). There should be a lot of improvement on the board to increase its independence and this will ensure that case of conflict of interest brought about by the presence of a controlling major shareholder does not recur. In this regard, it is necessary to have an independent director and especially a chairman who is elected in a manner that he will be made accountable to investors after the issuance of IPO. The directors under the guidance of an independent chairperson will ensure that the corporate code of conduct is observed while important decisions on any transactions are being boarded (Bebchuk & Hamdani, 2016). This underscores the need for an oversight board that will not be forced to implement the decisions of a major shareholder at the expense of public investors. The improvement of insight efforts by an independent board is a central aspect of corporate governance that is geared towards the general good of all the shareholders and stakeholders of a company (Yermack, 2010).

Pollywell's board should be arranged in such a way that conflict of interest does not arise in the decision-making process. The current board consists of members close to the major shareholder and it is possible that they may make decisions based on their implied loyalty to Lennon as the major shareholder. To avoid such a scenario, the provisions of the Corporate Governance Code should be given much attention, and hence, serve as a guideline in the composition of the board and in the establishment of the roles and duties of the board members. More specifically, the company should ensure that compliance with the latest version of this code is assured from now moving forward. At the same time, the selected board should be obligated to have a report about its compliance in the next annual report to be released before the issuance of the IPO.  The governance code describes the role played by the board as providing entrepreneurship leadership but within effective and prudent controls which allows for risk assessment and management (Becker Professional Education, 2017). This involves setting the strategic goals of the company, putting the human and financial resources in place so as the set objects can be met and management performance is reviewed.  To perform these tasks the code provides for the board to hold meetings regularly where high decisions to be delegated to the company's management (Becker Professional Education, 2017).  The newly composed board in Pollywell should hold formal meetings at least five times and other informal meetings in the year where they will consider strategy and risk for the investments to be undertaken in the future.  Such meetings will also ensure that any conflict of interest arising is dealt with before it adversely affect the performance of the company.

To adhere to the Corporate Governance Code, the composition of the board should involve diversity, where appointments are made on merit, while the formation of board committees that will oversee the audit, and remuneration of directors. For effectiveness, a board should involve people with the right experience, skills, knowledge, and independence of the firm a balance that will enhance the performance of their respective responsibilities and duties.  The code provides that the board should consist of executive directors and independent directors who are not members of executive so that it is not dominated by a small clique of people especially during decision-making process (Yermack, 2010). The current boards of Pollywell Limited consist of individuals who are cronies of Paul Lennon. The lack of independent non-executive members in the current board provides for the emergence of conflict of interest which is not good for a company that is aiming to issue an IPO. There is a need to ensure that committee members are selected from the board, especially to oversee the remuneration of directors, and undertaking the auditing process. An effective committee membership ensures that there is no unnecessary reliance on a clique of individuals during decision making, evaluating performance through auditing and this will reduce the chance of a conflict of interest arising (OECD, 2011). Another improvement should involve a transparent and formal arrangement of how risk management and reporting will be done, and this relates to the role of financial auditing and other auditing deem necessary to ensure accountability of the board and other individuals in the management level of the company. 

The role of reviewing internal control of financial resources and audit function in a company is placed on the audit committee (Becker Professional Education, 2017). This highlights the importance of having a well-established committee that is independent in Pollywell Limited and which the control and risk management of the firm. This implementation of these aspects especially in the board of directors will prepare the right avenue for issuing an IPO, whose performance will depend on the integrity and accountability that directors and other senior management exude to win over the confidence of the public.  The remuneration of the executive directors for the newly composed board should be aligned to the overall goal of the company that involves success in the long-run.  The corporate governance code on directors' remuneration requires that a remuneration committee consider the position of a company when compared to others, and the committee should consider an increase in the remuneration if it corresponds to an upward shift of individuals and company's performance (Becker Professional Education, 2017). In the case of, the determination of directors' profits share above their normal financial rewards should be done by an independent committee that will ensure any more allocation of rewards is proportional to their performance and the general performance of the company at large. The adherence to the corporate governance code is an indication of the expected changes if the company will insist on floating its shares to the public. 

