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IS CORPORATE GOVERNANCE REALLY WORKING?

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Governance and risk management are complex matters that go to the heart of the thinking about business, finance and economics

Corporate governance is not a new concept, but how well corporate governance works in practice to help businesses create value is a different matter.

In February ACCA (the Association of Chartered Certified Accountants), the global accountancy body, launched a detailed consultation paper ‘Creating value through governance – towards a new accountability’. It considers how well corporate governance actually works to the benefit of a business and whether something has gone wrong.

Paul Moxey

Paul Moxey

Corporate governance is vital to societies that depend on business to create economic wellbeing. In most economies, without companies that create long term sustainable value living standards would be very different.  Achieving good corporate governance is complex: it involves economics, politics and fundamental aspects of human nature as well as business and markets. Ultimately, governance is about how to make good decisions. As providers of financial information to support better decision making, accountants play a key role.

Capital markets, and attitudes to them, changed radically in the 20 years since the present direction of governance was set so the paper questions whether existing corporate governance and risk-management frameworks remain fit for purpose in light of current financial and economic conditions and our experience of how the frameworks have operated in practice over the past two decades.

Although corporate governance has grown from sound roots, it has seems to have become burdened with excessive rules and too much complexity. Events since 2007 demonstrated that certain banks and other major corporations which were thought to have excellent standards of governance and risk management turned out to have neither. Present approaches have not ensured that companies focus on, and succeed in, creating long term sustainable value.

Governance and risk need to be considered in the context of difficult topics such as the nature of wealth, economic growth, value and money and the challenges of measuring performance. Finding suitable measures of performance can be difficult. There is also a concern that risk management in some organisations has become over separated from management and premised on a belief that all risks can be identified and what is needed is an agreed action for each risk. The future is much less certain.

Corporate culture is a critical component of getting governance and risk management right. This is a vast subject which ACCA is researching separately with a report planned in June 2014.

Our paper argues that corporate governance is, or should be about creating value and that governance codes should be evaluated on how well they facilitate the creation of value. It sets out how a framework of ‘performing, informing and holding to account’ can help to assess and enhance how well governance is working. The framework envisages that the overarching purpose of governance, and indeed of most companies, should be to ensure that sustainable value is created and that three elements must work for value creation.

These are:

  • Performing; companies and those within them including the board must perform, i.e deliver performance that contributes value;
  • Informing: the performers need to provide good information on their performance to those to whom they should be accountable; and
  • Holding to account: those who should hold others to account (such as shareholders in relation to boards and boards in relation to executives) actually do so.

The consultation highlights problems with how all three elements work in practice – particularly with the last one. There are numerous examples of boards not having held executives to account and shareholders not doing as much as some people would like in holding boards to account.  Rather than attempt answers to what are highly complex matters, the ACCA consultation analyses the issues and asks 8 key questions and 50 other questions to stimulate thinking and understanding.

Governance and risk management go to the heart of thinking about business, finance and economics. ACCA does not claim to have all the right questions; some recommendations in our consultation are offered but no attempt has been made to find all the right answers. The hope is rather that this inquiry will lead to a better understanding of the problems and then to some solutions.

ACCA welcomes responses to these key questions, general comments about the analysis and issues raised in the paper, as well as responses to the other specific questions asked.

Following the consultation period ACCA intends to publish an updated paper on the subject of governance and value creation, reflecting the responses received and discussions held. Additionally, ACCA intends to prepare separate more targeted and brief papers for different audiences for example: boards, regulators and policy makers, investors and savers.

Paul Moxey is Head of Corporate Governance and Risk Management at ACCA (the Association of Chartered Certified Accountants)

Find out more about the Creating value through governance consultation – towards a new accountability’ and how to take part here

http://www.accaglobal.com/gb/en/technical-activities/technical-resources-search/2014/february/creating-value-consultation/creating-value-background.html

Watch the video Introduction to ‘Creating Value Through Governance – Towards a New Accountability: A Consultation’ at

https://www.globalbankingandfinance.com/creating-value-through-governance-towards-a-new-accountability-a-consultation/

Business

Battling Covid collateral damage, Renault says 2021 will be volatile

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Battling Covid collateral damage, Renault says 2021 will be volatile 1

By Gilles Guillaume

PARIS (Reuters) – Renault said on Friday it is still fighting the lingering effects of the COVID-19 pandemic, including a shortage of semiconductor chips, that could make for another rough year for the French carmaker.

Renault reported an 8 billion euro ($9.7 billion) loss for 2020 which, combined with gloomy take on the market, sent its shares down more than 5% in late morning trading.

“We are in the midst of a battle to try to manage a difficult year in terms of supply chains, of components,” Chief Executive Luca de Meo told reporters. “This is all the collateral damage of the Covid pandemic… we will have a fairly volatile year.”

De Meo, who took over last July, is looking at ways to boost profitability and sales at Renault while pushing ahead with cost cuts. There were early signs of improving momentum as margins inched up in the second half of 2020.

The group gave no financial guidance for this year, although it said it might reach a target of achieving 2 billion euros in costs cuts by 2023 ahead of time, possibly by December.

Executives said they were confident the carmaker could be profitable in the second half of 2021, but that they lacked sufficient market visibility to provide a forecast.

