Introduction
Corporate Governance (CG) is an important aspect that characterizes not only the company’s governance mechanisms but also the relationship between management and stakeholders. In the modern world, most imaginings cannot be limited solely to internal financial goals; they also have a social responsibility to a wide range of stakeholders. This statement is especially true for the members of the FTSE 100 list on the London Stock Exchange, who, in addition to their income, also focus on global policy changes and industry development. JD Sports Fashion PLC is a sportswear retailer and is currently experiencing an upswing in the stock market (“FTSE 100,” n. d.). The analysis of JD Sports Fashion PLC allows determining the type of its CG, the effectiveness of the Board of Directors as well as the remuneration policy adopted by the company. Taken together, these indicators allow you to determine how effectively CG is being built in the company and how it reflects the current goals and position of the organization in the industry.
“Narrow” and “Broad” Definitions of Corporate Governance
CG can be classified as either “narrow” or “broad,” which reflects the strategy chosen by the company. This division is based on the extent to which a company “focuses on satisfying the parochial interests’ of shareholders or meeting the broader interests of diverse societal stakeholder groups” (as cited in Ntim, 2017, p. 1). In its narrower sense, CG refers to the interactions which occur between the internal actors of the organization (Tabassum & Singh, 2020). Specifically, the actors include stakeholders, management, and the Board of Directors. Thus, the Board of Directors and the management are accountable to the stakeholders. In other words, CG, in its narrow sense, refers only to protecting the interests of those participants who provide the company with financial resources, namely investors. Narrow CG aims to regulate the internal mechanisms of the company to maximize its value and generate benefit (Ntim, 2017). A narrow CG company does not strive for a balance between economic and social and does not focus on meeting the interests of potential stakeholders such as suppliers, the community, or employees.
A broader view of CG involves considering factors which lay beyond the financial stakeholders and the internal responsibility of the organization. In a broader sense, a company has “a set of economic and social responsibilities as well, towards other stakeholders in the company” (Tabassum & Singh, 2020, p. 5). The contributors to which this definition applies may include the community, suppliers, or employees. This type of CG is needed when a company is looking to build public trust and attract investors. Additionally, in a narrower sense, CG is aimed at building trust between suppliers and the management of the organization. More broadly, CG helps build overall confidence in a company’s operations through transparency, disclosure, accountability, and protection. While narrow CG is purely internal control mechanisms, broad CG can include additional external aspects. This implies considering “the legal system, the market for managerial labor and corporate control, regulators, local communities, cultural, political, social and economic policies, and institutions within which corporations operate” (Ntim, 2017, p. 2). Thus, the two definitions differ in which circle of stakeholders is taken into account when managing a company and choosing a strategy.
JD Sports Fashion PLC Corporate Governance
JD Sports Fashion PLC releases annual reports, which can provide substantial information on the company’s CG. In the 2018 report, as well as in 2020, the company notes that its Board of Directors manages “the long term benefit of the shareholders, whilst also ensuring the interests of other key stakeholders – including employees and suppliers – are protected” (JD Sports Fashion PLC, 2018, p. 85; JD Sports Fashion PLC, 2020, p. 122). Moreover, the company emphasizes that management is mindful of “social, ethical, and environmental responsibilities” (JD Sports Fashion PLC, 2020, p. 159). The executive chairman’s statement includes information that the safety of colleagues and consumers is a top priority for the company. The organization also participates in the promotion of policies aimed at facilitating equality in relation to gender, ethnicity, age, and other kinds of identities in the industry. In particular, the company marks its responsibility as a major brand in the elimination of global discrimination through collaboration with other organizations. Thus, it can be concluded that the company is using a broader CG which focuses not only on the economic but also on social responsibility.
The Company Board Structure
The effectiveness of CG primarily depends on the Board of Directors and its activity. JD Sports Fashion PLC Board includes seven directors: “the Executive Chairman, the Chief Financial Officer, and five Non-Executive Directors” (JD Sports Fashion PLC, 2020, p. 122). The company also has a Nominations Committee, which, in particular, deals with the independence of certain Board members and considers their effectiveness. The Board’s priority is to maintain a leadership position in risk and control management. Additionally, the report emphasizes that “the Board’s mix of Executive and NonExecutive Directors provides an appropriate combination of judgment, skills, and experience to satisfy the Group’s need for overall effective and agile leadership” (JD Sports Fashion PLC, 2020, p. 122). The Board’s primary responsibility is to protect the interests of the company and manage its activities.
The report contains information on the main activities of the Board during the year as well. According to it, Board members were involved in the selection and approval of aspects of the company’s strategy, assessing the impact of Brexit on the company, as well as issues of cybersecurity and risk management (JD Sports Fashion PLC, 2020). Pentland Group PLC has a 55% share in the JD Sports Fashion PLC, but only two of the company’s Board members are related to it (JD Sports Fashion PLC, 2020, p. 118). Non-Executive Directors dominate the Board of Directors, giving the company an edge in the broader CG. Non-Executive Directors, unlike Executive Directors, do not have a direct interest in the management of the company. They are experts and can offer advice on company development in the industry. The independence of these members of the Board provides the company with a focus not only on the internal but also on the external aspects.
