Corporate Governance Of Wesfarmers Limited: Principles, Roles And Responsibilities

Introduction to Wesfarmers Limited

Discuss about the CGC Principles of Wesfarmers Limited.

Wesfarmers Limited is an Australian conglomerate, having its headquarters situated in Perth, Western Australia. The company is engaged in various types of business such as supermarkets, hotels, home improvement, office supplies and many more. It is the largest Australian company in terms of the revenue earned worth AU$ 65.98 billion. The company has approximately 220,000 employees which makes it the largest private employer in the country, outperforming Woolworths and BHP Billiton. Wesfarmers Limited is publically listed on ASX and traded with a ticker symbol of WES.AX (Wesfarmers.com.au. 2018).

Corporate Governance is a broad ranging term which lay down some rules, regulations, policies, relationships, systems and process that are to be exercised and maintained within the organization. However, following such principles leave a significant impact on Wesfarmers. They are as follows:

• Wesfarmers is obliged to make a proper disclosure of the role and responsibilities stated for its board of directors and management team.
• Amendments are been required in the structure of the board which modifies its size, composition and skills.
• The third principle enables Wesfarmers to act ethically and responsibly and in the interest of shareholders and society.
• The audit committee of the company needs to make sure that there is integrity in corporate reporting and required standards are been followed.
• Timely and balance disclosure of all the information becomes a necessary task for the company. Disclosing all the facts and figure may affect Wesfarmers to some extent.
• While complying with the principle, Wesfarmers is required to give appropriate information to its shareholders in order to respect their rights.
• The company must establish a risk management framework for managing and reviewing the various risks.
• Wesfarmers have to pay fair remuneration to its shareholders according to ASX CGC principles (Asx.com.au. 2014).

Following the above implications, Wesfarmers’ Corporate governance statement clearly represents that the company has completely complied with the listed principles and recommendations of ASX. The eight ASX principles applied by Wesfarmers are as follows:

The roles and responsibilities of the board is clearly stated in Wesfarmers’ corporate governance statement. Complying with the ASX principle 1, the company has laid down some duties for each of its directors. They are as follows:

• Role include approving the strategic directions of the group, guiding the management if the company and assisting it in achieving the set targets.
• Board follows a high standard corporate governance practices while fulfilling their responsibilities.
• It complies with ethical behavior practices, corporate integrity and respect for others.
• The managing director is held responsible for managing the day to day activities of the organization and is assisted by Wesfarmers’ leadership team.

In order to fulfill the above roles, board is required to haves some key focus areas developed during the fiscal year 2017. They are as follows:

• Overseeing the planning done by Managing Director and his appointment process.
• Appointing leadership team and reviewing management’s performance regarding strategy implementation.
• Monitoring the group’s financial performance, business operations, key metrics and safety performance of the management.
• Evaluating growth opportunities and revising board charters and committees.
• Policies and procedures review and enhancing the reporting for improving corporate governance (Wesfarmers.com.au. 2017).

Wesfarmers ensures that it has a perfect mix of directors who has appropriate skills, experience, diversity and expertise in making critical decisions for the group. The structure of the board comprise of nine directors out of which, eight are non-executive. In February 2017, Wesframers appointed Mr. Rob Scott as its Deputy CEO and he will join the board as Group Managing Director after the results of AGM. The structure of the board is as follows:

Name of director	Qualifications
Michael Chaney AO	BSc, MBA, FTSE
Richard Goyder AO	BCom, FAICD
Paul Bassat	B.Com, LL.B.
James Graham AM	BE (Chem)(Hons), MBA, FIEAust, FTSE, FAICD, SF Fin
Tony Howarth AO	SF Fin, FAICD
Wayne Osborn	Dip Elect Eng, MBA, FAICD, FTSE
Diane Smith-Gander	B.Ec, MBA, FAICD, FGIA
Vanessa Wallace	B.Com, MBA, MAICD
Jennifer Westacott	BA (Honours), FAICD, FIPAA

 (Wesfarmers.com.au. 2017).

Wesfarmers board of directors has the following skills and expertise:

• CEO level experience
• Risk management and strategy formation skills
• Ability to form regulatory and government policy.
• Understanding capital markets
• International experience
• Knowledge about finance and banking.

