Evaluation of Corporate Governance Of Starbucks

Overview of Starbucks:

Starbucks Corporation gained popularity as part of the “second wave coffee” since the initial days in 1971. The preliminary days of the coffee chain owner of about fifteen thousand stores started from a single constricted store front in Pike Place Market of Seattle, Washington. Taste, service quality and coffee varieties offered differentiated Starbucks from the other coffee outlets in the US. Now, Starbucks operate in US, China, Canada, Japan, South Korea and other countries which figures out to be more than 50 countries across the globe.  Starbucks specializes in dark roasted coffees served while later, whole ground coffee, hot and cold coffee, tea, espresso, Frappuccino drinks and many other eatables like pastries sandwiches, ice creams got added in the menu list at the outlets. Starbucks resorts to automated coffee makers to ensure flavor and food safety at the stores.

Starbucks has bagged many awards like “No 1 Best Coffee” and “No 1 Most Popular Quick Refreshment Chain” in 2009-2010, “World’s Most Ethical Companies” in 2007-2010, “Most Ethical Company in European Coffee Industry” in 2009-2010, “Most Admired Companies in America” in 2003- 2010 and many others. At Starbucks, coffee becomes celebration with textured heritage, tradition and a hot cup of cherishing experience that any visitor would love to share.  

Corporate Governance:

The set of guidelines that guide the operations of an organization can be collectively known as corporate governance. Corporate Governance creates a fine tuning between the organization’s outlooks towards the stakeholder line up and the society to which the organization belong. Corporate Governance contributes in achieving organizational targets. So, the components of the same are covered by almost all wings of management. Planning phase to operational control management including the disclosure of the relevant information influencing the investment decision of investors is covered by corporate governance.

The responsibility towards stakeholders like the management, shareholders, investors, suppliers, customers and government is balanced with the responsibilities towards community by the defined policies under corporate governance. The shareholders can impact the policies and guidelines that frame the corporate governance of a company. However, Tricker (2015) mentioned that the prime responsibility and authority of defining the principles of corporate governance lies in the hands of board of directors. The members of the stakeholders or the board members elect a limited number of members who represent the stakeholders. The elected team members form the board of directors.  Now, the board of directors actually defines the principles of corporate governance which is again a determinant factor on the share price of the company.

Principles of Corporate Governance:

The Main Principles of Corporate Governance can be Lined up as below:

Acknowledgment of all the stake holders can impact greatly in influencing the image of the organization. Often unequal distribution of importance is observed which basically become biased on the basis of the share volume held by the stakeholders and the position in the executive team. This cannot be accepted as good governance as each shareholder need to get chance to voice the views which can impact the development of the organization.

Distinct directions and guidelines need to be specified stating the responsibilities and authorities of the board members to reach the stakeholders clearly. This ensures all members are on the same page and can equally contribute towards the growth of the organization.

Organizations need to address the interest of all the stakeholders even when any one is not a shareholder of the same (Denis, 2016). This practice in corporate governance can create the goodwill among the society and media that can be even more an asset for the organization.

Transparency in business is an important factor to develop reputation of the company. The basic duty of corporate governance can be in defining the policies to remit direct and actual information related to balance sheets, income statement and reports of the relevant audit teams in the company. Transparency can be the best booster of confidence on the company’s brand value.

Business ethics can be one of the primary factors that can enhance the growth, promote trust of the stakeholders and above all, save the organization from falling into severe pit holes (McCahery et al. 2016). The ethics need to be laid down clearly by the board members to ensure the clear image, positive impact on business and above all, to prevent any legal nonconformities in future.

Criteria for Evaluating Corporate Governance:

Corporate governance is important as it influences others functional areas of any organization. In fact, it is the effectiveness of corporate governance of a company which also determines the risks or benefits of stakeholders associated with a company (Acharya et al. 2013). The basic components of corporate governance are usually aimed at meeting the interest of all the stakeholders. Here, corporate governance seeks to maintain a proper balance among the interests of various stakeholders.

