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The topic I have chosen for my Research and Analysis Project is Topic 17 - The Quality of Corporate Governance within an organization and the impact on an organization's key stakeholders''. The recent Corporate Scandals and apparent increase in Corporate Fraud, specifically Enron, Arthur Anderson and Barings bank, (LSBF 2009, p.12) have led to an increased responsibility of companies to adhere with corporate governance principles. It aims to highlight the effect I can possibly have on a company's key stakeholders.
Corporate Governance can comprehensively be defined as the ''System by which companies are directed and controlled'' (Cadbury Report s2.5, 1992). According to Organization of Economic and Corporate Development (OECD),
'' Corporate Governance involves a set of relationships with company's management, its board, shareholders and other stakeholders. Corporate Governance provides the structure through which objectives of the company are set and the means of attaining those objectives and monitoring performance are determined '' (OECD Principles of Corporate Governance, Preamble 2004)
The Company chosen for the analysis is GENERAL ELECTRIC INTERNATIONAL (hereon referred to as GE Intl.). It is an American based Company which focuses towards the infrastructure and finance to meet today's needs and growing demands in healthcare, information technology etc. Its operations are widespread and the company offers businesses in Lighting, transportation, industrial products, power transmission and medical equipment. GE started off with an innovation of Electric Light Bulb by Thomas A. Edison and his company in 1878 which later merged into General Electric Company later in 1892. It has a vast Global business and has been in operation for over 125 years! GE employs more than 300,000 employees worldwide and operates in more than 100 countries across the Globe. (Dave Mote, n.d).
Reasons for choosing the topic:
The reason I chose this topic was mainly due to my previous knowledge in this area. The knowledge and concept I acquired regarding this topic in my previous ACCA papers specifically F8 and P1, motivated me to dig in deep in this business area. Moreover due to recent corporate financial failures started in 2000, also urged me to explore the relationship between Corporate Governance and the performance of the organization and how it leads to success of the company by adhering to best practices.
Corporate Governance is an important issue in today's world and has a vast impact on the operations of different businesses around the world. It is important for companies to take its significance into consideration as it may affect company's performance and its impact of the stakeholders. This made me realize its importance and how I might use this knowledge to enhance my future opportunities and excel in my career.
Reasons for choosing the organization
GE Intl. is a well-known organization around the world and has been in operation for many years. I was keen you know about the company's historical background and explore it futher.
I'm also aware of a number of electronic households that I used in my home are a product of GE, yet another reason for choosing and knowing more about this organization.
Moreover, my father is an employee in GE Pakistan so it was yet a again a good source for me to get to know more about the organization , its operations and policies, and gather as much information as I can to deepen my understanding about its governance structure and management.
Project Objective and Research Question
Under this section, project objectives will be set out aiming at the accomplishment of these objectives.
Here under are the objectives regarding my Research and Analysis Report:-
To carry out an analysis about the extent to which corporate Governance contributes to sound performance in GE.
To assess the level of flexibility and extent of the control environment in GE to contribute to good CG practices.
To evaluate the potential impact, of adopting such practices, on the stakeholders.
Analyze effect of Good Governance practices on company's financial performance.
To identify any non-compliance to the Corporate Governance Code and evaluate the reasons of non-compliance.
A research question is an important part of a research as it guides our arguments in a way to catch the interest of the reviewer.
Following could be the possible research questions for this RAP:-
Is GE following the Code of Corporate Governance effectively?
To what extent does the corporate management follows its Governance Principles and complies with Codes of Corporate Governance and best practice?
Is GE effectively identifying and fulfilling the needs of its stakeholders?
What impact does the Corporate Governance principles might have on the stakeholders identified?
Overall Research Approach
My research is based on the collection of information from different sources such as internet, books, journals, newspapers etc.
A comparison is also carried out with the Company's compliance with Sarbanes Oxley Act "the Act" as well as New York Stock Exchange (NYSE) Rules with Company's own practices.
The Research is mainly based on the secondary source of information as it was relatively easier and cheaper to carry out. Other than that, the primary source of information was hard to collect due to certain limitations discussed further in the project.
There will be less reliance on the Information obtained from General Electric's website. However, it will only be used to analyze it's compliance with 'the Act' and NYSE Rules on corporate Governance.
