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Risk Management Assignment: Analysing Corporate Governance Practices Of Telford Plc

Question

Task:
Case study
Telford Plc is a successful FTSE 350 listed company with annual sales of £150m. It is financed by 50% Long-term loan secured on its UK Head office site. It has a number of short-term loans and also makes use of occasional sterling deposit facilities with its bank. The industry is very competitive but Telford is considered to be a secure business with a profitable future.

The board comprises a non-executive chair, a chief executive who has a large shareholding, a finance director, operations director and marketing director and a non-executive director who has wide knowledge of the industry. The board only has one committee, an audit committee. The audit committee consists of the chair, non-executive director and the finance director. Minority shareholders complain that they have little say in the running of the company and that communication with the board is poor.

There is no internal audit function, but the external auditors are relied upon to report on any apparent weaknesses in control and their letter of engagement authorizes them to carry out work over and above the financial audit in relation to internal control. The external auditors have always given a ‘clean’ audit report to the company and have reported that internal controls within Telford are sound. There is no formal risk management process in place in Telford although board meetings routinely consider aspects of risk during their deliberations.

Telford Plc prides itself on operating an efficient supply chain and developing strong relationships with suppliers across the world. It generally prefers to enter into long-term supply contracts.

Telford Plc uses suppliers from a wide geographical area. Most stock originates from Asia and Africa and is then sold on to customers across Europe and the USA. There is also a growing market for selling products back into Asia and Africa. Currently, this means that some products, which Telford Plc sources from suppliers located in Asia and Africa, cross the world, are stored in warehouses in the UK, to then be shipped back again to customers in Asia and Africa.

The board are concerned about the likely cost of introducing more stringent corporate governance regulations. They are not convinced that the company will benefit enough to justify the cost. They also want to review the operations efficiency and financial risk implications of their international trade.

Required:

  • Write a report on risk management assignment to the board evaluating the key reforms and best practice in Corporate Governance and Risk management practices that have taken place in recent years.
  • Recommend, stating reasons, which reforms and policies should be adopted by Telford Plc.
  • Recommend, stating reasons, suitable policies that the company’s treasury department should implement in order to minimize its financial exposure to international trade.

Answer

Introduction
The research on risk management assignment signifies that the UK's corporate governance is primarily dedicated to building risk management for companies. Corporate governance of the UK Code indicates that the board is responsible for identifying the type and degree of the risks being taken by the organization. Risk-taking is an essential driving force in business. Every business takes risks to achieve higher returns. However, controlling those risks is the accountability of the board. Therefore, corporate governance certifies that risks are understood, regulated, organized, and communicated effectively to the entrepreneurs. (Obembe & Soetan 2015). The report is based on Telford Plc, a major FTSE 350 listed company comprising of £150m sales. It is a competitive industry and the board is concerned regarding the corporate governance practises. The report aims to give key reforms and best practices in corporate governance practices related to corporate risk management to the board.

Best practices in Corporate governance and Risk management
In the UK, corporate governance practices have established risk management significantly. When the business fails, meaning that the risk has not been carefully evaluated and managed, the incident is often the result of a disobedience of corporate governance. Determination of risk is necessary due to due diligence in relation to the potential sale of the firm, which may result in the collapse of the company. The board should be required to regulate internal control systems and risk management and include those that could jeopardize its business model, future operations, liquidity. They also need to make a vital assessment of the company's significant risks. The management role of risk management is usually controlled by the audit committee and shared with the firm's risk management within the corporate governance board structure.

In addition, it can say that board is accountable for the business's entire approach to internal control and risk management. There are precise duties that are allocated to the directors.

The major development in internal control was witnessed in 1992 when the code of best practise was published by the Cadbury committee hat highly emphasized on the best practises that included separation of the CEO role and the chairman. It was prescribed to have a minimum of three non executive director and audit committee formulation

Turnbull report that emphasized on the internal control mechanism was a major landmark which was published in 1999. The guidance provides assistance to the directors of the listed companies on implementation of the internal control recommendation provided in the Combined code and helps in ensuring that effective risk management, as well as proper internal control system is present for the fulfilment of the needs of the business.

