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The corporate governance in UK is governed by the Combined Code (1998) which encapsulates the Cadbury, Greenbury and Hample codes.
THE CORPORATE GOVERNANCE EVALUATION FOR BURBERRY
Cadbury and Greenbury Combined Code
Compliance by Burberry
Roles of CEO and Chairman should be separated
John Peace (Chairman) and Angela Ahrendts(CEO) have duties that clearly defined in the report.
A senior independent Non executive director should be identified in the annual report.
Philip Bowman is the senior independent NED. This is mentioned in the annual report.
There should be a minimum of three NEDs and NEDs should comprise not less than one-third of the board. The majority of NEDs should be independent.
Five out of eight members of the board are Non executive directors. Burberry identifies them as independent.
Nomination committees should be established comprising a majority of NEDs and chaired by the Board chairman.
Nomination committee has seven members and five of them are NEDs. John Peace is the chairman of the Nomination committee.
All directors should be required to submit themselves for re-election at regular intervals and at least every three years.
Burberry has the details of the election. In 2010, John Peace(Chairman) will retire by rotation and will offer himself for re-election. (Burberry Group Plc Annual Report 2010: p 62)
The remuneration committee should consist of independent NEDs.
The committee has five members, all of them are independent NEDs. (Burberry Group Plc Annual Report 2010: p 71)
The remuneration report should be on the name of the Board.
The group complies with code (Burberry Group Plc Annual Report 2010: p 71).
Audit committees should consist of at least three NEDs, the majority of whom should be independent.
There are five members of audit committee and four of them are independent non executive directors.
Accountability and Audit
The directors should report that the business is a going concern.
The Group's objectives when managing capital (defined as net cash plus equity) are to safeguard the Group's ability to continue as a
going concern in order to provide returns to shareholders and benefits for other stakeholders.
The company should indicate level of proxy votes logged on each resolution proposed at Annual General Meeting.
The voting results of 2010 AGM are available on the website. The information includes the proxy votes logged.
Companies should propose a separate resolution at the annual general meeting on separate issues.
At the Annual General Meeting in 2009, shareholders approved
resolutions to allot shares up to an aggregate nominal value of
£72,000 and to give directors authority to allot shares for cash
other than pro rata to existing shareholders. Many other resolutions were also passed.
Summary of corporate governance codes from Cadbury to Combined Code(1998) (Keasey et al, 2005:26-28)
The Board is responsible for the governance and smooth internal functioning of the company. It controls the performance of the company. The Board has eight members: the Chairman, the CEO, the Executive Vice President-Chief Financial Officer and five independent non-executive directors.
The roles and responsibilities of the members of the board are decided collectively by the Board. The Directors are provided about the major on-going activities of the group through briefing on particular issues, meetings and presentations. The Chairman and the Company Secretary are responsible to make the information reach the Directors' which would help in proper decision making. Apart from the Board, there are Audit committee, remuneration committee and the Nomination Committee.
The non-executive members are the part of the audit committee. The audit committee has several functions. It reviews financial statements of the group, the internal audit and the risk management system. It makes recommendations for the appointment of external auditors.
The Board nominations are recommended to the Board by the Nomination Committee. The directors are elected by the shareholders at the Annual General Meeting.
To have a highly effective form of governance, the directors are informed thoroughly through induction packs that guide them about the key Group policies and information on corporate governance matters.
The directors can seek advice of the Company Secretary and the senior management. The directors can also appoint external consultants for independent professional advice but at their own risk.
Burberry Group should present an understandable assessment of the Group's position. The group has issued a statement which proves that it complies with the code regarding the Group's status as a going concern.
The group should also present a report of the auditor. The following can be considered
The financial statements and the Director's Remuneration report has been audited by PricewaterhouseCoopers LLP. 'In the opinion of the auditor the group financial statements have been prepared in accordance with IFRS as adopted by the European Union. They have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS regulation. The group financial statements give a true and fair view of the state of the group's affair' (Burberry Annual Report 2009-10).
Burberry has an internal control system which is designed to manage the risk of failure to achieve certain business objectives. The audit committee has reviewed the effectiveness of the key procedures that provide the internal control. Burberry has confirmed that internal control system is in the guidelines of the Revised Turnbull Guidance code also called the combined code.
The Group Risk Committee of management evaluates the progress towards the achievement of business objectives by financial and non financial key performance indicators. This forms the part of Risk control and Risk assessment. Considering the fluctuations in foreign exchange currency, the following actions were taken by Burberry.
Due to its high percentage of profit from Japanese licensing agreements, the group is exposed to Yen to Sterling exchange rate. The group is also expanding in Europe and the United States and thus makes the group vulnerable to Euro to Sterling and US Dollar to Sterling exchange rate. The group uses forward exchange contracts to hedge its exposure and thus minimizing the risk of extensive loss.
The derivative financial assets are shown in the balance sheet of Burberry annual report. The derivative financial assets for 2010 were £2.4 million (including current and noncurrent assets) and the derivative financial liabilities for 2010 were £ 0.2 million. The hedging reserves of £ 1.1 million were subtracted from the capital reserves in the Balance sheet. This shows that Burberry was highly prudent in regard to the fluctuations that take place in world economy.
