Accounting & Finance Assignment

Accounting and Finance Lu Shang

This essay is divided into three parts. Part one identifies the key term stakeholders and display different types of it. Following that, the reasons why stakeholders always have interest in business’ financial statement will be carried out. In the second part, it will give several definitions about corporate governance, and then gives some example of the conflicts between shareholders. Eventually, take Mark and Spencer as example, the essay will explain how corporate governance work in the real life in more details

There are many groups of people who have an interest in financial or in the performance of a business, these different groups are known as stakeholders. They always have different purposes by looking at the company’s financial statement. The essay will explain the reason in the blow.

Shareholders-These people have a clear financial interest in the performance of the business. They have invested money into the company through purchasing shares, and expect the company to grow. As a result, that they can get good feedbacks on their investment: Firstly, by rising in the share price, so they can sell their shares at a higher price than the purchase price. Secondly, based on the level of profits for the year, the company issues a portion of this to each shareholder for every share that they hold.

Employees-This group also has an obvious financial interest in the company. Their pay levels and their job security will depend on the performance and the profitability of the business. If the company makes profits, then employees will think that the business will continue for a long time. However, if the company make a loss, it is possible that the company will make a redundant. Then employees will worry about the secure of the job. In addition, the employees who are going to retire will care about pensions.

Customers-Customers are vital to any businesses through they purchase goods and services, which provide the business with the majority of its revenue. Therefore, they will always pay attention on company’s reputation and financial situation. If company is profitable, customers will continue purchase their goods and services. Otherwise, they will change their loyalty to other companies.

This is a preview of the whole essay

Suppliers-Normally, the suppliers sell their products to company by credit. In order to reduce bad debts they always concern about the company pay back ability. if the company’s profit is negative growth, suppliers will think about not sell raw materials to them anymore. Because suppliers may not to get money back or take a long time, it also impact on their normal running as well. On the other hand, without flexible and reliable suppliers, the business could not guarantee that it will always have sufficient high quality raw materials.

The Government-Firstly, businesses have to pay a variety of taxes to central and local government, including Corporation Tax on their profits, Value-Added Tax (V.A.T) on their sales, and Business Rates to the local council for the provision of local services. Consequently, the government will concern about whether or not the companies pay the tax. Secondly, businesses also have to follow a wide-ranging amount of legislation, which is aimed at protecting the consumers, the employees and the local environment from business activity.

Potential investors-Potential investors always by looking at financial statements or corporate governance details to decide whether or not invest in this company. If the business running well, they may invest and get more dividends back, otherwise they will not do that.

Due to the demands placed on businesses by so many different stakeholders, it is no surprise that there are often disagreements and conflict between them. Consequently, the key term corporate governance has been carried out. Corporate governance can be identified as:

“The Cadbury Committee defined corporate governance as the system by which companies are directed and controlled.” (Davies and Pain, 2002, P.241)

“Corporate governance is concerned with the resolution of collective action problems among dispersed investors and the reconciliation of conflicts of interest between various corporate claimholders”. (Internet source 1)

“Corporate governance is one of the critical issues in business today. For companies, good governance means securing access to broader-based, cheaper capital. For investors, a commitment to good governance means enhanced shareholder value. For both, good governance equals good business”. (Internet source 1)

From the above concepts, we can firstly understand the importance of the corporate governance. It’s not something we can ignore, but something we should put our most notice on, because it affects the interest of both sides: Investor and current shareholder, and further effects directors and all employees in the company.

Then how to get good governance? The key is trust and being honest. All the key persons in the board should trust each other, while being responsible to what they are doing. By doing this, the communication will be much clearer and what they have done can be filed to show investors.

Some of the more common areas of conflict are:

Corporate governance helps to control conflicts between directors and shareholders. Profit maximisation is often the most important objective of shareholders. As a result, they can get large dividend payments and can sell their shares for a high price. However, it is far more likely that the directors of the business will aim to profit satisfy rather than profit maximise. This conflict between these two groups is often referred to as divorce of ownership and control.

Customers are unlikely to remain loyal and repeat purchase from the business if the product that the have purchased is of poor quality or is poor value for money. More customers are prepared to complain about the quality of products or other aspects, and the business must ensure that it has in place a number of strategies designed to satisfy the disgruntled customer.

Suppliers are often quoted as prompt payments complaining from businesses for raw materials deliveries. If this became a regular problem, the suppliers may refuse credit to the businesses or may even cease all dealings with them. Also, many businesses have been known to complain about the late raw materials and components from suppliers deliveries, and the dubious quality of the parts once they have been inspected.

The Corporate governance structure in Marks & Spencer, included Audit, Remuneration, Nomination, and Corporate Social Responsibility Committee.

According to their corporate social responsibilities, their determination is to provide employees good working conditions, and take responsibility for product quality by dealing directly with manufacturers and to make local communities better places to live and work. In addition, Marks & Spencer has had a consistent record of success and profitability until recently when they were suddenly hit by falling sales. Their relationship with suppliers and employees can be described as poor. Such poor practice coincided with a period of decline sales for M&S. In order to recovery from that, they have looked again at CSR heritage and tried to make it fresh, relevant and effective.

In order to reward shareholder, M&S have to increase profit, if there is a failure to make profit, then it leads to loss of confidence in the business, this is particularly among the shareholders that is why, it is important for them to keep the shareholders happy. The chairman and executive Luc Vandevelde said that "while providing a more appropriate capital structure by returning £2 billion to our shareholder." If M&S can return £2 billion to their shareholders, then I would say that they are successful in meeting their objective. The way Mark and Spencer shareholder receive their shares, is by being given yield this is the rate of return to the shareholder paid in the form of dividends, so the higher the yield, the more money the shareholder earns.

To sum up, this essay has talked about the reason why six stakeholders have interest in company’s financial statement. And then, it also displayed three definitions for corporate governance with my understanding, and the conflict between stakeholders. Finally, according to the case Mark and Spencer, the discussion about the corporate governance in the real work will be carried out.

Sometimes, in the business world, strong labor force doesn’t necessarily make good outcome. One thing to be the barrier is the poor governance. It’s always something to think and to do when many people want to work together. How can they cooperate? What’s the direction they should go toward? Can they be confident with the company’s future when they are working? This kind of questions more or less is decided by the governance. If the governance is managed poorly and not so consistent, the many people’s work will not be added together, but to minus to each other.

From the outside of the company, strong corporate governance makes the company looks reliable from the investor’s point of view.