This where there was no significant divide between the

This report will examine the effect of how separation of
security ownership and control in a large company has on how the company is
governed, it is typical of large corporation to have different owners and
managers. Economists are concerned with the problems that arise in the decision-making
process of a firm where the firm’s managers are not necessarily the firm’s
owners or shareholders.

Shareholders have an important, albeit limited role in
ensuring that companies adhere to sound and effective corporate governance
standards. Whereas managers are responsible for overseeing and supervising the
activities and employees of a company

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1)

The aim of a company is the maximization of the market or
shareholder value of the company. These aims are likely to differ from that of
the managers who may seek to maximize their own personal gain, sometimes even
at the expense of the company.

The type 1 agency problem or the classic agency problem is
simply the conflict of interest between owners and mangers as explained by
Jensen & Meckling (1976) and Fama and Jensen (1983), as a result of the
divide between the ownership and control in a company. The nature of the
problem is that when a firm is managed by a manger hired to represent the owner’s
interests, there is a probability that the manager may choose to pursue their
individual interests which are different from the primary interests.

Villalonga and Amit (2006) observed that within family firms
where there was no significant divide between the ownership and control of a
company as a result of a more concentrated and involved range of owners, the
agency problem was non-existent. Within family firms, the founding family are
more invested as a result of their connection to the business, it also common
within a family firm for the manager to have a stake in the business and, or be
a member of the owning family. This observation outlines how the scope and
range of the owners is a very influential factor in the agency problem.
Comparatively in the scenario of a public traded company where there are many
owners that have little to no involvement in the management of the company and
all day to day running of the business is intrusted to the appointed managers,
the classic agency problem is prevalent (Jensen – Meckling).

The organisation of a company is very important in
determining the existence of the type 1 agency problem. The type 1 Agency
problem is defined as the conflict of interest between shareholders and
managers and can only exist in a Public Limited company as the problem is based
on the divide between the owners and managers. Another very important factor is
the ownership structure and the owners of the company. The larger the pool of owners
the more common it is for the agency problem to exist. This information is also
required to determine if the managers have part ownership of the company, in
which case the likelihood of the Type 1 Agency problem will fall. The ownership
information of a publicly traded company is available online.

The second type of conflict of interest (Type 2 Agency
Problem) arises in the instance where a large shareholder abuses its influence
in the company in order to enjoy what Grossman & Hart (1980) term “private
benefits of control” at the cost of smaller shareholders. As compared to the
example stated in the classic Agency problem where family owned companies
benefit from the concentration of owners, the second type of agency problem
describes the cost of having ownership of a company with a body of controlling
(family) shareholders. This Agency problem is more prevalent within family
firms as compared to corporations because of the influence the controlling
family have on the company. The larger the presence of families in the
ownership and control of a company, the less likely the occurrence of the Type
1 agency problem but the more likely the occurrence of the Type 2 Agency
problem.

 

2)

J. Sainsbury PLC Is the holding company of Sainsbury’s
Supermarkets Ltd, the second largest supermarket chain in the UK with a of 16.9%
share of the supermarket sector. J Sainsbury PLC consists of 3 divisions,
Sainsbury’s Supermarkets Ltd, Sainsbury’s Bank and Sainsbury’s Argos. There are
123 Companies in the corporate group, 182 recorded subsidiaries and 113
shareholders. The majority shareholder is Qatar Holding LLC which owns 21.99% of
the stock (Fame). Qatar Holding LLC is a private equity firm that operates as a
subsidiary of the Qatar investment authority. The second largest shareholder in
J. Sainsbury PLC is the Credit Suisse Group which controls 11.55% of the
company and the third largest shareholder is Black Rock Inc., an American
global investment management corporation which owns 3.79%. The other 110
shareholders each hold less than 3.1% of shares

J. Sainsbury PLC has an intelligent board structure with
some of its directors holding managerial positions within the company. The
board is made up key roles in the company management such as the trading
director, Mr Michael Andrew Coupe, The Chief Financial officer, Mr Kevin
O’Bryne and the company secretary, Mr Timothy Fallowfield. The board also meets
the board requirements non-executive directors. This amalgamation of
traditional Directors, non-executive directors and managers helps ease
communication through the company.

Furthermore, both Mr Michael Andrew Coupe and Mr Timothy
Fallowfield and four other board members hold shares in J. Sainsbury PLC. This
investment in the company means the board have a vested interest in the success
of the business. This key detail strengthens the company against the classic
agency problem by reducing the divide between the owners and managers as the owners
are also managers. The majority presence of non-executive directors on the board
also gives the board greater independence and objectivity.

 

3)

The UK Corporate Governance Code requires that at least 50%
of a of the directors of a UK listed company, excluding chairman, should consist
of non-executive directors who are “independent
in character and judgement and free from relationships or circumstances which
may affect, or could appear to affect, the director’s judgement”. 5 out of
9 J Sainsbury PLC board members, excluding the Chairman, are non-executive
Directors. This balanced board structure allows for good unbiased entrepreneurial
leadership. In addition, all directors of J Sainsbury PLC serve as executive or
non-executive directors or hold other leadership positions in other companies
in multiple industries. This provides them with the appropriate balance of
skills and experience to enable them to carry out their roles and responsibilities
effectively. The aim of the UK Corporate governance code is to set as a
guide rather than a set of rules and in the combined code and it states that “Departures
from the Code should not be automatically treated as breaches” (Financial
Reporting Council, 2006: 7). If the board has
a good reason for deviating from the regulations they have the option to leave
it up to the shareholders to advice on the decision. This means that it
is possible to conform with the code without fully satisfying all the
regulations. This approach is put into practice through the employment of the ‘explain
or comply’ rule, which allows companies to deviate from unsuitable regulations
but to further justify the non-compliance. ‘While it is expected that listed
companies will comply with the Code’s provisions most of the time, it is
recognised that departure from the provisions of the code may be justified in
particular circumstances. Every company must review each provision carefully
and give a considered explanation if it departs from the Code provisions’
(Financial Reporting Council, 2006: 5). The allowance of deviation from the
Code through the ‘comply or explain’ approach allows the Financial Reporting
Council to allow provisions for different types of companies, Baums states size,
ownership structures, international ownership and requirements of capital
markets as examples (Baums 2003: 7). Failing to
adequately explain the reason for non-compliance is a breach of the code.

J Sainsbury PLC complies
with all the UK corporate governance code and according to the Good Governance
Report of the Institute of Directors, J Sainsbury satisfies most the Board
effectiveness indicators.

The UK Corporate governance code
is very relevant to individual shareholders as it promotes good boardroom
practice and board composition. The employment of the comply or explain model
enhances transparency within the company and its shareholders. The UK Corporate
Governance Code also outlines the role of board committees, risk management, remuneration
and shareholder relations. Companies are also required to report to
shareholders instead of regulators, making the shareholders decide if the
company’s governance is adequate.