There is also some use of Tables, Pie charts and Smart Art to help make information more meaningful and allow the reader to understand important areas of research.
Since the topic I chose tends to involve more of non-financial analysis, the research I undertook also involves a bit of financial analysis as well. For instance, Ratio Analysis was used to compare information between companies as to how the financials are affected because of compliance with the Corporate Governance Principles.
Information Gathering and Accounting/Business Techniques
Sources of Information
The two widely known sources of gathering information are Primary and Secondary Sources of Information. It all depends on the researcher as to which source is appropriate to use since there are some limitations attached to it as well. The following are the two main types:
"Primary data or information is the information that is collected for the first time, used for solving the particular problem under investigation". (Lamb, Hair and McDaniel, 2011)
This data or information can be collected through interviews, intensive observation and surveys (Jennifer Neel, 2011). It focuses on key issues and enables the researcher to present unbiased and original data. However this type of data collection is time consuming, costly and may cause difficulty to evaluate and analyze since the amount of data is very large (Blurtit, 2012) and due to these reason, primary source of information was not used in the research I carried out for this project.
Secondary data are the data gathered and recorded by someone else prior to the current research. These usually are historical and are already assembled (Zikmund and Babin, 2006). For example, the information available on the internet is primarily collected by someone else but used by the researcher as secondary information.
In my research, secondary sources of information were extensively used to gather information due to restricted time and commitment with studies that restricted me to carry out primary research. I focused on the use of electronic sources such as internet as well as some text books and different articles were also referred to carry out the research.
Methods used to collect information
Internet was one of the major sources used to gather information for this project and was widely used to support the objectives of this Research. Many well-known websites and search engines were used to acquire information such as Google, Yahoo etc. Due to time limitations and to quicken the process of research, internet as well as other e-sources was used to carry out the research.
Moreover, Information required about the organization- GE, such as history, financial statements, annual reports and Governance Principles etc. were obtained directly from the company's official website.
Library was also one of the methods used to collect limited information. Information relating to the Corporate Governance, in general, was gathered by exploring different books, especially ACCA study text books. Moreover, my University's library : Tun Hussein Onn Library, has e-search facility as well that allowed me not only to gather required information but also made the task quite easy and quick. Since the research topic was already covered in my previous studies, I had the knowledge about the chapters in text book which save quite a bit of time.
GE's Annual meeting and proxy statement was easily available from the company's website and was used to get know how about the company's corporate Governance Practices.
Limitations of information gathering
Since the research was undertaken using mainly the secondary resources, it had some limitations as well to deal with. Some of them are as follows:
Inaccuracy of Information
As it is known that secondary data is collected by the person other than the researcher himself, such information is likely to have errors and might not be accurate. Hence, to avoid any chances of inaccurate information, I preferred using information available in GE's Annual Report and the general information from the official website. To ensure that the information is precise, GE retained KPMG (Klynveld Peat Marwick Goerdeler) to audit their consolidated financial statements for the year 2011 (Proxy Statement, 2012), which also enhanced the reliability of the information used in this research.
Biasness of Information
It is pretty much likely that the information gathered from, e.g. secondary sources, may well contain biasness due to the fact that the author of the information may choose to depict a better picture of the subject being researched about. It was important to for me to take care of only the information that was free from biasness and was consistent with my research questions so I could use it in my research work. Thus, reliance was not placed solely on GE's official website.
Obsolete & Outdated information
Information taken from secondary sources might have been collected a long time back and may lead to obsolescence due to the dynamic business environment. This would perhaps cause a limitation to my research work in such a way that the information I used from studying course books and other relevant books available in the library may contain old and outdated information. In today's environment, things are changing rapidly and it is pretty much likely that in these circumstances even the most recent information is a bit hard to find.
Ethical Issues during Information Gathering
Oxford Brookes University requires all the students working on their Research and Analysis project to comply with the University's Code of Practice 'Ethical Standards for Research, involving Human Participants' (ACCA Global, 2012). Section 3 of ACCA rulebook stresses upon the code of ethics and conduct and emphasizes all the members to apply ethics fundamental principles in practice. The five principles include integrity, objectivity, professional competence and due care, confidentiality and professional behavior (Code of Ethics, 2011).