When investment and competitiveness are essential, and when the government is developing an effective strategy, it is effective for boards to build the strength of the corporate governance to prepare for the risk, challenges, and opportunities that lie ahead (Arnold & Lewis 2019). The objective of corporate governance is to facilitate entrepreneurial and prudent management that can provide a company's long-term success. It contains an outline of laws, codes, and voluntary practices. The Corporate Governance Code of UK has newly published further direction on managing risk management. Developments in the key reforms and best practices in Corporate Governance and Risk management practices have hugely impacted the broad responsibilities. The report specifies how corporate governance classify the risk management procedure. Firstly, it ensures the plan and execution of appropriate internal control systems and risk management that classify business jeopardies and empower the board to make a firm assessment of critical risks. Secondly, the new Code emphasizes that the remuneration committee’s duty takes staff remuneration and related policies into deliberation when determining director remuneration. Give remuneration teams a wider responsibility for monitoring pay and incentives in their company. They need to engage with a broader workforce to clarify how executive compensation aligns with a more comprehensive business pay policy. As per provision 17 it is stated that the board must create a nomination committee to lead the appointment procedure, certify that there are strategies for consecutive succession for both the board and senior administration positions and a varied pipeline for succession. It is imperative that the Board should ensure that they have the right mix of skills, knowledge, and creative thinking to promote diversity in the firm. The new Code emphasizes the need for boards to reform and make succession plans.

Thirdly, the new Code reinforces the role of the nomination committee in the establishment of succession preparation and miscellaneous boards (Derenyielo & Joseph 2018). In addition, the nomination committee report should comprise a description of an external board evaluation contact with the board and individual executives. Boards are asked to make a culture that lines up company values with approach and assesses how they preserve value over the extended term. There is a new provision to allow greater board engagement with the staff to know their ideas. Section 172 sets out three significant suggestions for reform to strengthen the voice of personnel, customers, and broader stakeholders in boardroom decision-making. It also involves taking into consideration the interests of workforces, consumers, suppliers, and others who are directly involved in the performance of the business. Large businesses should comprise a statement as a slice of their strategic report that facts directors related to matters in sections 172 (1) (a) to (f) of the Companies Act 2006. This means that they have to statehow their directors have performed responsibility to endorse the company’s success.

  • Determine whether the organization can take risks and the level of significant risks to achieving its strategic objectives.
  • Ensure that the proper culture and rewards system is rooted throughout the company.
  • They assess how significant risks should be managed or lessened to decrease the likelihood of their occurrence or their impact on the business (Tao & Hutchinson 2013).
  • Ensure the process of overseeing and reforming management and control systems to determine who is working efficiently and right actions are taken where necessary.

The recent reformations of practice associated with risk management and corporate governance assure that a business is running sound and supports better access to finance and investment. Internal controls and risk management must be unified into the business's management and governance procedures for business success and profitability. However, assessing risks as an essential part of the business planning process should help in making useful decisions., certify that boards and management retort rapidly when risks arise and make sure investors and other stakeholders are visible to critical risks. In contrast, if the company does not do this effectively, it can have significant consequences. Good leadership of the board should not be a barrier to taking a prudent risk, which is vital for development. Apart from this, if the board relies on the Diligent Governance Cloud, it will help keep them up-to-date. Diligent Governance Cloud provides the board with all the material needed for supervision, guidance, and back up. With Governance Cloud's integrated with digital tool; board members can have an easy access to the investment report available in the libraries, revenue statements, efficiently executed conflict of interest, and streamlined with secure communications, and many more. In addition to this, Diligent understands what the board requires to perform its responsibilities, with facilities established for accommodation. The platform helps in providing real-time updates with continuous improvement that links to the matter of risk an governance. The governance cloud ecosystem comprises of Diligent Boards, Boards Evaluation, Diligent Minutes, Management of Entity, Interest of Interest Questionnaire, and Resolution Insights (Tallio 2014).

Diligent will be a growing partner for a broad of directors. Cooperatively, such tools help corporations to attain a fully digitized and governance ecosystem that is integrated to alleviate risk, strategic planning, and governance at the maximum level.