Renault struck a cautious note, saying it was focused on its recovery but warned orders had faltered in early 2021 as pandemic restrictions continued in some countries.

The group is facing new challenges as the European Union tightens emissions regulations and after rivals PSA and Fiat Chrysler joined forces to create Stellantis, the world’s fourth-biggest automaker.

The auto industry endured a tough 2020 but a swift rebound in premium car sales in China helped companies such as Volkswagen and Daimler to weather the storm.

Auto companies globally have since been hit by a shortage of semiconductors that has forced production cuts worldwide.

“The beginning of the year has shown some signs of weakness,” De Meo told analysts, but added the chip shortage should be resolved by the second half of 2021. “We have taken the necessary measures to anticipate and overcome challenges.”

Renault estimated the chip shortage could reduce its production by about 100,000 vehicles this year.

SHARP HIT

The group was already loss-making in 2019, but took a sharp hit in 2020 during lockdowns to fight the pandemic, which also hurt its Japanese partner Nissan.

Analysts polled by Refinitiv had expected a 7.4 billion euro loss for 2020. The group posted negative free cash flow for 2020.

The 2018 arrest of Carlos Ghosn, who formerly lead the alliance between Renault and Nissan, plunged the automakers into turmoil.

In a further sign that the companies have been working to repair the alliance, De Meo told journalists that Renault and Nissan will announce new joint products together in the coming weeks or months.

Renault has begun to raise prices on some car models, and group operating profit, which was negative for 2020 as a whole, improved in the last six months of the year, reaching 866 million euros or 3.5% of revenue.

Analysts at Jefferies said the operating performance was better than expected. Sales were still falling in the second half, but less sharply.

Renault is slashing jobs and trimming its range of cars, allowing it to slice spending in areas like research and development as it focuses on redressing its finances. It is also pivoting more towards electric cars as part of its revamp.

It was already struggling more than some rivals with sliding sales before the pandemic, after years of a vast expansion drive it is now trying to rein in, focusing on profitable markets.

De Meo told journalists on Friday that the French carmaker will make three new higher-margin models at its Palencia plant in Spain, where manufacturing costs are lower, between 2022 and 2024.

($1 = 0.8269 euros)

(Reporting by Gilles Guillaume and Sarah White in Paris, Nick Carey in London; Editing by Christopher Cushing, David Evans and Jan Harvey)

 

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Business

UK delays review of business rates tax until autumn

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UK delays review of business rates tax until autumn 2

LONDON (Reuters) – Britain’s finance ministry said it would delay publication of its review of business rates – a tax paid by companies based on the value of the property they occupy – until the autumn when the economic outlook should be clearer.

Many companies are demanding reductions in their business rates to help them compete with online retailers.

“Due to the ongoing and wide-ranging impacts of the pandemic and economic uncertainty, the government said the review’s final report would be released later in the year when there is more clarity on the long-term state of the economy and the public finances,” the ministry said.

Finance minister Rishi Sunak has granted a temporary business rates exemption to companies in the retail, hospitality, and leisure sectors, costing over 10 billion pounds ($14 billion). Sunak is due to announce his next round of support measures for the economy on March 3.

($1 = 0.7152 pounds)

(Writing by William Schomberg, editing by David Milliken)

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Business

Discounter Pepco has all of Europe in its sights

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Discounter Pepco has all of Europe in its sights 3

By James Davey

LONDON (Reuters) – Pepco Group, which owns British discount retailer Poundland, has targeted 400 store openings across Europe in its 2020-21 financial year as it expands its PEPCO brand beyond central and eastern Europe, its boss said on Friday.

The group opened a net 327 new stores in its 2019-20 year, taking the total to 3,021 in 15 countries. The PEPCO brand entered western Europe for the first time with openings in Italy and it plans its first foray into Spain in April or May.

Chief Executive Andy Bond said its five stores in Italy have traded “super well” so far.

“That’s given us a lot of confidence that we can now start building PEPCO into western Europe and that expands our market opportunity from roughly 100 million people (in central and eastern Europe) to roughly 500 million people,” he told Reuters.

To further illustrate the brand’s potential he noted that the group has more than 1,000 PEPCO shops in Poland, which has a significantly smaller population and gross domestic product than Italy or Spain.

The company, which also owns the Dealz brand in Europe but does not trade online, has already opened more than 100 of the targeted 400 new stores this financial year.

Pepco Group is part of South African conglomerate Steinhoff, which is still battling the fallout of a 2017 accounting scandal.

Since 2019 Steinhoff and its creditors have been evaluating a range of strategic options for Pepco Group, including a potential public listing, private equity sale or trade sale.

That process was delayed by the pandemic, but Steinhoff said last month that it had resumed.

“The business will be up for sale at the right time. It’s a case of when, rather than if,” said Bond, a former boss of British supermarket chain Asda.

Pepco Group on Friday reported a 31% drop in full-year core earnings, citing temporary coronavirus-related store closures.

Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were 229 million euros ($277 million) for the year to Sept. 30, against 331 million euros the previous year.

Sales rose 3% to 3.5 billion euros, reflecting new store openings.

($1 = 0.8279 euros)

(Reporting by James Davey; Editing by David Goodman)

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