The Roles of Corporate Governance and its Influances on Risk and Performance : Tesco Plc

Transcription

1 Universiti Utara Malaysia From the SelectedWorks of Izza Naziha Ismail Spring April 10, 2017 The Roles of Corporate Governance and its Influances on Risk and Performance : Tesco Plc Izza Naziha Ismail, Universiti Utara Malaysia Available at:

2 The Roles of Corporate Governance and its Influances on Risk and Performance : Tesco Plc Izza Naziha Bt Ismail Universiti Utara Malaysia ABSTRACT The purpose of this study sought to examine the overall performance of Tesco PLC with specific risk factors and macroeconomic factor on profitability performance. The data obtained from annual report of Tesco PLC starting from The measurement of liquidity ratio and operating ratio used to see the overall performance of Tesco PLC in 5 years which allegedly beyond benchmark. The additional measurement is the asset size, this variable has a negative and no significant relationship with liquidity risk. To see the relationship of risks factors to the profitability, this paper is utilizing liquidity ratio and operating ratio. Data was analyzed by utilizing regression and bivariate correlation. The regression analysis and bivariate correlation shows only one factor of profitability is significant to operating ratio which is ROA with the highest impact to the profitability. However, the liquidity and GDP is not significant to profitability with low impact to the profitability. Keyword : factor, profitability, Tesco PLC, liquidity ratio, regression, correlation INTRODUCTION In individual assignment we need to measure the performance of a company that we choose. I have chosen a retailing company that have been well known to all Malaysian people which is Tesco. The actual name of Tesco is Tesco PLC. PLC stand for Public Limited Company which means that their shares are open to public and has limited liability. The first founder of Tesco was Jack Cohen. He actually was the Royal Flying Corp. However in 1919 after the end of Great War, he left it and use money that he get from demob to buy his first stock. After that in 1924, Jack starts have his own brand of tea that he gets from his supplier, TE Stockwell. Before the company was name Tesco, it called Tesco Tea. Tesco name actually is a combination between the initial name of the supplier which is TES and Jack surname which is CO. After that in 1934, he built a new headquarters and ware

3 house in north London. Through this warehouse Tesco became the first company that produce modern food warehouse and new method for stock control. In 1947 Tesco stock was floated with share price 25 pence. Tesco continue expend their business year by year and they start used term supermarkets for their store in 1968 when they open their market in Crawley. Besides, supermarkets Tesco also have open petrol stations. Furthermore, Tesco also has introduced Computer for School in 1992 and raised 185 million to buy equipment for school around United Kingdom. As we in this era many people more interested in using online shopping instead go to supermarket by self, Tesco also has launch Tesco.com which will give convenient to their customer. This online shopping web site has been launch 2000 and has serve 500,000 customer every week. In Malaysia, Tesco has been operate since 2000 and they have open 47 braches around Malaysia now a days and their partner in Malaysia is Sime Darby who has 30% share in Tesco. Tesco also has built Tesco bank when they have buying 50% shares of Royal Bank of Scotland in It has become full service retail bank since then. In 2010s, Tesco focus more in make their company more modern. They stared to introduce the world s first zero carbon supermarket. Besides, Tesco also has been recognizing as the Green Retailer of the year in June 2012 at Annual Grocer Gold Award. This award shows that Tesco is a friendly eco company and always want to ensure our environment free from any hazardous. In year 2015, there are 10 person that have position in Tesco PLC Board of Directors. First is Chairman of Tesco PLC, John Allan. John has many experience through his career before he became the Chairman of Tesco PLC. Before this he had be a CEO of some companies like Ocean Group PLC and CEO of Excel. Besides, he also has hold a position as CFO in Excel in 2007 to 2009 also. Currently, John also hold a position as Chairman of Barrat Developments and Chairman of Worldpay. Second is Group Chief Executive, Dave Lewis. Before this, Dave have experience working with Unilever for 28 years in variety of positions. He last 3 roles in Unilever is Chairman of Unilever in UK and Ireland, President for American and Global president, Personal Care. Third is Chief Financial Officer, Alan Steward. He joined The BOD on He has an intensive financial experience in retail. He also a qualified accountant and start his career in investment banking with HSBC. He also has hold a position of CFO, CEO in various company. Now, he also hold a position of NON-Executive Director of Diageo plc. Forth is Senior Independent Director, Richard Cousin. He was appointed to Joined the BOD in 2014 and became senior in Independent Director in Like previous BOD, Richard also has been in many position in many