There can be various parameters that can be used for evaluating the effectiveness of corporate governance in an organization. In current scenario, the following five criteria is used to evaluate the effectiveness of corporate governance of Starbucks. These are discussed below:

Board Effectiveness:

Assessment of a company’s corporate governance policies begins with review of its board of directors. A board of directors which is not at all committed to fulfill its fiduciary responsibilities might lead to incompetent and ineffective management behavior. In this context, Wintoki et al. (2012) stated that good corporate governance can be achieved by a company by top-down or bottom-up approach

Board Autonomy:

Board autonomy or independence is one of the major factors determining effectiveness of corporate governance. The number of proportion of non-executive directors determine the degree of autonomy or independence of the board of directors. Thus, higher the number of non-executive directors greater is the autonomy of the board and vice-versa.

Accountability & Integrity:

In the view of Erkens et al. (2012), accountability in context of corporate governance can be defined as the responsibility and obligations to provide an explanation to the conduct of a company. It is the responsibility of the board to present an understandable and balanced overview of the future prospects and current position of the company. Strong internal control and sound risk management systems are two key elements of an efficient corporate governance. There also needs to be regular communication between the board and the stakeholders. According to Westphal and Zajac (2013), flawless financial reporting is the symbol of an excellent corporate governance. Setting up of an independent audit committee for overseeing the audit process is vital in this regard.

Transparency:

Transparency is mainly concerned with the extent to which the stakeholders are informed about the current activities, future strategies and risk level of the concerned company. In other words, transparency is about maintaining clear communication with the stakeholders. Here, disclosure of both financial and non-financial performance are important. As mentioned by Hoskisson (2013), transparency ensures that the stakeholders can keep faith on the management and decision process of a company.

Fairness:

Fairness is concerned with equal treatment of the stakeholders by a company. Here, the major stakeholders to a company are investors, customers, suppliers and employees. The extent to which a company is able to treat its employees in an equitable manner is indicated by fairness. As mentioned by Khan et al. (2013), the fairer an organization is able to appear the better it is in a position to tackle the pressure of the stakeholders. Inequitable treatment, biasness and personal prejudices often hamper the long-term sustainability of an organization.

Stakeholder Management:

The efficiency of corporate governance is also judged by the way in which the management of the company manages its stakeholders. Here, it is important to properly identify interest and power of each stakeholder. It is the responsibility of the governing authority of a company to strike a proper balance among varied interests of the stakeholders.

Performance Measurement and Recognition:

Performance measurement is an integral part of corporate governance which is mainly concerned with comparing actual performance of employees against preset targets to determine efficiency. A good corporate governance is usually have a well-established performance measurement policy & procedures. In addition, Frias?Aceituno et al. (2013) stated that the governance of an organization needs to be capable of rewarding positive performance and eliminating negative performance.

Return Generated for Investors:

Wealth creation is often considered as a key responsibility of the management of a company in connection with corporate governance. This involves providing adequate returns to the shareholders in the form of dividend payouts and Earning per Share (EPS). Here, profit is the main factor as dividend payout & EPS are positively linked to profitability.

Evaluation of Corporate Governance of Starbucks:

Starbucks is one of the leading companies in the coffee shop industry with large scale operations, huge customer base and large number of retail stores. The board of directors of Starbucks Corporation comprises of maximum 12 members who ensure the business and corporate goals of the organization are met maintaining long term interests of the stakeholders. The nominations from the corporate governance committee are sent for those members who accord the Nasdaq Stock Market independence criteria. Whenever the number of board members falls below 9 and the board feels the necessity of adding new members, election of new members is performed (Yeh et al. 2013).

The frequency of board meeting at Starbucks in minimum 5 times in a financial year with additional teleconferences, video conferences and personal meetings as and when needed.  One board member is dedicated to strategic planning. The agendas for the meetings are circulated prior to the meeting by the chief executive officer or chairman of the board. The board mainly is responsible for monitoring the management of operations of the organization for meeting the interest of the company to the best along with the benefits of the shareholders. Michelon and Parbonetti (2012) mentioned that the primary legal binding that impacts the decision of the board members are responsibility of care and loyalty. This binding ensures that the board members make decisions to the best of interest of the company irrespective of any personal interest.