The research has been done on the related material available from the code of conduct and corporate governance policies. However, considering the business and the choice of operations the result might vary. The major limitation of the methodology is that it is based upon the review literature proposed by the UK corporate governance. Nothing in the review can be self proposed hence, the entire discussion rests upon the codes that are prescribed. Moreover, the code is not mandatory and optional in nature.

2. Recommendation – reform and policies to be adopted by TelfrodPlc
Following are the reforms & policies that the Company should adopt in the company:

  1. As studied from the case study, we have seen that the company does not have an internal control department. The company solely depends upon an external auditor's services who have never given a qualified audit report. Here lies a significant gap in the area of governance. The company should form an internal control department which shall constantly work upon building up new controls for the company and reinstating the existing management. The external auditor will also be benefited from the Internal Audit department as it can use their report on their evaluation of control placed and risk assessment within the company (Mouselli, Abdulraouf & Jaafar 2014). The external auditor will comment upon the shortcoming present in the company based on the Internal Audit report and the measures that may adopt a time to overcome them.
  2. The company should also form a nomination department responsible for hiring new workforce and managing the Board of directors' succession. This time is significant for a company to timely infuse fresh hiring and manage all the employee-related queries Like Increase in salaries, promotions & transfers etc. The Nomination department will also oversee the employees demand for salary increments. This way, the company can be better managed as the employees are the key drivers of the company growth and development. This department acts as a bridge among the employees and the top management. Due to modern day's hierarchy, the communication gap is becoming a hurdle in the company. This department shall facilitate a dialogue among the various levels of the company.
  3. The Board of directors is the ultimate business runners who the shareholders entrust to run the companies for them. The Board of directors should be more transparent in their decision-making, and its well-being should justify it. The shareholder's wealth maximisation should be the sole criteria of directors working styles. The modern era of governance has introduced a new responsibility on directors in the form of Corporate Social responsibility, which states that the company should give back benefits, perks and advantages to the society, working environment and the people at large in the form of new job opportunities, better working environment, better carbon emission management, better gender numbers, schools and parks for society (Khan & Rehman 2020). This all has added extra work and responsibility for the directors to be more efficient, transparent, and alert in their working methodology.
  4. The Board of directors should build a conducive working environment at their workplace, enhancing the company's productivity. The company should hold frequent meetings and invite newer ideas and creativity from the employees. In times of fierce competition and more recent innovations, the only way to succeed is to understand the market and customer's needs. Customer satisfaction has never been so crucial as it is now. So the Board has to change its strategy to be more aggressive and at the same time more balanced and logical to adapt to new ideas, procedures and policies. The company has to diversify as per modern technologies and changing customer's needs. More and more companies are going for adaption of best practises in their businesses. The businesses are now required to enter into new domains and diversified services. So to keep abreast of the changing times and business needs as mentioned above, The directors have to switch to better and more logical reforms as per the demanding needs of the business.

3. Recommendation Suitable policies to be adopted by the treasury department to lessen the financial exposure to international trade
The company Telford PLC is into business with foreign suppliers across the globe. The company imports its supplies from Asia and Africa. The company then sells back those goods back to Asia & Africa also. The cost of importing goods first and then exporting back to Asia & Africa is vast and ultimately reduces the company's profits. Also, the changes in foreign exchange rates play a significant role. Due to falling currency rates, the company import goods at higher rates and may have to export at reduced prices. Following are the safeguards that the company's Treasury department can take for minimization of the financial risk in international Trade.