Burberry has stated in the notes that it does not hold any collateral as a security. The Group has no significant concentrations of credit risk. It has policies in place to ensure that wholesale sales of products are made to customers with an appropriate credit history. This is a risk control procedure that Burberry follows to minimize the anticipated risks.
The remuneration policy is highly essential to attract and retain skilled employees in the organization. The remuneration for the top level executives is benchmarked against main competitors. Burberry has several share schemes such as long term incentive arrangements such as 'The Burberry Exceptional performance Share plan' and 'The Burberry Senior Executive Restricted share plan' (Burberry Annual Report 2009-10).
The remuneration committee members are the non executive directors of the Board. A director is not involved in the discussion of his/her remuneration and the committee has the prerogative to decide the remuneration. The committee sets the remuneration of the executive directors which includes the pension rights and compensatory payments.
RELATIONSHIP WITH SHAREHOLDERS
Other extremely necessary action in the corporate governance is the relations with the shareholders. The company communicates with its institutional investors frequently through formal meetings, informal briefings and conferences.
Burberry organizes an Annual General Meeting which gives the shareholders to voice their opinions. In 2009, the directors, the Chairman of the Board and the chairmen of each of the committees were present in the Annual General Meeting to answer the questions from the shareholders. This proves that Burberry followed the corporate governance code as per the code of Cadbury Report.
JPMorgan Chase and Co, Blackrock Inc, Massachusetts Financial Services Company are some of the major institutional investors. 'Both Cadbury and Hampel report expect institutions to take on the role of large shareholder, who will monitor company management on behalf of smaller shareholders' (Keasey et al, 2005: 67).
Burberry is committed to high standard of corporate governance and considers it necessary for the smooth functioning of the organization and maintaining the confidence of the investors. Burberry has confirmed that throughout the financial year, it has complied with the provisions set in UK Combined Code on Corporate Governance. As stated in the Annual report of Burberry 2009-10, Burberry complies with the laws and the Board monitors the corporate governance framework. Adherence to the rules of the code can be seen in the notes of the financial statements.
Risk Management involves identification of risks and the steps taken by the firm to overcome them. The SWOT analysis on Burberry and the overall luxury goods industry revealed the following points:
'It's often argued that the luxury goods marketplace is immune to the normal vicissitudes faced by other sectors. Consumers with 'real' money to spend don't feel the cold winds of recession the way that the average household does' (Managing the risks of counterfeit products: PricewaterhouseCoopers, 2007).
'Asia Pacific and Europe continued to deliver double-digit like-for-like sales growth, with Hong Kong, the UK, Italy and France among the best performing markets.' (Burberry's momentum continues as it reports strong sales and revenues, Oct 2010)
'20% of UK consumers own at least one genuine luxury good' (Managing the risks of counterfeit products: PricewaterhouseCoopers, 2007). This is expected to increase because luxury markets target the rich and ostentatious consumers. This can help Burberry penetrate deeper in the developing countries market where the population is getting richer.
'To own the same clothes and accessories as their celebrity icons is also accelerating an enormous growth in cheaper, counterfeit goods that is costing the luxury goods industry millions in lost sales and damage to their brands' (Managing the risks of counterfeit products: PricewaterhouseCoopers, 2007 ). Burberry has a high risk of counterfeit products. Burberry can have a high setback in sales if large numbers of counterfeit products come in the market. Moreover, the reputation of the Burberry would be in stake because the middle and low income groups will buy counterfeit Burberry products from the market.
'Burberry is dependent on the strength of its trade marks and other intellectual property rights'( Market and risks, n.d). Burberry's trade marks and other proprietary rights are fundamentally important to the success and competitive position of the business and are intrinsic to maintaining brand value.
'A whole new breed of consumer magazines now exists to show not just photographs of celebrities and the clothes and accessories they are wearing but also advice on where affordable versions of those items can be bought on the high street'(Managing the risks of counterfeit products: PricewaterhouseCoopers, 2007 ). This is again a big threat to Burberry.
'Since 2004, the global luxury goods market had grown by around 8% per annum prior to the economic downturn in late 2008. In 2009, it is estimated that the global luxury market declined by around 9%, as consumer confidence and spending fell. Industry analysts expect the sector to show some recovery in 2010, although not as high as the 8% seen prior to 2008' ('Burberry Group Overview', nd).
Other Risks and weaknesses
However there are certain risks that cannot be controlled such as fiscal policies, political regimes, tax and regulatory policies etc. Other factors that can be considered under Burberry's control are:
Over-reliance on key trading partners:
In order to reduce this risk, the group should look for alternatives and improve its supply chain management system. Effective supply chain management is highly essential as any shortcomings would have an immediate result on the final products distributed to the consumers.
Recession and economic crisis causes fewer people to travel. Decline in travel volumes has affected Burberry's business as many people buy luxury brands while travelling.
Burberry relies heavily on its key individuals on senior management. Their resignations will affect business heavily.