Integrity and Plagiarism
Integrity is one and rather important cause of plagiarism. It requires us to be honest, fair and truthful in all our dealing and business relationships (Code of Ethics, 2011).
Literally, Plagiarism can be defined as "pilfering of a person's ideas or words and using that information as your own" (Business Dictionary, 2012). It was deemed necessary for me to prepare my research and Analysis project with sufficient information and provide relevant references to avoid the threat to plagiarism. The De Montfort University Student Regulations (DMU Student Regulations 2009, p.03) states that "plagiarism is the significant use of the work and knowledge of other individuals and submitting that information as if it was their own work". In order to cite proper references, I was required to use the Harvard System of References in my project. Referencing is important for a number of reasons but essentially "To acknowledge other people's ideas" and "To allow the reader to locate the cited references with ease and help them to evaluate the interpretation of those ideas" (ACCA Global, 2012).
Many organizations are hesitant to provide all the information to the public and have to keep some crucial information confidential. However, being a student I did not face any such ethical issue regarding the collection of information for GE since the research was inclined more towards secondary information.
Apart from the above issue, it is even more important to have a set objective and a proper frame of mind to undertake any research and analyze information without any hindrance of ethical dilemmas. Hence, to ensure that everything stays on the right path, I based my research on the information collected from authentic and reliable sources that helped me evaluate the relevant information accurately and effectively.
Accounting / Business Techniques used and their Limitations
Following the Code of Best Practice
Sarbanes-Oxley Act of 2002 (SOX)
New York Stock Exchange Listing Requirements (NYSE Rules).
GE's Governance Principles.
Compliance with Securities and Exchange Commission (SEC).
However, there arose a number of limitations as well as to how the principles were applied and complied with by GE. GE's Board of Directors ''Recognizes that there is an ongoing and energetic debate about corporate Governance" (GE, 2012). The company has its own set of Governance Principles and allows an annual review of these principles instead of having rigid and unchanging Rules.
Use of Mendelow Matrix
"Mendelow (1991) developed a framework to help analyse stakeholder power and interest" (Norton, 2008). "Mendelow Matrix helps to identify the relationships that should be built between different stakeholders" (Dalton and Best, 2006). The stakeholders' position can be identified using Mendelow Matrix and it depends on mainly two factors: Power and influence. For detailed analysis and correct identification of GE's Stakeholder, this technique was brought into use.
However, there's a possibility that the number of different stakeholders in a particular quadrant could be more than one which can result in conflicts in decision making process and hinder progress (Campbell, 2008, p.46). Additionally, it emphasizes more on the one's which have high power and interest and those stakeholders with less influence are simply ignored.
Figure 1 below illustrates the Mendelow Matrix.
Figure 1: Mendelow Framework
(Mendelow Framework cited in Campbell, 2008, p.46)
Despite the fact that my topic involves qualitative analysis, narrow application of ratio analysis was required to justify whether good corporate governance contributed to good performance of GE, hence limited number of ratios were used.
However there are some limitations attached to ratio analysis. For instance, frequent change in price levels may affect the validity of of ratios for different time periods. Also, similar businesses use different accounting procedures which can make comparison with other companies difficult as well as misleading (Accounting for Management, 2012).
Results, analysis, conclusions and recommendations
General Electric International Inc.
General Electric is a listed company in New York Stock Exchange and has its headquarters situated in Fairfield, Connecticut USA. Since the organization is American based, GE int'l is required to follow the US corporate Governance principles. Such rules and principles have been stated in the Sarbanes-Oxley Act of 2002 (SOX).
The analysis on this research focuses on the CG principles followed by GE Int'l under SOX and company's compliance with NYSE and SEC respectively.
Compliance with Corporate Governance Framework:
Sarbanes-Oxley Act of 2002 ("the Act")
The Sarbanes-Oxley Act of 2002 ("the Act") amends the U.S securities and other laws in a significant ways. Due to the fall of Enron, Arthur Anderson and WorldCom etc. there was a need to pass an Act that could change and standardize accounting and other irregularities in response to the public outcry. The Act changed corporate reporting, regulations for audit firms, Corporate Governance as well as the responsibilities of directors and officers. The act has provisions that have been enhanced by the Securities Exchange Act of 1934 ("The Exchange Act"), this will be scrutinized later in the analysis (Lander, 2003).