It is the primary objective of the company to provide reasonable returns to its shareholders and follow its values and code of conduct in order to perform ethically and responsibly. Also, the board regularly reviews its policies so to ensure that its values and standard of behavior remains high.  

Wesfarmers whistle blower policy promotes ethical behavior within the organization. The policy promotes the reporting of illegal and unethical conduct.

Role of the Audit and Risk Committee

ASX CGC Principles Applied by Wesfarmers

It is the responsibility of Wesfarmers’ Audit committee to monitor the internal control policies and procedures that are formed to maintain integrity in financial reporting and safeguarding the Group assets. The committee has a direct access to the external auditor and the internal auditor. Key focus are for the committee is to overview the financial processes and internal control system which establishes integrity in the reporting structure.

Ernst & Young is the external auditor of Wesfarmers which performs audit for the company and provide a declaration of its independence. The role of E&Y is to attend the AGMs and prepare independent auditor’s report for the company. Analyzing the risk and managing them properly also counts in the responsibility of the auditor. Wesfarmers has a proper risk management framework which is reviewed by it board of directors on regular basis (Wesfarmers.com.au. 2017).

Wesfarmers has a market disclosure policy which requires an internal reporting of market sensitive information and all the relevant data that is useful for the shareholders. Timely and balanced disclosure is been made by the company by a disclosure officer appointed by Wesfarmers. The officer administer the policies and a disclosure committee is held responsible for managing and making determinations in respect of Group’s continuous disclosure obligations. The disclosure are related to confidentiality and engagements with the media and the investor’s community. 

Wesfarmers Limited has an official website which reflects all the information about the company and the group. It shows the investors relations as well as all the ASX announcements made during the year. The website also a ‘Corporate Governance’ page that is linked to the government related documents and important announcements.

The Group completely recognizes the importance of providing information to its shareholders and investors who participate in each and every shareholder decision of the company. A program is been developed by Wesfarmers for enhancing the investors engagement in order to engage its shareholders, debt investors, media and the broader investment community. This helps the group to respect the right of its security holders by engaging them in the decision making and its operations (Wesfarmers.com.au. 2017).

In order to recognize and manage various risk, Wesfarmers has a proper risk management framework. It deals with overarching principles and risk management controls that are used in Group’s risk management processes and reporting systems. The framework establishes a code of conduct, divisional structures, a formal corporate planning process, compliance reporting system and many other procedures and policies used or managing and identifying several risk, to which the group is associated with.

Roles and Responsibilities of the Board

Wesfarmers limited has a Remuneration Committee which is held responsible for deciding the fair remuneration of the directors and management. It is the duty of the committee to advice the board of directors in respect to fix the remuneration, annual and long term incentive and rewards for the Group’s directors (Wesfarmers.com.au. 2017).

So it can be said the Wesfarmes Limited completely follows all the eight ASX CGC principles in its business.

The company was found in 1914 and from there Wesfarmers has grown into one of Australia’s largest listed companies. It has diversity in its business operations that include supermarkets, hotels, liquor, department store and many others. The Group is the leading organization n the retail market of Australia, outperforming Woolworths. It has a strong shareholder base of 530,000 and employees over 220,000 (Wesfarmers.com.au. 2018).

It was stated in Deloitte’s last year report that, there are new immigrants in Australian retail market. They are The TJX Companies Inc., UK department stores, American retailer, French leisure good retailer Décathlon and John Lewis and Debenhams. This is the result of strong economic conditions and increasing demand for international brands. In the report, it is also mentioned that Wesfarmers was appeared in top 250 global retailers list. However, retail market of Australia is still fighting back for the investments and store designs. Therefore, Wesfarmers is focused on providing good quality services to its customers and thus contributing to the growth and prosperity of the country (Deloitte Australia. 2017).

The business strategy of the Group includes a Wesfarmers Way Framework which comprises of the core values, growth enablers and value creating strategies made to achieve the primary business of the company.  In order to provide satisfactory returns to its shareholders;

• The Group emphasizes on strengthening its business by satisfying customer need and improving operating excellence.
• Establishing long term management for sustainability.
• Taking entrepreneurial initiatives for securing growth opportunities.
• Renewing the portfolios through value-added transactions (Wesfarmers.com.au. 2018).

