ACF528 Corporate Governance And Ethics

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ACF528 Corporate Governance And Ethics

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ACF528 Corporate Governance And Ethics

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Course Code: ACF528
University: Ulster University

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Country: United Kingdom

Questions:

As regards the analysis of the case, each student is required to address the following discussion questions:1.What were the main corporate governance issues within this case?2.What does the theoretical, academic, professional or legal literature/regulation say on these issues? Were such events or features of your case consistent with or in contrast to the theoretical, academic, professional or legal literature/regulation?3.If the company/organisation addressed these issues, was the response appropriate? Did it address the fundamental issues at stake? If a response has yet to emerge, what would you expect a suitable response to be and why? 4.Could similar events happen again in the UK today? Why? Do you think the current system of corporate governance and accountability in the UK is sufficient to deal with these issues? 5.What were the general lessons learnt from this case? What have you as a student learnt about governance, risk and ethics from this case?Would you invest in this firm? Give the reasons for your decision.

Answers:
1. Corporate governance focuses on elevating the shareholders’ value thereby magnifying the overall welfare corresponding to the stakeholders as well as the society. On the other hand, business ethics refers to normative term that mainly focuses on the behavioural and the ethical approach of the human beings. Nonetheless, ethics brings into discussion the question about what is apt and what is incorrect concerning business scenarios and situations. The assignment is a case study analysis where Primark has been selected as the chosen organization. Significant corporate governance issues such as Rana Plaza incident, procurement of cotton, use of cheap labour and human trafficking, child labour, auditing the suppliers, the company’s board of directors relating to the company will be discussed thereby linking the discussions with mainly the 4 issues such as ethics, risk management, auditing system and leadership. Furthermore, the issues will be connected with the theories such as the stakeholder theory, resource dependence theory and the agency theory (Council, 2012).
Risk Management
The international Organization for standardization states that the risk factor of the businesses is the uncertain circumstances that affect the set objectives of the organization. In this case, the uncertain impact thus caused is observed to be totally diverse from that of the outcome which might be viewed either in positive or negative light. Therefore the risk that evolves within the business entity is sought to manage through the application of risk management which entails identification, evaluation as well as supervising the unwanted outcomes thereby exploring the further opportunities within the system (De George, 2011).
There are certain risks concerning the aspect of modern slavery on which Primark has been observed to incorporate risk management strategies. Trafficking of human labour and the employment of forceful labour are something which is considered to be too unethical and might pose as a risk to the organization (Brammer et al., 2007). 
2. Primark is a retailer that is based in Ireland. The company is the subsidiary to AB Foods. Primark is known for its affordable clothing prices targeted towards the middle class community of the global society. It got tied with the Rana Plaza incident which took lives of several thousand of workers concerning ethical considerations (Velinova, 2014).
Risk analysis Model 
Initiation of quality risk management process includes risk assessment, control as well as review through risk communication. Primark implemented the process through suppliers’ audit, controlled through Primark “Code of Conduct” thereby conducting reviews on regular intervals.
Ethics
The Rana Plaza incident took place during 2013 which witnessed the collapse of an 8 storey building in Bangladesh. It was during this incident that around 2500 workers got highly injured and later were rescued from the location. This incident has been considered as a historic accidental event pertaining to the clothing industry segment. Further while the incident occurred, several questions were asked to the business enterprise on the grounds of ethical considerations (Shah, 2014).
The consumers started boycotting the products of the business enterprises. The consumers became aware regarding the working conditions that were provided to the workers by the company. In fact the workers in some instances are even not allowed to go for their toilet requirements and are instead asked to finish the work within the stipulated time given. Primark is also seen related with the term ‘sweat shops’ where it has been traced that the business organization hires child labour at very low wages (Salvioni & Astori, 2015).
It has been observed that the children falling within the age bracket of 11 years are sewing sequins in the Primark t-shirts and that also in the poor working surroundings. Thus the question regarding unethical fashioning that Primark caters to its consumers at paltry prices extended towards the kinds of suppliers it possess agreements with. Hence Primark gradually worked on magnifying its commitment in conducting ethical trade through the application of a web-based contract in regards to supply chain network through frequent audits (Mizen et al. 2012).
