BHP Billiton: Compliance With UK Corporate Governance Code

Board characteristics

Approach

Implications

Did the Company comply with

the code? Explain/Provide

Evidence

Separated roles of

Because of the segregated roles of the chairperson and CEO, BHP Billiton has managed to increase its executive compensation, which occurs at the expenditure of shareholder profits. Since an independent chairman leads the organisation, it has been possible to identify the areas drifting from its mandate and accordingly, corrective actions have been taken. These measures have helped in creating value for the wealth of the shareholders (Banseh and Khansalar 2016).

CEO/Chairman

“Section A of the UK Corporate Governance Code 2014” states that the chairperson of an organisation is obliged for board leadership along with assuring the effectiveness of its role aspects. According to “Section A.1.2 of the UK Corporate Governance Code 2014”, it is necessary for an organisation to identify the chairman, chief executive and other members of the board committee. “Section A.3.1 of the UK Corporate Governance Code 2014” denotes that the chairperson needs to develop independence criteria for the non-executive directors. Besides, this provision states that the chairman and chief executive officer of an organisation could not be a single person (Al-Najjar 2017).

In the case of BHP Billiton, Jac Nasser is the current independent chairperson of the board from 31^st March 2010. Moreover, the person is a non-executive director of the organisation since 6^th June 2006. On the other hand, Andrew Mackenzie is the Chief Executive Officer of BHP Billiton, which denotes that the organisation has a different chairperson and different CEO. The body has conducted board meetings 14 times in 2016, in which the non-executive directors attended the meetings only on board invitation. It complies with the “Section A.3.1 of the UK Corporate Governance Code 2014”.

BHP Billiton has assigned the chairperson as the leader of the organisation, which includes assuring a culture of openness along with ensuring strategic and shareholder issues. Thus, it complies with the “Section A.1.2 of the UK Corporate Governance Code 2014”.  

Board characteristics

Approach

Implications

Did the Company comply with

the code? Explain/Provide

Evidence

Gender diversification

According to “Section B.2.4 of the UK Corporate Governance Code 2014”, a description of the policy of diversity including measurable objectives developed for implementing the policy and progress on accomplishing the same needs to be mentioned.

The result has been positive for the organisation, as the percentage of female staffs increased to 21.28% in 2016 from 21.16% in 2015. Besides, senior female leaders have been 65 in 2016, which were 62 in 2015 and 55 in 2014. Furthermore, the number of women board members has been 3 in 2016, which were two both in 2015 and in 2014. However, it is noteworthy that the number of staffs has been falling in BHP Billiton over the years, which denotes the ability of the organisation to retain its key staff due to ineffective human resource management policies.

(percentage of female to male)

As commented by Boyd, Gove and Solarino (2017), inclusive and diverse operations help in accomplishing better performance. According to the annual report of BHP Billiton, the organisation strives to ensure a culture of openness by enhancing female representation since 2010. It has created a CEO-led “Inclusion and Diversity Council” constituting of functional and asset leaders from within the organisation. The duties of this council include providing education to the staffs along with resourcing campaigns for higher female participation. It denotes that BHP Billiton has adhered to “Section B.2.4 of the UK Corporate Governance Code 2014”.

Skills and Board knowledge

Following the “Section B.2.2 of the UK Corporate Governance Code 2014”, it is necessary for the nomination committee of an organisation to assess the overall balance of experience, skills, knowledge and independence of the board. Besides, after careful assessment of the same, it needs to develop a description of the capabilities and role necessary for a particular appointment (Chan, Watson and Woodliff 2014).

