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Mark Spencer plcs Corporate Governance Case
There are a number of well known business insolvencies which happened without any sign. These collapses affected to all related parties included shareholders and stakeholders and this is the main reason that all parties have tried to force the company to comply with good corporate governance. In recent years many companies have turned to comply with related corporate governance rules, however, there are some companies that turn their backs to the corporate governance norm with confidences that they could explain. The recent controversial issue related to non-compliance with corporate governance code should be a case of Mark & Spencer plc (M&S) which a board of director appointed the existing Chief Executive to hold addition position as Executive Chairman or they decided to combine these role together whilst the most corporate governance code recommend these two functions to be separated. Many shareholders and stakeholders disagree with this board’s decision and the explained reasons. The purpose of this essay is to summarize the main concept of John Rawls’s “A Theory of Justice" which concentrating in the part of “Original position", give background information about the M&S case and finally critically analyze the M&S board’s decision by using “Original position" of John Rawls.
In March 2008, Sir Stuart Rose has been promoted to be Executive Chairman as well as hold the Chief Executive position. This board’s decision is not comply with the corporate governance code which the Executive Chairman position and Chief Executive position should be separated in order to avoid the conflict of interest problem. This news causes much concern among the shareholders as the violation of the UK’s Combined Code in Corporate Governance could lead to uncontrollable power on one man within the company. The reason behinds this decision is the terminate announcement by Sir Stuart which he expect to leave M&S in 2009. Board wants to hold Sir Stuart Rose with M&S until it can get through the uncertainty period and until the new appropriated candidate is replaced. The only possible tempting propose to Sir Stuart is to be promoted as Executive Chairman which allow him to stay with M&S until 2011.
John Rawls has proposed his idea regarding forming a social contract in a book called “A theory of Justice" which against the Utilitarianism for its concept of happiness of humankind generally. He thought that in order to decide the best solution for happiness of people in general, it definitely has benefit for most people but on the other hand, some people also would get the negative effect from that decision. Moreover it is possible that some people or the minority would get bad outcome from the decision more often than most people, therefore, a rule should be established to solve this unfair result. From his book; a fair social contract could be occurred from “the original position". In the original position, all members are in the state of “veil of ignorance" or no one knows their position in the society. Each member has no awareness of their own social and economic advantage or disadvantage. Everyone have no knowledge according to their own future that who they would be in the society. This is possible for anyone to end up with the highest class or the lowest class in any aspects in society. By this unknown, the social contract will be fairly designed since everyone wants it to be fair for every position in the constitution. Therefore, the rule would be designed not to in favor of particular person. The original position has two principles which lead to “justice of fairness". First the equality, everyone has the same right, opportunity and liberty. Secondly, if there are inequality in term of social and economic, the unbalances have to be managed by allow greatest advantages to lest disadvantage group. From these principles, the rule with justice and fairness could be created and accepted by all member of society. A Theory of Justice in part of the original position can be applied to use in the moral reasoning by taking the original position and considering the reasoning without any bias that who are we in this situation.
Base from the theory of justice, the moral decision should be made at the original point which no one realize their status in the society or in the other words it is under the unknown position for every member. Form the M&S case, the ethic decision is whether Sir Stuart should be appoint to be Executive Chairman apart from holding Chief Executive position. The start point is from the original position which means the decision makers do not realize that whether they are the board members, the shareholders or other stakeholders. Therefore, the decision would be considered by group of decision makers that finally they might end up being the board members, the share holders or other related parties. In this case, the analytic will be concentrated on what is the best practice for good corporate governance in this particular case which is fair for every party. From this case whether or not the role of Chief Executive and Executive Chairman should be combined or separated under the assumption of neither being the board members nor the shareholders, the solution should be fair and acceptable to every related party. Therefore, the advantages and disadvantage of co-position or separate positions will be evaluated in order to make a fair conclusion.