 

Benefits to Pollywell of full compliance with the Code

The benefits of complete compliance with corporate governance code have their basis on the independence brought about by non-executive directors on the board. As members who are not employed in the company nor have no affiliations, the non-executive team of management can make decisions that are independent and which cannot be influenced by the people for the sake of their vested interests (Azeez, 2015).  The directors are normally included in the board with an aim of bringing independence, impartiality, broad range of experience and special knowledge to the company. The NEDs plays an important role in improving the effectiveness of the performance of the board and this sends the appropriate message to existing shareholders and future potential shareholder and this increase the attractiveness of the company to investors in the future.  They ensure that there is increased compliance with the principles on which the corporate governance code is based and this brings benefits not only to the firm but also to managers and their transparency, especially during disclosures.  The knowledge, skills, and experiences brought in by the NEDs enhance the process of strategy development in a company and in directing it in the right path for future success. The improved strategies are integral part of finding solutions to various challenges that a firm may be facing internally or in the market. One of the challenges is increased competitiveness in the market in which a company operates.

The market environment for Pollywell is becoming more challenging while conducting business operations and selling the products. The media and communication industry is becoming increasingly competitive as new firms are emerging while changing their strategies so as to be at par with changes in technology. The online-advertising has increased competition in the market as sales of hard copy publics continue decreasing over the years. Pollywell Limited needs a change in strategy and can rely on the experience and knowledge of independent non-executive directors in the formulation of a strategic plan that will place the company on the online platform.  An important role of NED is ensuring that every audit requirement in a company is complied with and satisfied, ensuring accountability in the process and hence improving the confidence of investors and other stakeholders in the direction of the company (Azeez, 2015). Eventually, there will be an improvement in accessing financial markets and capital markets by the firm (OECD, 2011). The required strategic plan for Pollywell to remain competitive requires capital input for such it to succeed. Paul Lennon is considering raising capital by issuing IPO at the London Stock Exchange and this is where the company will benefit for adhering to the corporate governance code. 

The post –flotation performance of the business will depend on whether the firm has raised enough financial resources for the capital required to fund the implementation of the online adverting strategy. This highlights the relationship between the compliance with Corporate Governance Code, the access to the needed capital for strategic change in Pollywell and the future competitiveness if the company in a market that is consistently changing. The experience and knowledge of the NEDs will also be important for the company in managing various risks that may come with floatation and even the adoption of a different strategy in the company. The business expertise of the non-executives will also be important to the firm especially in preventing the possibility if over-trading which may be detrimental to the performance and growth of the firm (OECD, 2011). In addition, compliance with good practices of corporate governance help to improve the confidence of many investors both domestic and local and this will lead to a reduction in capital cost or even more focus towards sources of financing that are reliable and stable (OECD, 2011). 

While the firm is developing and popularizing its marketing strategy, it will require an independent advice on business which will offer new perspectives on the market and operations.  The non-executive directors in Pollywell will be well placed to offer such kind of advice that may help the firm from making mistakes that will cost its image and intended transformation in the market. After floatation, the company will be developing and hence, become more relevant to the interest of the public and at this time the non-executive directors can be counted upon to provide the needed guardianship. NED are also important in checking the conduct of executive directors in a company by ensuring that they observe the established ethical standards , accountability in reporting and integrity while carrying out their responsibilities and duties (Azeez, 2015). This kind of scrutiny will prevent the executive directors from making decisions that are likely to plunge the Pollywell in scandals that may affect the performance of the company, especially after floatation. The benefits of complying with the Corporate Governance Code will justify the decision for this compliance in the firm.

References

Becker Professional Education, (2017).ACCA Approved - P1 Governance, Risk, and Ethics. 1021-1026

Bebchuk, L. A., & Hamdani, A. (2016). Independent Directors and Controlling Shareholders. U. Pa. L. Rev., 165, 1271.

 

Azeez, A. A. (2015). Corporate governance and firm performance: evidence from Sri Lanka. Journal of Finance, 3(1), 180-189.

 

OECD, (2011). Corporate governance. Retrieved from: http://www.oecd.org/investment/toolkit/policyareas/corporategovernance/44931152.pdf

Yermack, D. (2010). Shareholder voting and corporate governance. Annu. Rev. Financ. Econ., 2(1), 103-125.