With the help of useful skills and board knowledge, BHP Billiton has identified climate change as the primary strategic issue affecting investment decisions (Eling and Marek 2014). The Sustainability Committee of the organisation devotes ample amount of time taking into account the systemic climate change to detect the opportunities and threats of future investments. As a result, it has helped the organisation in undertaking future capital projects.

and

According to the current annual report of BHP Billiton, the Nomination Committee of the organisation has developed a list of skills needed for its non-executive directors, which all of them possess considerably. Some of these skills take into account honesty and integrity, commitment to the greatest governance standard, experience to manage in uncertain situations and maximising the wealth of the shareholders.  The previous and current experience of the board members has been depicted below in the form of a figure (Refer to Figure 1). This implies that BHP Billiton has complied effectively with the “Section B.2.2 of the UK Corporate Governance Code 2014”.

(Skills,

Current  and  previous

board experiences)

Age

As BHP Billiton is not involved in disclosing the average age of its board members, it might question its diversity and divisiveness (Elshandidy and Neri 2015). The effect is inherent, as many employees have left the organisation over the three-year period.

(Average Age of the Board)

According to “Section B.2 of the UK Corporate Governance Code 2014”, it is necessary for an organisation to depict the average size of the board along with its age. According to the annual report of the association, the average age of the board has not been mentioned, which implies that it has failed to comply with the above-depicted code.

Independence

Despite the limited number of non-executive directors, the organisation has managed to increase the wealth of the shareholders effectively. However, it needs to recruit additional members to carry out its business operations in UK, if the government of the nation makes the number of non-executive directors fixed for large-scale organisations.

(Number

of Independent

board

According to “Section B.1.1 of the UK Corporate Governance Code 2014”, it is necessary for a board of an organisation to identify the non-executive directors, who could be considered as independent. Besides, “Section B.1.2 of the UK Corporate Governance Code 2014”, states that at least half of the board excluding the chairperson needs to constitute of non-executive directors, which the board would consider as independent.

According to the corporate governance report of BHP Billiton, the board has 11 members at present, and there is yearly re-selection through voting on the part of the shareholders. All of this personnel are adjudged independent of management, and they are not bound to any business association, which could interfere materially with the objective exercise. However, the number of non-executive directors is little in contrast to most of the other large-sized UK organisations (Filatotchev, Jackson and Nakajima 2013). Thus, it has not completely complied with the above code provisions.

members to executives)

Accountability components

Approach

Did the Company comply with the code? Explain/Provide Evidence

Implications

Structure of audit committee (number of independent audit members)

As per the section “C.3.1 of the UK Corporate Governance Code 2014”, it is mandatory to establish an audit committee of at least three with at least one auditor having relevant and current financial experience (Frc.org.uk 2017). However, the chairperson could be a member of the audit committee in the case of smaller firms, if he is independent at the time of being appointed as chairman. Besides, the chairperson could not be the head of the audit committee. In the case of BHP Billiton, the organisation has currently five members in its audit committee, and the director of the committee is Lindsay Maxsted. This personnel has above 30 years of experience in the financial domain, and thus, this satisfies the above code provision.

The formation of an active audit committee has helped the organisation in saving the time needed to assess the quality of the financial statements prepared. Besides, there is less waste of resources, which has helped in establishing the market value of the firm (Keay 2015). This is because the investors have shown trust due to the transparency of financial statements.

External auditors (who are the auditors of the firm, what is the time scale of their contract)

As per the section “C.3.7 of the UK Corporate Governance Code 2014”, the primary responsibility of the audit committee of an organisation is to recommend regarding appointing, re-appointing or removing the external auditors. Besides, the agencies need to place the contract for the external audit to tender in each ten years. In the case of BHP Billiton, the principal external auditors include Price Waterhouse Coopers and KPMG; however, the last tender was back in 2002. However, in 2003, only KPMG has been kept as the sole external auditor after an audit review. However, it has not placed tender in 2012 by putting the outer audit contract. This implies that BHP Billiton has not conformed adequately to the code provision.

Although the board has remained satisfied with the performance of the external auditor, it might lead to manipulation of financial statements, which would result in lesser returns for the shareholders in future.  