In particular, Non-Executive Directors are hired for this position for their specific skills and the value they can bring to the company. In the case of JD Sports Fashion PLC, where the Board is based on this type of Directors, one can talk about a high degree of expertise. The report also indicates that Board members attended all scheduled meetings throughout the year. This is an important factor which indicates the Board’s interest in the company’s activities and the process of working on its activities. The structure of the Board of Directors chosen by JD Sports Fashion PLC allows the company to consider a wide range of responsibilities. Most of its members are not direct employees of the company but do not represent a specific shareholder either. Two of the Non-Executive Directors are interested in Pentland Group Limited as a major shareholder.
The structure of the Board improves the efficiency and productivity of the CG due to the independence of its members. Company CG refers to a stakeholder theory where a company is accountable to many stakeholders, including the community, customers, and employees. This Board structure enables JD Sports Fashion PLC to meet a wide range of needs, including social, not just financial. A structure with a large number of direct participants in the company’s management would limit the range of interests that it supports. Focusing on the internal governance of the organization would have prevented JD Sports Fashion PLC from engaging in global politics.
Executive Remuneration Packages/Plans
The report offers extensive information on the company’s remuneration policy. The main aspect of remuneration in 2020 was the salary cut for members of the Board, for the Senior Management Team, and the Executive Chairman (JD Sports Fashion PLC, 2020). The 2018 report indicated that the company strives to provide the fairest payout in line with the performance of Board members and management (JD Sports Fashion PLC, 2018). The overall activity of the company in relation to remuneration aims to “increase transparency and retain competitive remuneration that supports the growth of the business” (JD Sports Fashion PLC, 2020, p. 133). The company’s remuneration policy also includes performance metrics that are improved and revised every year.
In particular, the company has a Long-Term Incentive Plan (LTIP) program, which reflects the key aspects of the company’s performance. The company also has an Annual Bonus Plan, Pensions, and Benefits whose terms were revised in 2020. The Annual Bonus allows the Executive Directors receive bonuses based on the achievement of financial goals. The size of this bonus can be up to 200% of the salary and is paid once a year. LTIP allows Executive Directors to receive competitive rewards in order to better serve the interests of the shareholder. This bonus can be up to 100% of the salary and depends on changes in profits or share price. Non-Executive Directors fees reflect the time and effort spent by Board members in contributing to the development of the company. The amount of such payments is set every year and revised individually.
The company’s LTIP depends on both financial and strategic goals set by the committee for the coming year. In addition to the goal of achieving a certain profit before taxes, there are also goals related to increasing transparency, digital development, environmental and governance performance. While financial goals account for two-thirds of the CEO’s annual bonus, strategic goals account for only one-third of incentives. With regard to Non-Executive Directors, it is not entirely clear what indicators influence the formation of their fees. It is only stated that “the Board as a whole is responsible for setting the remuneration of the Non-Executive Directors, other than the Chairman whose remuneration is considered by the Committee” (JD Sports Fashion PLC, 2020, p. 143). Thus, the remuneration policy for most of the board members is not regulated and depends on the decision of the committee.
In this case, the weakest side of this remuneration plan is that the Non-Executive Directors who make up the majority of the Board has no direct financial relationship to the company’s performance. In other words, the financial and strategic goals set by the committee directly affect only the management and employees of the company, while the rest of the Board members have exclusively advisory power and are not responsible for the outcomes. Thus, the entire financial responsibility rests with the Executive Chairman and the Chief Financial Officer, whose fees and awards are highly dependent on the revised policy.
However, the remuneration policy also encourages members of management and immediate employees to fulfill financial plans, which is the strong point of the presented plan. It is stated that over 50% of the Executive Chairman’s income is variable elements of remuneration, while for the Chief Financial Officer, it constitutes over 80% of income (JD Sports Fashion PLC, 2020, p. 147). These conditions fully reflect the responsibility that lies with the company’s management. Since most of the rewards are financials, it is imperative that the plan reflects the goals set. The remuneration program used by the company as a whole is effective as it encourages Board members to achieve their strategic and financial goals.
Conclusion
CG reflects which aspects of activities and interactions with stakeholders are the basis of the company’s operations. In the case of JD Sports Fashion PLC, it can be noted that the company focuses on a broad CG aimed at meeting not only internal but also external needs. The organization supports both financial and social responsibility, which is reflected in its objectives. The Board of Directors is predominantly composed of Non-Executive Directors, which also identifies the company as targeting a wide range of stakeholders and maintains standards of expertise. The general analysis of the company’s CG shows that the remuneration system is also in line with the established policy since performance indicators depend not only on financial but also on strategic goals.
References
FTSE 100. (n. d.). London Stock Exchange. 2021, Web.
JC Sports Fashion PLC. (2018). Annual report and accounts [PDR file]. Web.
JC Sports Fashion PLC. (2020). Annual report and accounts [PDR file]. Web.
Ntim, C. (2017). Defining corporate governance: Shareholder versus stakeholder models. In A. Farazmand (Ed.), Global encyclopedia of public administration, public policy, and governance (pp. 1-9). Springer.
Tabassum, N., & Singh, S. (2020). Corporate governance and organizational performance: The impact of board structure. Springer International Publishing.