"The Act is mandatory and is required to be followed by all US and non-US listed Companies. Compliance with the legislation need not be a daunting task, like every other regulatory requirement it should be addressed with thorough study and proper analysis" (Sox Law, 2006). The Securities and Exchange Commission's report (SEC, 2009) on SOX states the importance of 'section 404' which is viewed to have a high cost of compliance as compared with other regulations which tend to have a more flexible principles based approach.
Keeping everything in view, the Act did bring some advantage to the companies in the U.S as stated in (Forbes, 2003) that SOX developed the Public Company Accounting and Oversight Board (PCAOB) "to ensure the accounting statements are audited according to the independent standards". It is certain that compliance costs have increased but the act did have some positive effects on the governance as well. (Forbes, 2003)
GE also stated in their Annual report of 2007 in relation to the adoption of corporate governance principles that the audit Committee within GE reviews the requirements under the section of 'the act', as explained above, as well as its compliance with GE's own policies and other applicable laws (GE Principles, 2007).
Sarbanes Oxley is a rule based approach and has more stringent requirements as compared to the UK Corporate Governance Code, reason being there is more flexibility in compliance under UK CGC as it is the principles based approach of Governance.
Chairman and CEO:
Jeffery R. Immelt is the current chairman and CEO for GE International succeeding John F. Welch, Jr. in 2001 and has retained the title since then (GE Leadership, 2012). The role of chairman has been clearly stated in the UK Combined code (Financial Reporting Council 2010, p.10) as being responsible for sound leadership on the board as well as ensuring effectiveness of the role. According to Garten (2001, p.5) the chief executive officers or the "top executives, lead the organizations with enormous reach".
GE tends to stick with this ideology of having single person being the CEO as well as the chairman of the board. Even though many companies in the U.S are splitting the roles of CEO and Chairman, starting from 27% in 2004 to 40% until 2011, and gaining momentum, GE has not yet split the roles and considers dual role to be more effective. As per the requirements of U.S Securities Exchange Commission (SEC), rational reasoning is required to be explained to the investors by all public Companies for allowing a person to handle both the roles.
Despite the fact that proposals were made by the potential shareholders against the dual leadership role, the board believes, stated in their corporate governance principles, that the combined role provides an effective structure that ensures effective oversight by the independent board than an independent chairman (Proxy Statement, 2004). This, at the same time, also ensures the fulfillment of explanation required by SEC to be provided to the shareowners of the company.
Moreover, shareowners are of the view that one person serving both positions might also hinder the board's ability to monitor CEO's performance. In response to this, the board believes that the company's overall corporate governance principles and practices serve to minimize any potential conflicts that may arise due to the combine role of chairman and CEO. They further believe that one person can lead and speak for the company and the board more effectively and efficiently (Proxy Statement, 2012).
Thus, it is important for companies to show independence and objectivity in their organizational structure, therefore GE does not seem to follow the ideology of independent roles of CEO and chairman having stated legit reasons under the law of Compliance.
Director's independence has grown into importance after the collapse of Enron and other major firms in the U.S. SOX has laid great importance on the director's independence and enforces them to be separate from the management to prevent biasness and other management abuses from occurring. According to Dravis (2007), independent directors can provide a better oversight to the company and a good opportunity to overcome 'wishful thinking and loss aversion influences' on the decision making.
The NYSE rules, section 303A, also require the listed companies to have majority of independent directors to avoid any conflicts of interest on the board. Additionally it requires disclosures in the company's form 10-K (to be filed with SEC) and any non-compliance must be specifically explained (NYSE, 2003).
GE has a healthy set of Governance Principles that also cover the independence of directors. The company seeks to have at least one third of its board to be independent. The guidelines established by GE also assist in determining independence according to NYSE listing rules as well. In this respect, GE complies with the SOX guidelines on the board independence stated in Section 101 of the Act. Moreover the company believes in transparency of its policies and operations and demands disclosure in its proxy statements upon compliance with NYSE Listing Rules (GE Governance, 2012).
The number of Directors on the board of GE ranges between 13 and 17 spread across the sub board committees. They are elected annually through a nomination process in the annual meeting with shareholders. Currently the board consists of 16 Independent Directors of a total of 18 under GE's independence guidelines and NYSE guidelines except for Mr. Jeffrey Immelt who is the chairman of the board, CEO as well as Public Responsibilities Committee Member (GE Independence, 2012).