Board evaluation (when was the last time the firm took an external perspective to this)

According to “Section B.6.1 of the UK Corporate Governance Code 2014”, it is necessary for the board to depict in its annual report the way of conducting its performance evaluation, associated committees and individual directors (Larcker and Tayan 2015). As per the annual report of BHP Billiton, such evaluation has been undertaken in 2016 to review the conformance to the governance document, internal referential terms consideration of the committees and internal assessment of the individual directors. This implies that the organisation has successfully complied with this provision of the code.

From this evaluation, it has been found that the board of BHP Billiton is involved, diverse and inclusive with effectual discussion and debate accomplishing a balance between challenge and support. Besides, the focus of the organisation is to the shareholders, and the planning and processes of the board are thorough and exact.

Remuneration characteristics

Approach

Implications

Did the Company comply with

the code? Explain/Provide

Evidence

Structure

of

Remuneration

In compliance with “Section D.1.1 of the UK Corporate Governance Code 2014″, the performance-related compensation schemes need to include provisions that would help an organisation in recovering any paid amount or withholding any amount paid. “Section D.1.3” states that the remuneration levels associated with non-executive directors need to depict time commitments and their pay must not take into account share options or any performance-related constituents (McCahery, Sautner and Starks 2016).

As the compensation structure of the organisation is smooth and thorough, it has assured in achieving the long-term goals in the form of greater returns to the shareholders.

(Components of Pay/ Clawback/

According to the annual report of BHP Billiton, the remuneration committee associates a considerable pay of part to the performance of the directors for increasing the value of the shareholders in the long-run. For accomplishing this objective, the fee of the chairperson has been reduced by 13%, while the base fee of the non-executive directors has been minimised by 6%. Thus, the remuneration committee of the organisation has complied with the code provisions effectively.

Long-term targets)

Structure

of

compensation

“Section D.2.1 of the UK Corporate Governance Code 2014” denotes that the remuneration committee of a firm needs to comprise of at least three independent members. Out of these members, the chairperson could be a member as well; however, the personnel would not be the head of the committee (Müller 2016).

In the case of BHP Billiton, there are presently 12 directors in its remuneration committee, out of which the chairperson is a member as well. However, he is not the head of the committee, which denotes that the organisation has complied adequately with the above code provision.

As the organisation has the adequate number of independent members in its remuneration committee, this has helped in ensuring the fairness and transparency in its compensation about pay, superannuation and other facilities.

committee

(number

of

independent board members)

CSR characteristics

Approach

Implications

Did the Company comply with

the code? Explain/Provide

Evidence

AGM reporting

According to “Section E.2.4 of the UK Corporate Governance Code 2014”, the organisation needs to arrange for AGM notice and the associated shareholders should be provided with the associated papers at least 20 days before the meeting. In this session, the organisation needs to disclose the voting results and number of such meetings held within a year (Reisberg 2015).

(number of meetings/ disclosure

As per the annual report of BHP Billiton, two AGMs took place in 2016, and the detailed disclosures of voting have been presented as well. This denotes that the organisation is complying with the code provision in an effective fashion.

The effective disclosure of meetings and voting results has helped the organisation in knowing the concerns of the stakeholders and accordingly, steps have been adopted that have increased the value of the shareholders.

of voting)

Communications with

As per “Section E.1.2 of the UK Corporate Governance Code 2014”, an organisation needs to depict in its annual report the steps undertaken to gain an insight of the shareholders’ views in the form of online surveys, face-to-face contact and broker or analyst opinion (Sikka and Stittle 2017).

As per the annual report of the organisation, the shareholders could contact through the official website, and the analyst opinion is also taken into consideration. Thus, it has adequately complied with the code provision.