In UK, the Company uses the unitary board system which means they have only one combined board. Hence, it is more appropriate in term of good corporate governance to split the roles of Chairman and Chief Executive. In general, the main point of corporate governance code which requires the company to split Chief Executive from Executive Chairman is to mitigate the corporate governance risk by allowing Chief Executive to concentrate in running the business follow the strategy that has been set by board. On the other side, the Chairman is stand for control board and oversee the management results. These two roles should be separated mainly to increase the internal control within the organization. In the purpose of transparency and accountability, the action of Chief Executive should be monitored by board which controlled by Chief Executive rather by himself. In this way the shareholders could ensure their best interest and the possibility of fraud and corruption should be decrease. For these reasons, the combined position of Sir Stuart would not be benefit to the shareholders as they could no longer ensure the board decision making that would be done on the purpose of highest wealth of the shareholders. Without overlook, the executive managements could decide any resolution for their interest and the shareholders could not ensure that they manage the company on their behalf or their own interest. In addition, combining these highest positions, allow Sir Stuart to be in a dominant position and no other position to act as a counterbalance and the error decision could be occurred. If the wrong resolution is happened, not only the shareholders would get negative effect but the managements also have bad performance for the mistake. In the worst case, without unmonitored, fraud or corruption could be occurred which is the last thing that the shareholders expect to be happened. Moreover, it is true that when the chairman is segregated, his decision will be fairer and more benefit to the company which means the shareholders will finally gain more interest. Therefore, in order to protect the shareholders best interest in many aspects, the efficient board should be established by separating Chairman from Chief Executive.
On the other hand, some people oppose the idea of splitting Chief Executive from Executive Chairman since it may lead to leadership ambiguous, internal conflict and slow decision making. However in the M&S case, the boards have made this decision as they intend to hold Sir Stuart to stay with M&S for longer period. From Sir Stuart’s leaving announcement caused the boards concern about the company’s future during the economic hardship. Sir Stuart has been known as the Chief Executive who turned M&S back to the market again. Under his control, M&S presented much better performance than the past and the future is very promising. Therefore in this particular case, holding Sir Stuart with the Company and allow him to have more power could be a better strategy for M&S to survive under the economic crisis which definitely give advantage to both the shareholders and the managements. Under the economic difficulty, the proper and fast decision is essential. The conflict between Chief Executive and Executive Chairman may be the hindrance for the company. In addition, after Lord Burns step down from the Executive Chairman, there were no other suitable candidates to replace him and Sir Stuart seemed to be a perfect answer at that moment.
On another aspect, M&S has held the great reputation in good corporate governance for several years. Until the board’s decision to combining the role of Chief Executive and Chairman, the stock price fallen, investors confident about the company decreased, oppose by shareholders and lots of critics from many organizations. These negative results affected both the shareholders and the management in term of negative company’s image.
From the fact that the board decided to combined the role of Chief Executive from Executive Chairman could be explained by the theory of justice that the board did not take the original position as the decision was mainly benefit their interest and did not show the fairness to the shareholders as reasons mentioned above. Therefore, this decision was both contrasted with corporate governance code and unfair to the stakeholders.
In this part, all advantages and disadvantages will be used to analyze under original position. Given the pros and cons of combining Chief Executive and Chairman from this particular case, the fact that it is against the good corporate governance is very strong and seems to have negative results for every related party. Moreover, given the state of unknown position there is no other information such as no other candidate, Sir Stuart’s leaving or even possible conflict among these two roles. Without any further information, the decision should base on the way that good corporate governance should be applied. It is cleared that segregation of duty between Chief Executive and Chairman is fundamental within the unitary board system like M&S as it should not allow one person to have ultimate power within the company without any observation. In addition board should have regularly meeting and well balance between executive and non-executive directors. All essential data should be provided to the board and the accessibility to all information should be granted. Moreover, the re-election of all directors not only chairman should undertake for regular basis and the former Chief executive should not be allowed to become the Chairman.
In conclusion, using the original position of John Rawls to analyze to judgment of M&S’s board to combine Chief Executive and Chairman is shown that such decision has not been made at the original position and has not provide fairness to every stakeholders. Therefore, the analysis follow by Theory of Justice has been proposed and revealed that the function of Chief Executive and Chairman should be split in order to provide fairness to every related party.