This however impairs board director's independence of operating multiple roles, hence leading to accountability issues. As discussed earlier, GE and Mr. Immelt should consider this fact and should act independently in company's operations.
Board Committees, Composition and its practices:
Since the US Corporate law recommends for a single board structure in the listed companies in U.S, GE adopts the same unitary board structure without any supervisory or management board. The Co.'s board consists of a number of sub board committees established to perform specific operations. This is illustrated in the Figure below.
Figure 1: General Electric Sub Board Committees, (GE Committees, 2012)
All the committees are chaired by respective persons and hold meetings in conjunction with the full board (GE, 2012). Section 4 of GE's Governance Principles states that the Committees are delegated with certain responsibilities to carry out the tasks effectively and "assist the board in overseeing reputational risks" (GE Governance s.4, 2012).
The board of GE consists of personnel with highest level of integrity, values and integrity which is in line with the Section 10(e) of Sarbanes-Oxley Act of 2002 which states that the board must have 5 individuals who possess a certain level of integrity and demonstrate commitment in the best interest of investors.
The Following Pie chart shows the board composition of GE.
Figure 2: Board Composition of General Electric
According to section 5 of GE's Governance Principles (2012), board directors are nominated year by year by its shareowners. It is important for the board to appoint members who have the ability to lead GE's Business in the light of Success and continuous Growth.
It is therefore necessary to have personnel that have the right balance and mix of skills, experience and knowledge to serve and lead the board effectively and ensure company's smooth progression in the long run.
Board Meetings and Attendance:
Types, composition(pie charts), independence, appointments, consult proxy statement
No. of Meetings (tables). & attendance (acc to NYSE, sec, sox, FRC report?)
Refer to BY-LAWS file
Directors in Committees and indep compliance with NYSE,FRC and SOX
In addition to and in relation with the Corporate Governance Principles adopted by GE, the company also lays great emphasis on the ombudsperson process which adds to the integrity of the company. The company has the policy to take disciplinary action against the employees who do not report the suspected or known concern to the board. Such issues are mainly reported to the Audit Committee (GE Ombudsperson Process, 2009).
This adds to Corporate Governance in such a way that it enables an organization to imply good practices within the culture and ensures effective governance takes place. Likewise, having this culture - ethics are given much importance that it allows the employees to act professionally by demonstrating honesty and trust .Moreover; it enables the company to help employees raise questions with confidence thus adding to overall integrity. This analysis further relates to the objective (2) of this project by ensuring emphasis is laid on the effectiveness of company's internal control environment.
The following chart categorizes the concerns raised year by year and shows the company's ability to mitigate the number of misconducts throughout the five year period by taking disciplinary actions.
Fair Employment Practices
Conflicts of Interest
International Trade Controls
Security &Crisis Management
Business Records (T &L, Time &Attend)
Environment, Health &Safety
Routines, Documentation Internal Measurements
Controllership (Accounting, Fin. Reporting, Billing)
Working with Governments
Complying with Competition Laws
Other Integrity Concerns
Figure 3: Ombudsperson concerns by Area (reports per Policy), (GE Ombudsperson Process, 2009)
As this adds to ethics, section 406 of Sarbanes-Oxley Act of 2002 as well as Securities Exchange Act of 1934 requires the disclosure of ethical conduct of senior financial officers. SOX ("the Act"), defines code of ethics as the act that "promotes honest and ethical conduct, including the handling of actual or apparent conflicts of interest between personal and professional relationships" (SOX sec.406, 2002).
Hence it can be said that GE effectively demonstrates a culture of integrity and ethics, in compliance with SOX, through its ombudsperson process. However there have been some ethical acts by the company prior to the introduction of The SOX Act of 2002, but since the company complies with the current regulations, not much emphasis is laid on the past issues in this analysis.
Proxy Statement pg. 36
Comparison with competitors e.g. Siemens, Sony, Emerson
Any Compensation Disclosure req?