With the help of such regular communication, the directors are highly aware of the raised issues along with obtaining a practical insight of the views of the shareholders.

shareholders

(what tools are used)

Examples of Bad Corporate Governance Practice

Consequences for TESCO

Recommendation

Issues in revenue recognition

Recognizing the revenue is the primary domain of department of finance in the organisation such as Tesco as it has the impact on the success of the business.  Reputation and profit of the company will be affected if the process adopted for recognising revenue is inconsistent. Accurately recognising the revenue takes into account some of the factors such as organisation should have sound financial policies that board of directors endorse and their practical implementation. Different industries have their own way of recording and recognising the revenue (Tricker and Tracker 2015).This accounting issue mostly relates to recording of income on the early basis so that management is not able to account for it along with several stakeholders. Revenue recognition at Tesco has been front loaded because revenue recognised from suppliers has been front loaded over a multi-year period. This has led to overstating of profits.

Tesco has faced the massive failure of the process of recording revenue due to this and corporate governance. This has hampered the reputation of Tesco as one of the major retailers in the United Kingdom and they have plunged deeper into crisis (Westpha and Zajac 2013).

The organisation should not have any inconsistencies in recording and recognising revenues. They should adhere to some new formulated regulations that call for the more stringent method in revenue identification. They should account for following the more advanced process of recognising revenue. Revenue needs to be spread over time and takes into consideration contract amendments. Nonetheless, it is entirely possible that organisation will face challenges with customer engagement. In this event, the organisation is required to monitor purchasing done by customers closely, how the services are delivered and obligations of the company. There needs to be good revenue administrator within the organisation. They should also adhere to policies of recognizing revenue and should have union framework for recognizing revenue from contracts. Fragmented policies are created by the new guidance of revenue e recognition, and this is industry neutral.

Manipulation of risk inherent in estimating commercial income

Risk manipulation is one of the issues of corporate governance that has been faced by Tesco. This was evident in the annual report of the organisation. Some of the factors that facilitate the manipulation of the risk of the annual report are prematurely recording of revenue, recording of fictitious revenue, reducing liabilities improperly and shifting expenses (Mason and Simmons 2014).

A number of factors that organisation needs to take care of guards’ accuracy and quality of data available at the disposal of stakeholders. The organisation should have in depth understanding of market liquidity, corporate profitability ratios, and internal liquidity solvency analysis ratios and conducting multiple market analysis.

False accounting and abuse of position.

Accounting scandal at Tesco has cost more than 214 million along with making some compensation payments. Finance director and executive at Tesco were all charged for conducting the false accounting. For deriving personal gain, they have acted dishonestly and thus hampering the reputation of the company. Executives of Tesco were involved in altering and reporting unrealistic profits.

The organisation needs to amend their policies that will help them in dealing with false accounting and adhering to stringent laws that will make such accounting records a failure (Denis 2016).

Falsification of digital accounting records

There was a false account of the financial position of Tesco that was done by managing director, finance director and food commercial director and relied upon some commercial figures that lead to falsification.

Materiality

The materiality of Tesco stood at £150 million as per their audit report.

A number of factors that organisation needs to take care of guards’ accuracy and quality of data available at the disposal of stakeholders. The organisation should have in depth understanding of market liquidity, corporate profitability ratios, and internal liquidity solvency analysis ratios and conducting multiple market analysis.

Case for institutional investors intervention

Explanations

Justification and Implication for Tesco

Poor performance of non-executive

One of the concerning issues for investors in the organisation is when executives are not able to balance the board and provides required inputs intended to reassure markets. It has been viewed that contribution s of nonexecutive are laws considered to be effective. Investors mainly consider this when they feel that there is need to carefully constraints and monitors the board of directors when one or another factors become an issue to them (Claessens and Yurtoglu 2013).

Non-executive directors of Tesco have ben derelict in their duties and they mostly ignored the problems faced by the accounting system. They did not take steps to ascertain the reason for making false accounting and did not tends to identify the reason behind falling sales. Non-executive directors tend to play a crucial role in any organisation.