This contract states that there will be auditors employed who will scrutinize the background of the suppliers thereby putting up all sorts of information collected in the BSI management process so that the managers are able to survey the suppliers’ background. The owner of the enterprise, Associated British foods has further stressed on the aspects that this sort of auditing will usher better global visibility as well as lead to control of information by the management. Nonetheless, the association has been viewed to come under strict scrutinization on the grounds of ethical considerations which has been followed by several investigations (Lu, 2013).
Stakeholder Theory
This issue certainly calls for “The stakeholder Theory” that concentrates on the organizational management aspects as well as business ethics that limelight the factors such as managing morals as well as biasness values within the association. Hence Primark was no exception in implementing and linking “The stakeholder Theory” to the ethical issues that it faced according to Bonazzi & Islam, (2007). The consumers, suppliers as well as the employees are the significant stakeholders to any organization. Primark also concentrated on bringing in certain amendments concerning the ethical issues relating to these stakeholders. Not only the company initiated a change process within the supply chain network thereby making it web based but also, it started compensating for the lives lost of its workers or the families that lost their earning heads due to Rana Plaza incident. The company promised to spend around £1 million towards short term compensation (Kor et al., 2008).
Resource Dependence Theory
This instance of the company can also be linked with “The Resource Dependence Theory”. This theory revolves around the study that in what ways the external resources pertaining to the company might influence its behaviour. Moreover according to this theory it is very vital for the business enterprise to procure external resources that helps in strategically managing the organization.  In this instance, Primark concentrated on gaining its external resources such as establishing an effective relationship with its suppliers, establishing its brand channels, economy, and the consumer base and so on. Hence, in order to strengthen its branding and external resources, it concentrated on boosting its corporate social responsibility (Littler, 2011).
 This is because the company is considered as a global business enterprise which posses an international supply chain network and also a fast developing retail base that prompted the company to act responsibly as well as conduct ethical trade. The business that it owns employs almost 700,000 employees. Therefore, Primark nurtures a vision to render protection towards its employees (Manners-Bell, 2014).
Agency theory
Agency theory supposes about settling issues that might exist corresponding to official/ agency connections due to non-intersecting objectives. A company as an ethical agent might be examined through two standards in particular, which are the legally binding and partnership models. Moreover the enterprise can go about as an ethical operator to the degree pertaining to the internal front that it involves the workers into an undertaking which is something beyond a financial endeavour; however, on the outer front it collaborates with various stakeholders in light of a legitimate concern for the benefit of all (Carrigan & De Pelsmacker, 2009).
Similarly, Primark can be noticed aiding its diverse stakeholders with extensive training facilities as well as monetary help including its suppliers though the concerning aspect might not be a legal consideration for the company. There is a certain Primark code of conduct that is followed by the company which ensures the safety, rules relating to employment and others are being listed. However, the set standards are structured on the basis of Ethical Trading initiative (ETI) which in turn is excerpts from International labour Organization (ILO) (Fienhold, 2014).
UK Corporate Governance Code
Primark being a responsible player concerning its relations with its suppliers has implemented labour laws pertaining to UN guiding principles based upon Human rights as well as focuses on OECD Guidance corresponding to affairs of Due diligence. There is also risk concerning the external resources such as the raw materials. For example, the cotton clothes that Primark sells is not manufactured directly by the business entity, however, this cotton is bought by the suppliers that the company is in agreement with. Therefore, the suppliers might use such processes in the manufacturing system that causes environmental hazards (Council, 2012).
The company will not be able to trace this hazard which might pose as a risk factor that calls for effective management. Hence, Primark took part in an environmental initiative which is the SCAP (Sustainable Clothing Action Plan). The SCAP strategizes in bringing down the waste that causes landfill problems. In fact, the above instance might also be considered as a risk management pertaining to agency theory. It is known that the agency theory focuses on settling the issues that the entity might face in having the relationships with different suppliers within the supply chain network. Especially the supply chain network of cotton is obnoxiously complicated. Hence, Primark aims at sourcing its raw materials through the implementation of sustainable and ethical strategies (Crane & Matten, 2016).