Whistleblowing can be defined as "an act of a person who overrides the interest of an entity he serves for the best interest of the public, by blowing the whistle publicly if he believes the entity is involved in an illegal or fraudulent activity" (Lewis, 2001)
Section 806 of SOX includes a provision from the United States Code which focuses on providing protection to the whistleblower. It includes mentioning of certain restriction on the acts of employers who may discriminate the employee in "terms and condition of employment" even if they do the lawful act ( )
Having a code of conduct and Underlining the culture of ethics within the organization constitutes greater level of Corporate Governance in the Company. GE has had this culture for many years and has policies regarding any GE's Conduct, accounting policies, internal controls or auditing matters. GE welcomes its employees to address the issues with the presiding director or the audit committee.
As discussed earlier in section 3.2.5 of this research, ombudsperson is one important process that GE adopts to allow employees report irregularities and their concerns to the management. However, having the process and a culture may not necessarily mean that everything is working up to the standards and everyone is following, it is however necessary to not allow any misconduct or involve in any illegal act that may give rise to whistleblowers taking action.
Moreover, not much importance was given to whistleblowing process before the Global crisis arose and the introduction of SOX Act when there no 'stringent rules' like the way SOX requires companies to follow today. GE avoided to get involved in illegal acts since then as the cost of compliance can be pretty costly to bear once not followed.
GE happens to have control over reducing whistleblower concerns in late 20th century but did have to face litigation and eventually pay damages in the mid-1992, amounting to $13.4m, for the illegal sale of Fighter Jets to Israel. The following path could be followed by the whistle blowers to raise any integrity concerns within General Electric International.
Figure 4: General Electric Concern Reporting Channel (The Spirit & The Letter,p.11 2012)
Hence, GE must have realized the importance of whistleblowers actions and what it could lead the company into. The strength of this process could be judged from the Ombudsperson Chart provided in the appendix as to how GE controlled and resolved the issues raised with time.
It avoided any such actions later on but certainly breached the rules of 'the act' for which it had to bear a heavy cost.
GE's audit committee holds the responsibility of review the financial reporting process whereas the management is primarily responsible for maintaining adequate internal financial controls for the preparation of financial statements (Proxy Statement, 2012). The committee consists of 6 members in total with Douglas A.Warner III being the chairman. Moreover the chair of the committee has the authority to pre-approve any audit or non-audit services on behalf of the committee if a single engagement exceeds $1m.
General Electric has been enjoying audit and other services from KPMG since quite a long time, in fact a 100 years! This has raised numerous issues in the media for attaining non-audit services from the same audit firm.
Sarbanes Oxley act of 2002 lays great emphasis on the rotation of audit partners every 5 years. Section 203 of this act enforces that it is against the law for an audit firm to provide audit services to the client if the audit partner has reviewed the audit, performed audit services, for the client in each of the previous 5 fiscal years of that client.
The Company also got away with a proposal which was supposed to be included in 2012 proxy statement regarding mandatory auditor rotation at the "industrial Giant" which was allowed by SEC not to take action against and simply remove from the statement, reason being the proposals are meant to deal with only "ordinary Business operations" (Blog) Thus, no action was taken.
It is stressed in the corporate governance rules and the lessons learnt from the fall of Enron and Arthur Anderson as to not repeat the same mistakes or practices that could result in future litigation and eventually collapse of the company. GE does not seem to abide by this rule and was faced with criticism and hefty fine amounting to $50 million to Securites Exchange Commission (SEC) for earnings manipulation through accounting- right under the nose of KPMG (Blog).
According to the Forbes magazine, an article was published in late January this year which stated that KPMG earned 10 percent of their total audit fees from General Electric in relation to tax services without having any direct or indirect connection to audit. However, as far as compliance with the rules under Sarbanes- Oxley Act is concerned, these services should never have been provided in the first place (Forbes, 2012). Even though they got away with the fine, such taxes and relations with the audit firms should not be adopted.
Therefore, in relation to objective (1) and (4) of this research report, it can be wisely said that GE did not comply with certain rules and regulations regarding audit which affects the degree of its Corporate Governance.
Code of Ethics
Objective (2) of this research can be related to this sub section as good ethics contribute to effectiveness in control environment. Having a culture of ethics in an organization enables it to take strict actions against any unethical act whether external or internal. As a company grows and becomes more powerful, as in this research General Electric's humungous business growth around the world, ethics become increasingly important (eHow, 2012).