  1. The company should open its branch offices in Asia and Africa so that they can locally procure goods and sell them locally to their local business owners. This way, the company shall not be exposed to international trade and currency fluctuations. The company will be in great position if it opens a office in Asia & Africa so as to tap local markets and the customers very well. In this way, the company can save a lot of money in the form of import & export duties, freight & cartage etc. This will also save a lot of time & efforts for the company and keep the warehouse's cost of storing goods. If the goods are perishable, the cost of their storage goes even higher than the standard goods.
  2. The company can take insurance cover for default in payments, that is, bad debts. The company can take insurance cover against any bad debts which occur in the ordinary course of business. Also, the company should take transit insurance for goods both in case of imports and export of goods. Hence even in case of any bad debts or mishappening with the goods in transit, the company will remain safe, and any losses will be covered by the Insurance policy. The insurance cost is not very high but ensures insurance cover in case of any loss in International Trade. Taking Insurance cover for business transactions is a very prudent approach (Crouhy, Galai & Mark 2014).
  3. International Trade requires a lot of country-specific compliances like Bill of entry, Invoices, Other papers etc which are at times incomplete as per Importer countries requirement or specification. In that case, the goods remain at the custom place, which may be a very over crowded or unhygienic place till the time the paper requirements are not fulfilled. To overcome this problem, the company should use the services of Local custom agents to get the goods cleared so that the goods at the customs area are removed at the earliest and reached the customers point. In this case, both the quality of exported goods will remain good, and the party's payment will be made as per the allowed credit period. More the delay more shall be a delay in payment for exported goods.
  4. The company should also form an Internal Committee within the company comprising Chairman & directors to assist and comment on the International trade transaction. In the committee, the company should hire experts in the area of international Trade who shall study and comment on the most suitable practices in the area of international transactions so the financial risk can be minimized to the extent possible (Asghar et al 2020). This way, the company can become very professional and can have risk free approach while entering into international trade transactions.

Hence using the above approach, the company minimizes the risk involved in International transactions at large.

4. Conclusion
In the report, corporate governance and risk management practices in recent years in the UK are explained. There are essential responsibilities that need to be performed by the board for managing the risks within the business. It has been found that from the above report, corporate governance is an integrated part of the company and without the principles of corporate governance it would be difficult to maintain the ethical stand. Corporate governance highlights the responsibility which then sets a clear direction for the individuals and helps the board to guide the company in an ethical manner. Further, risk management becomes easier and implementation of different plan is easier. It is thereby imperative for the board to establish conduits with management proficient in performing these responsibilities.

References
Arnold, G & Lewis, D. (2019). Corporate Financial Management, 6th Ed., Pearson, London.

Asghar, A., Sajjad, S., Shahzad, A., & Bolaji, T. M. (2020). Role of discretionary earning management in corporate governance-value and corporate governance-risk relationships. Corporate Governance, 20(4), 561-581. doi:http://dx.doi.org/10.1108/CG-11-2019-0347

Crouhy, M., Galai, D., Mark, R. (2014). The Essentials of Risk Management. 2nd Edition, McGraw-Hill Education

Derenyielo, B., & Joseph, E. M. (2018). Risk management and enterprise risk management in nigeria: implications for national development and growth. Kuwait Chapter of the Arabian Journal of Business and Management Review, 7(3), 29-40.

Khan, J., & Rehman, S. U. (2020). Impact of corporate governance compliance and board attributes on operating liquidity in pre- and post-corporate governance reforms. Corporate Governance, 20(7), 1329-1347.

Mouselli, S., Abdulraouf, R., & Jaafar, A. (2014). Corporate governance, accruals quality and stock returns: Evidence from the UK: [1]. Corporate Governance, 14(1), 32. Retrieved from https://www.proquest.com/scholarly-journals/corporate-governance-accruals-quality-stock/docview/1690998870/se-2?accountid=30552

Obembe, O. B., & Soetan, R. O. (2015). Competition, corporate governance and corporate performance. African Journal of Economic and Management Studies, 6(3), 251-271. doi:http://dx.doi.org/10.1108/AJEMS-02-2012-0007

Tallio, V. (2014). Multinational enterprises in africa: Corporate governance, social responsibility and risk management. Cadernos De Estudos Africanos, (28), 89-92. Retrieved from https://www.proquest.com/scholarly-journals/multinational-enterprises-africa/docview/1641939168/se-2?accountid=30552

Tao, N. B., & Hutchinson, M. (2013). Corporate governance and risk management: The role of risk management and compensation committees. Journal of Contemporary Accounting & Economics, 9(1), 83.

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