4 company. The last position he has hold is as NON-Executive directors of Reckitt Benckiser Group PLC and HBOS PLC and P&O. Fifth is Non -executive Director, Mark Armour. Mark start to join Tesco PLC BOD on September Before this, he works as CFO of REED Elsevier PLC and Reed Elsevier NV. Currently, he is a Non-executive Director of the Financial Reporting Council and Non-executive Director and Chairman of Audit Committee of SABMiller plc. Sixth is Non-executive Director, Stuart Chamber. He starts to join the BOD from July Before this he was Group Chief Executive of NSG and Pilkington PLC. He also use to hold position in Non-executive Director of Manchester Airport Group and Smiths Group plc. He also has be appointed to be Chairman of Rexam plc. and ARM Plc. Seventh is Non -executive Director, Byron Grote. He was appointed to be in BOD on May Before he was appointed to be one of Tesco BOD, he has much experience as he has be appointed in various positions like CFO and Chief Executive. He also previously has been as Non- executive Director of Unilever. Currently he also holds position S Non-executive Director of BOD of Anglo American. Eighth is Non-executive Director,Ken Hanna.He was appointed to be on BOD in April 2009 and became the Audit Committee Chairman on October Previously he hold a position as CFO of Cadbury plc. from 2014 until Besides he also has hold position as CFO and CEO in many companies. Now he also holds position as Chairman of Inchcape plc. Aggreko plc. and shooting Star CHASE. Ninth is Nonexecutive Director, Mikael Olsson. He was appointed to be on the BOD in November He has many experience about business world as he has serve IKEA for 34 years and have holds various position throughout the years. Nowadays he also hold a position as Nonexecutive Director of The Schiphol Group, Volvo Car Corporation. Lastly is the only woman in Tesco BOD in 2015 is Non-executive Director, Deanna Oppenheimer. She was appointed to be on BOD on March 2012 and became the Chairman of Remuneration Committee on January Previously he has holds various position as senior roles at Barclay. She also is the founder of CameoWorks LLC and Non- executive Director at NCR Corporation and The AXA Group.

5 DESCRIPTIVE ANALYSIS 10 RETURN ON ASSETS (%) YEARS RETURN ON ASSETS (%) ROA Return on assets shows how efficient the company manage their assets in order to generate income from it. The higher the ROA the better because it shows the company can generate higher income even with small investment or asset. A good company should wisely allocate their resource so that they can make sure that their action would raise their profit and increase shareholder wealth. Based on Tesco ROA from year 2011 until year 2015 we can see their movement is positive from year to year. Even though in year 2015 there is a slightly decrease in their ROA, but it still show a positive figures. Their assets are most well manage year 2014 because their ROA shows a most highest figures in that year which is 6.23%. This means that in that year every 1 they manage to get income Their lowest ROA was in 2011 with %. This is because they having a loss in that year. However they manage to raise their profit back until now.

6 40 RETURN ON EQUITY (%) YEARS RETURN ON EQUITY (%) ROE For this kind of ratio, it actually measures how efficient the company profitability. The efficiency is based on how much profit that company can get with the money that they get from their shareholders. This type of ratio can make sure that the shareholder satisfied with the money that they invest if they find that their money grow well in that company. As for Tesco Return on Equity (ROE), we can see that their ROE fluctuated through these five years. As in 2011 their shareholder must be a bit disappointed as they shows a really bad condition of their ROE with ratio %. In that year they suffer losses in their profit. However, Tesco start to gain back their shareholder trust as they got the highest ROE in 2012 with ratio 20.54%. This means with every 1 of the investment from shareholder, the company manage to get profit which is quite high. After that, the company ROE keep fluctuated, however it still shows positive figures.

7 QUICK RATIO YEARS QUICK RATIO QUICK RATIO Quick ratio actually measures the company ability in order to meet their short term liabilities with most liquid asset in their company. In quick ratio we deduct the inventories, as the inventories take some times before it gets sold. If the company want to sell their inventories in short period of times, they might have to sell their inventories under value from the actual value that they have to sell. This kind of action will reduce the profit of the company or worst they might get losses if they need to sell their inventories lower than the value of their cost. Then, this ratio is important to make sure that the company is very reliable to meet their short term obligation without need to reduce their profitability. The higher the company quick ratio shows that the company liquidity is more stable. For Tesco quick ratio, we could see the most highest is in 2013 with ratio 0.5 which means with every 1of their liabilities, they only have 0.5 to cover their debt. While the lowest quick ratio they get was in 2011 with Even in 2013 show the highest ratio, still Tesco did not manage cover their debt properly. This is because they did not have sufficient liquid asset to cover their obligation. This means that Tesco not in good financial health.