It is also stated in section 12 of GE's Governance Principles that it has this culture of ethics and expects its officers and employees to act ethically at all times and follow their respective code. If there exists any conflict of interest or unethical behavior occurs, the directors are permitted inform CEO. Additionally, SOX also lays great emphasis on the ethical behavior as discussed earlier in Ombudsperson Process section.
The following list shows the clauses in GE's Code of Conduct which emphasizes on "obeying the applicable laws and regulations governing our business conduct worldwide"
Figure 5: GE Code of Conduct (The Spirit & The Letter, 2008)
Having said that, GE has had a good history of business ethics but at the same time there were some rough times when the company got involved in acts that were considered to be unethical. One of the ethical cases against GE was in 1999 when in Chicago, GE collected Debts from its consumers by unfair means and was ordered by law to reimburse them and this amounted to $147m! (blog)
Therefore, the analysis shows how it may affect the stakeholders, consumers in this case, and the governance in GE.
Relations with Shareholders and Disclosures
Disclosure is an important part of good corporate governance as it allows reduction in information asymmetry as well as more open communication and view of the company's performance is available to the shareholders. Sections 401-409 of Sarbanes-Oxley act also stresses upon enhanced disclosures by the company in various aspects including internal controls and other financial information etc. GE meets this requirement by filing disclosures to the SEC in its form 10-K. The most recent disclosures made by the co. according to NYSE includes (finance.yahoo !!)
It is equally important as appropriate disclosures to have strong relationship with the shareowners of the company as they may have an effect on the company indirectly by the power of their votes. GE believes to have a healthy relationship with all its shareholders and determines to have annual meetings for discussion of proposals and election of directors. Article 7 of the company's By-Laws also stresses on the frequent and timely meetings with the shareholders to ensure effective communication.
Moreover, GE also tends to have a succession plan for the position of CEO in its governance principles which is required to be reviewed from time to time. In case of succession, the board's initial target is to identify internal successor for the position of CEO, otherwise it maintains an emergency succession plan to execute in emergencies. Having said that, GE seems to "ignore" such 'rule' as well as the proposals made by the shareowners about the combined role of CEO and chairman every year. This has raised leadership concerns and furiousness amongst the shareholders that company does not seem to have any signs of succession of Mr. Jeff Immelt as the CEO in near future.
Thus, GE does comply with the disclosure and communication with shareholders requirements pretty well apart from the succession of CEO. Shareholders have raised concerns about this in almost every proxy statements but have need been voted FOR in the meetings.
Impact of CG practices on Key stakeholders of GE
Stakeholder is "any individual or a group of individual who can affect and be affected by the policies, practices and operations of an organization" (Polonsky, 2005). Considering objective 3 of my research report, key stakeholders of General Electric will be identified and the impact of Corporate Governance on these stakeholders will be discussed here under.
General Electric Stakeholders Analysis
Good Corporate Governance is likely to have a positive impact on the key stakeholders of a company as it is believed that the company is managed and run according to the respective governance principles.
Stakeholders play an important part in performance and running of every organization. It is importance for entities to clearly identify, classify and consider the need and wants of its stakeholders to ensure smooth progress in the market.
The diagram below illustrates the recognition of GE Stakeholders as to how they can be classified into external, internal and connected stakeholders.
Figure 6: Recognition of GE's Stakeholders
Furthermore, in accordance with objective (3) of this research, Mendelow's matrix is used as a business model to analyze the power and influence of the above stakeholders and place them in the matrix accordingly. This is illustrated below:
Figure 7: Mendelow Framework
The Matrix above suggests that GE considers its Directors, Customers and Majority Shareholders as the Key Players as they tend to have high power and high influence that may affect the decision making of the organization. GE offers great support to its customers and employees thus proving to be good 'Corporate Citizen'.
The positive effect of good corporate governance on different stakeholders ultimately results in a strengthened economy and a tool for socio economic Development (Articlebase,2008). Shareholders are the true owners of the company and can therefore enforce their power to affect company's decisions. GE shareholders majorly comprise of institutional Investors and Mutual Funds who have a shareholding of 53% (Yahoo Finance, 2012). Thus, Mendelow places GE Shareholders in Key Players quadrant due to their importance.
The layout below shows the no. of shares and their estimated values acquired by the top Institutional shareholders.