Deteriorating performance

Interventions by investors in any organisation are also triggered by deterioration of organisation over the short time span. If the annual reporting of the company does not adequately explain that reason behind the falling sales and declining profits, this calls for intervention by investors.

For the first year of business in 2014, the expected profits of the organisation have fallen and this was one of the reasons for intervention by investors. Income of Tesco has dropped by 50 percent. Investors expect the organisation to carry pot their operation with integrity and transparency so that their operation is clear.

Failure of internal control

It is required by investors to explain signs of loss of control over the business operation by senior management. Some of the issues relating to internal control are mentioned quality, budgetary control and projects related to information technology (Boreik and Murgia 2016).  

Tesco had a failure in their internal control system and this lead to arising of institutional investors’ intervention. Tesco was not in full control relating to internal procedures. This has resulted in arising from internal investigation.

Poor corporate governance performance

Lack of social responsibility is another reason for intervention by investors in the organisation. Involvement of organisation into the scandal would to hampering their image and this is a matter of concern for stakeholders particularly investors.

False accounting

If an organisation is involved in changing records ad figures by dishonest means and false information about financial statements of company. This is indicative of the fact organisation is not acting in the best interest of shareholders as they are not concerned about their image that would ultimately deteriorate the profits attributable to shareholders.

Non-executive directors of Tesco were involved in making false reporting of the profits figures. This lead to intervention of investors in enquiring about relations with the organisation and outside parties. Accounting practices followed by organisation was not consistent and there were a lot of doubts about spreadsheets. Management did not throw light on accounting irregularities and this has apparently considered to be taken role of market of organisation.  

Falling share price and profits

Poor performance is attributable to falling sale and declining profits of organisation. Performance of market below the expectation of investors becomes the matter of concern. This would trigger the institutional investor intervention. It is considered unfortunate if the actual results are made public after the disclosing initial results. Any misstatement in the initial results needs to be accounted for as this can lead to lack of control within the business. There is always a need to explain it to shareholders if the expectation of performance of organisation is below market performance.

Tesco has been witnessing falling sales and declining price of shares. When compared to their competitors such as Aldi and Lidl, revenue of Tesco has fallen by 4 percent and share of market also slipped by 1.5 percent.  Financial statements of Tesco were considered at least accurate by investors as they warned about the latest profit figure reported.  

Regulatory system and chances of compliance failures

If the regulatory system of organisation is weak and it often fail to be adhere compliance with the laws. It becomes an important issue for investors to intervene in the matter of organisation. Reporting of organisation is overseen by management as it was not effective. If there is a disregard of relevant accounting standards in an organisation that might lead to severe allegations become an important factor of investors to intervene in matters of organisation. For the legal allegations of fraud, investors are required to have an urgent clarification. As far as investors are concerned, fraud and scandal is considered to be an important factor in investors institutional relationship.

Tesco was alleged to have a scandal resulting from their inconsistent accounting practices. There are certain matters relating to corporate governance that are deemed to be significant to investors that needs to be reserved for the board of directors. Furthermore, there was structural deficiencies in organisation that lead to following of some aggressive practices. This has led to intervention by investors in organisation. Moreover, corporate leaders of Tesco were quite irresponsible in handling matters relate to accounting and there was unblushing approval of code.

Weaknesses in TESCO Company’s Internal control Systems

Violation of COSO component

Implications of weaknesses TESCO continuity

· Computers and phones of Tesco plc are not examined and this wipes off the accounting data.

· The audit management should be more efficient while examining the financial statement of retailers.

· It violates the control on the environment of the business due to low capabilities of Tesco’s management and directors.

· Incompetent accounts and auditors violate risk assessment as it leads to decrease in share value and revenue.

· If Tesco does not expand their capabilities, then it will affect the environment of the business. However, business environment cannot be controlled.

· The auditors, management and the directors influence the financial performance of Tesco. However, the company cannot attain higher profit due to inefficient and incapable executives.