8 CURRENT RATIO CURRENT RATIO YEARS CURRENT RATIO In current Ratio we can measures the ability of the company to meet their long and short term of liabilities.the higher the ratio, the higher the capability of the company to pay off their liabilities when it comes to due. This is because it shows that the company have enough cash or other current asset to pay their obligation. To make sure the financial of the company is in good condition, we need to make sure that their current ratio is more than 1. For Tesco current ratio, we can see the highest is in 2013 with 0.7 while the lowest is in 2015 with 0.6. Even so, the ratio is the highest in 2013, still Tesco cannot afford to cover their debt whether long term or short term because they did not enough current assets. In 2013, Tesco only can cover 0.70 from 1 of their liabilities. This means that they still short of 0.3 to cover their debt. This shows that Tesco liabilities management is quite bad.

9 90 DEBT RATIO (%) YEARS DEBT RATIO (%) DEBT RATIO Debt ratio is a tool to measure the company leverage. The higher debt ratio of a company shows that the company have a greater financial risk. However debt not a bad thing to company as it is one of the tools to help the company to grow and sustained their business. For Tesco, their debt ratio increase year by year. These shows that the Tesco highly using leverage to finance their operation. This can be proved by seeing their debt ratio percentage which is more than 50%. However as Tesco are company that their cash flow higher debt ratios are norm, so they may be easily manage their debt that more than 40%. Even though their ratio increase year by year, their asset still more than liabilities as their ratio do not exceed 100%.

10 DISCUSSION Descriptive Statistics Mean Std. Deviation N ROA % % 5 ROE % % 5 SIZE REMUNERATION GDP INDEX SCORE In descriptive analysis, we use to measure the differences of the profitability. We can measure the differences based on the standard deviation. Based on the table, we can conclude that the Tesco differences in their profitability is smaller. By that, it shows that if Tesco have increasing in their profit, their profit will only increase in small amount and so do their risk. So there is also advantage of having small differences of profitability. They do not have to bear such a huge losses if anything happen to them. The amount of losses only in range of 4% of their total profit. As in the table we could see there was a negative relationship between size of the company and the profit the company receive. As the company has large size, they need to pay more to their staff. The larger their company, the more staff they need to manage their operation. So they need pay more salary to their employee. Thus, it will reduce a bit of their profit. Besides, the larger the company, the more the remuneration that they need to pay to their Board of Directors as the BOD need to think more on how to make sure that the company always maximizes the shareholder value. So as their responsibilities toward the company is increase, the more remuneration that the company need to pay to them. As for the GDP, we can see that they show a negative relationship toward their profitability. This means, this type of external factors does not contribute much in the profitability. Plus it the lower the company involve in GDP the higher the profit that the comoany will get. For example, if the company reduce their export activities, they will increase their profit as they can cut cost of export tax.

11 Correlations ROA ROE SIZE REMUNERATION GDP INDEX SCORE Pearson ROA Correlation ROE SIZE REMUNERATION GDP INDEX SCORE Sig. (1-tailed) ROA ROE SIZE REMUNERATION GDP INDEX SCORE N ROA ROE SIZE REMUNERATION GDP INDEX SCORE Model Summary b Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson a a. Predictors: (Constant), GDP, ROE, REMUNERATION, SIZE b. Dependent Variable: ROA ANOVA a Model Sum of Squares df Mean Square F Sig. 1 Regression b Residual Total a. Dependent Variable: ROA b. Predictors: (Constant), ROE

12 CONCLUSION In conclusion, Tesco have been established for almost 100 years. Throughout the years Tesco have been face many problems and have been established many new things to improved their production and to be an international company that always look up by customer. Even though they have been established for a very long term, they still need to improve their company financial health. Their financial department need to pay attention on their liquidity as they have a very bad liquidity and this situation will lead them to a bad reputation and worst they might be have to sell their asset with a low price if they did not have a sufficient money when it comes to due of their loan repayment. However, for this past 5 years Tesco has shown a great increasing their profitability. This can see through the profitability ratio which is ROA and ROE. After the face losses in 2011 they has improve their performance as we can see in their ratio. This means their BOD has do their responsibility to make sure that their management do their duty to improve their company performance. This action make their shareholder happy as they know when the company performance is increase, their value of share also increase. Besides shareholder, this kind of performance also attract new investor also.

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