Number of Shares
Estimated Value* ($)**
VANGUARD GROUP, INC. (THE)
BlackRock Institutional Trust Company, N.A.
Capital World Investors
Bank of New York Mellon Corporation
NORTHERN TRUST CORPORATION
PRICE (T.ROWE) ASSOCIATES INC
WELLINGTON MANAGEMENT COMPANY, LLP
DODGE &COX INC
Figure 8: Top 10 Institutional Shareholders (Yahoo Finance, 2012)
* Value shown is computed using the security's price on the report date given.
**Currency in USD
Number of Shares
Estimated Value* ($)**
VANGUARD TOTAL STOCK MARKET INDEX FUND
VANGUARD 500 INDEX FUND
VANGUARD INSTITUTIONAL INDEX FUND-INSTITUTIONAL INDEX FD
SPDR S&P 500 ETF Trust
INCOME FUND OF AMERICA INC
DODGE &COX STOCK FUND
COLLEGE RETIREMENT EQUITIES FUND-STOCK ACCOUNT
SPARTAN 500 INDEX FUND
WASHINGTON MUTUAL INVESTORS FUND
Figure 9: Top 10 Mutual Fund Holders (Yahoo Finance, 2012)
* Value shown is computed using the security's price on the report date given.
**Currency in USD
Currently 2,621 institutions hold 6.02 Billion shares in GE whereas the shares held by insiders total up to 16.79 K currently (Daily Finance, 2012)
Corporate Governance can affect the financial performance of a company. The impact on the shareholders will be evaluated in terms of Profitability, EPS and Share Price of GE and the EPS and Share Price would also be compared with competitors to further analyze the impact.
The table bellows shows GE revenues over the five year period from 2008 to 2011.
Figure 10: GE Revenue from 2008 to 2012 (Daily Finance, 2012)
Figure 11: Analysis of GE revenue
*Due to the limitation of Full year financial information for 2012, quarterly sales are added together for the 9 month period ended 30 September 2012.
**The Amounts are presented in 'million USD.
Even though the graph shows decrease in revenue, GE had a total net income of $14.366 billion in year-end 2011. This is an increase of 25.6 % since December 2009 due to strong market performance in different sectors around the world.
Earnings per share of GE are compared with its Competitors as well as the industry average.
Figure 12: Analysis of EPS with industry and competitors (Daily Finance, 2012)
GE's Share price is compared with the industry average as well as the other competitors here under.
Figure 13: GE share price growth over 5 years (Yahoo Finance, 2012)
Employees are amongst the key stakeholders of an organization. They play an important role in the rise and fall of any organization. GE keeps its employees needs in view and tries to get the best of them by motivating them and providing a good workplace environment. GE expects its employees to act with integrity, comply with GE's Policies, and act to enforce compliance and avoid any violations (The Spirit The Letter, 2008)
Workplace safety has been given great importance in GE and tries to get involved in the activities that prevent any workplace injuries and provide a safer working environment to its employees. It considers the health and safety of its employees as a 'law' and believes it to be the right thing (The Spirit The Letter, 2008).
However, there had been a few cases against GE in respect to the Safety of employees in the past where it violated at least 858 rules of the occupational Safety and Health Administration (OSHA). There were some serious injuries with substantial probability that death or physical harm could have resulted. GE ensured that its Environment, Health and Safety (EHS) goals are achieved and a safe workplace environment is provided.
It can be said that the better the Corporate Governance is in an organization, the more committed the employees will be. To support this, GE introduced different employee programs which include; Matching Gifts, GE STAR Awards and United way, with a view of supporting and educating GE employees and retirees (GE Foundation, 2012)
Therefore, the overall commitment of GE's management towards its employees shows good sigh of quality Corporate Governance practices within GE and its concern towards its employees.
+ GE recalled 3.1 million dishwashers beginning in 1999, stating that a side switch could melt and ignite, presenting a fire hazard.
+ In April 2001, New York State AG Eliot Spitzer won a ruling in state court that, in connection with the dishwasher recall, GE falsely told consumers the problem could not be repaired, prodding customers with partial rebates to buy new GE dishwashers.
The Spirit and the Letter pg. 16
Society and Environment:
The Spirit and the Letter pg. 40-44
Â GE agreed to pay $15 million in damages and to conduct a number of projects designed to acquire or enhance wildlife habitat.