Income statement ratios

	Formulas	2017
Gross Profit margin	Gross profit /Net sales	32%
Net profit margin	Net profit / net sales	4%
Operating profit margin	Operating profit / Net sales	6.89%
Earnings per share	Net income / Number of outstanding shares	2.55
Return on Equity	Net income / shareholders’ equity	12%

(Financials.morningstar.com. 2018).

Current ratio	Current Assets / Current liabilities	0.93
Quick ratio	Quick Assets / Current liabilities	0.30
Debt-equity ratio	Debt / Equity	23%
Days Sales Outstanding	(Receivables / Revenue) x 365	9
Days Inventory Outstanding	(Inventory / COGS) x 365	51
Days Payable Outstanding	(Accounts Payable / COGS) x 365	52
Cash Conversion Cycle	DIO + DSO – DPO	8
Receivables Turnover	Revenue / Average Accounts Receivables	10.43
Inventory Turnover	COGS / Average of Inventory	1.81

 (Financials.morningstar.com. 2018).

Audit risk are basically of three types; Detection risk, Inherent risk and control risk. Wesfarmers being a large company and a conglomerate, it is mostly exposed to inherent risk. The situation which arises due to the error or omission in a financial statement is known as inherent risk. Wesfarmers has a huge business diversity, so it may be possible that the group can have errors in their financial statements or the items which are wrongly reported. Also being a multinational company, the various environmental and external factors increases the group’s inherent risk (Merna and Al-Thani, 2011). 

There are various ways to reduce an inherent risk. As this risk in an internal error so it can be reduce by improving the internal control system of the company. Daily and timely review of Audit and Risk Management committee can reduce the audit risk. Another way is to bring harmonization in the auditing and accounting standards followed by the accountant and auditors. Inherent risk is basically founded in the financial statements, so it is necessary for the company to hire qualified accountant in order to avoid such risk.  Proper notes to disclosure can be another method to minimize the inherent risk (Ward, 2016). 

Conclusion

From the above report, it can be concluded that Wesfarmers completely complies with the ASX Corporate Governance principles. Its CG statement discloses proper details of the roles and responsibilities of its board of directors and management. Also Wesfarmers is mainly associated with inherent risk which can be reduced by following the discussed ways or methods.

References

Asx.com.au. (2014). Corporate Governance Principles and Recommendations. [Online] Available at: https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf [Accessed 30 April 2018].

Deloitte Australia. (2017). 2017 set to be ‘fascinating’ year for Australian retail | Deloitte Australia | Global Powers of Retailing 2017. [Online] Available at: https://www2.deloitte.com/au/en/pages/media-releases/articles/2017-set-to-be-fascinating-year-for-australian-retail-240117.html# [Accessed 30 April 2018].

Financials.morningstar.com. (2018). Balance Sheet for Wesfarmers Ltd (WES) [online] Available at: https://financials.morningstar.com/balance-sheet/bs.html?t=WES&region=aus&culture=en-US [Accessed 30 April 2018].

Financials.morningstar.com. (2018). Income Statement for Wesfarmers Ltd (WES). [Online] Available at: https://financials.morningstar.com/income-statement/is.html?t=WES&region=aus&culture=en-US [Accessed 30 April 2018].

Merna, T. and Al-Thani, F.F. (2011). Corporate risk management. 2^nd ed. England: John Wiley & Sons.

Ward, S. (2016). The Changing Face of Compliance: Managing Regulatory Risk. New York: Routledge.

Wesfarmers.com.au. (2017). Annual Report 2017. [Online] Available at: https://www.wesfarmers.com.au/docs/default-source/reports/j000901-ar17_interactive_final.pdf?sfvrsn=4 [Accessed 30 April 2018].

Wesfarmers.com.au. (2018). The Wesfarmers Way. [Online] Available at: https://www.wesfarmers.com.au/who-we-are/the-wesfarmers-way [Accessed 30 April 2018].