Primark and its auditing system
There is a specific group that works under the ethical trading group of Primark thereby safeguarding the supplier production units pertaining to Tier 1, so that the factories abide by Primark’s “Code of Conduct”. Continuous audits are schemed through the ethical trading group of the Company while the suppliers are briefed beforehand. On the basis of the audit reports, corrective measures are incorporated through audit action plans. Certainly, Primark’s auditing system complies with the Stakeholder theory as the auditing system is formulated to maintain ethics. Again on the contrary, it is also connected with the Resource Dependence theory as it ultimately influences the ethical procurement of labour as well as raw materials for external resources (Shah, 2014).
Leadership or Board of directors
According to Solomon, (2010) the definition of a successful enterprise lies in governing the enterprise effectively while recognizing the enterprise’s board as the heart of the company. The board plays a significant part in executing effective leadership, setting strategies, determining the main stakeholders and aligning the firm’s objectives to that of the workers. On the contrary, the Agency Theory of Jensen and Meckling (1976), is based upon two key factors which are the principal and the agent. In this context, the shareholders are the principal whereas the directors or the management is the agent. The shareholders are known to invest money while the directors utilize the money in conducting the operational activities of the firm. There are also places where certain discrepancies might arise such as the actions incorporated by the management at the cost of the shareholders pertaining to aspects such as  increment of payment, meeting targets, promotion and others. Nonetheless it leads to 3 significant problems which are the separation of control, and ownership, differences in the goals set by the management as well as the shareholders and the flow of asymmetric information (Salvioni & Astori, 2015).
It is noted that Primark employs a handful of board of directors. There is chairman, finance director, chief executive, non-executive director there are also independent non-executive directors while the main shareholder of the company is AB Foods. Primark’s chairman, Charles Sinclair states that he looks forward in instilling great corporate governance to ensure the sustainability and the success of the firm (Fienhold, 2014). He further added effective corporate governance requires great leadership skills which can be traced within the structure and the formation of the board as mostly all the directors do possess an international work background. During May, 2014 certain changes were introduced by the Financial Conduct Authority concerning the listing regime in order to boost and magnify the “minority shareholder protection”. Therefore all the above aspects indicate the successful applications of the agency theory pertaining to corporate governance and the board of directors (Littler, 2011).  
The above issues to the case exhibits that Primark tried to maintain ethical consistency with the theories and the legal standards.
References
Bonazzi, L., & Islam, S. M. (2007). Agency theory and corporate governance: A study of the effectiveness of board in their monitoring of the CEO. Journal of Modelling in Management, 2(1), 7-23.
Brammer, S., Millington, A., & Pavelin, S. (2007). Gender and ethnic diversity among UK corporate boards. Corporate Governance: An International Review, 15(2), 393-403.
Carrigan, M., & De Pelsmacker, P. (2009). Will ethical consumers sustain their values in the global credit crunch?. International Marketing Review, 26(6), 674-687.
Council, F. R. (2012). The UK corporate governance code. London, September.
Crane, A., & Matten, D. (2016). Business ethics: Managing corporate citizenship and sustainability in the age of globalization. Oxford University Press.
De George, R. T. (2011). Business ethics. Pearson Education India.
Fienhold, L. (2014). Risks of MNCs involved in international business diplomacy: the OECD Guidelines for Multinational Enterprises as a facilitator?(Bachelor’s thesis, University of Twente).
Kor, Y. Y., & Misangyi, V. F. (2008). Outside directors’ industry?specific experience and firms’ liability of newness. Strategic Management Journal, 29(12), 1345-1355.
Littler, J. (2011). What’s wrong with ethical consumption. Ethical consumption: A critical introduction, 27-39.
Lu, C. (2013). Activist political theory and the challenge of global justice. Ethics & Global Politics, 6(2), 63-73.
Manners-Bell, J. (2014). Improving global supply chain sustainability. Risk Management, 61(10), 12.
Mizen, P., Packer, F., Remolona, E., & Tsoukas, S. (2012). Why do firms issue abroad (No. 401). BIS Working Paper.
Phillips, N. (2015). Private governance and the problem of trafficking and slavery in global supply chains. In Vulnerability, Exploitation and Migrants(pp. 15-27). Palgrave Macmillan UK.
Salvioni, D. M., & Astori, R. (2015). Sustainable development and global responsibility in corporate governance.
Shah, A. H. (2014). Examining the perceived value of integration of earned value management with risk management-based performance measurement baseline (Doctoral dissertation, Capella University).
Velinova, R. (2014). The Case of Rana Plaza: A precedent or the severe reality?. The Beagle: a Journal of Student Research and Enterprise, 2(2).
Vose, D. (2008). Risk analysis: a quantitative guide. John Wiley & Sons.

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