The Corporate Governance of Starbucks is Evaluated as Below:

Board Effectiveness:

Starbucks uses a top-down approach in respect of its decision making and communication purpose. The key decisions and long-term strategies of the company are formulated by the top level management and then passed on to the lower level of management. The employees or the lower level employees are required to follow the instructions laid down by the higher level of management. This strategy of Starbucks helps the company in maintaining a tight control over organizational activities. On the contrary, top-down approach is often criticized because of the low level of employee engagement associated with this approach (Mason and Simmons, 2014).

Board Autonomy:

The corporate governance system of Starbucks comprises of various committees like audit committee, risk management committee and similar others in addition to the board of directors. The composition of the board and relevant committees indicates presence of non-executive directors. However, Claessens and Yurtoglu (2013) observed that the proportion of non-executive directors in case of Starbucks is lower compared to the number of executive directors.

Accountability & Integrity:

It is practice of Starbucks to provide a detailed overview of its corporate governance, CSR, current performance level and future directions in its annual reports. The financial statements of the company are supported by adequate schedules and notes for detailed explanation on accounting policies (Subramaniam et al. 2013). Starbucks also has a risk management committee responsible for monitoring the business environment, identifying potential risks and developing risk mitigation strategies. Furthermore, Starbucks has an audit committee engaged in monitoring and overseeing the audit process along with maintaining consistent communication with the external auditors.

Transparency:

Starbucks seems to be very much clear with communication with its stakeholders. The annual reports and website of the company indicates that Starbucks clearly mentions both positive and negative sides of current performance level of the company. Future strategies are also specified clearly. In addition, Samaha et al. (2012) expressed that written communication is a major part of the communication process of Starbucks and that the company believes in clear, specific and written records for all its organizational policies and procedures with the stakeholders. 

Fairness:

Starbucks has shown considerable fairness to the investors and suppliers. The company has provided a standard dividend payout and EPS to its shareholders till date. Starbucks also provides an initial training program to its suppliers to ensure that all suppliers get equal opportunity to perform at the best (Schiehll et al. 2014). On the contrary, a key limitation of current corporate governance policies of Starbucks is that the company does not have any proper mechanism, portal or platform where employees can place individual complaints or grievances. The same problem persists for its customers as well as the stores of Starbucks do not have any customer feedback collection mechanism. Fairness in treatment is hampered due to this.

Stakeholder Management:

Starbucks seems to have been quite successful in managing its stakeholders. The company offers good returns to the shareholders and also ensures timely clearance of invoices of the suppliers. Creditors are also paid interest and repayment of principle amount of time. On the other hand, Hsu et al. (2013) stated that Starbucks offers friendly working environment, career growth opportunities and challenging job roles to its employees. As regard to the customers, the entire corporate governance system of Starbucks is customer centric and thus puts customer interest on the top priority in respect of decision making.

Performance Measurement and Recognition:

Starbucks uses Balanced Score Card (BSC) approach to measure organizational performance van (Essen et al. 2013). The key elements of BSC used by Starbucks are financial, customer, learning & growth and internal business processes. As a part of the strategy, the company identifies Key Performance Indicators (KPIs), sets targets for the same and reviews actual performance level against set targets at periodic intervals (Filatotchev et al. 2013). This allows Starbucks to identify major deviations and correct the same. The corporate governance system of Starbucks is focused on adopting an integrated approach in performance measurement.

Returns Generated for Investors:

The corporate governance system of Starbucks has been successful to generate adequate profits for its shareholders consistently in spite of tough market competition. This is clearly indicated by the financial performance of the company over the past five years. Starbucks has also been consistent with its dividend payments which is has been a major tool to attract investors looking for quick returns or steady flow of income.

Recommendations:

The following recommendations have been developed for Starbucks based on the above analysis of corporate governance of the company:

Increase Employee Engagement:

Starbucks can use participative leadership style to engage its employees in company affairs as the same can help in enhancing employee loyalty and motivation level. Techniques like brain-storming, teem meetings and others can be used for this purpose.

Raise Number of Non-Executive Directors:

It is advisable for Starbucks to ensure that the proportion of non-executive directors are at least more than 51% of the total number of directors. This could help in increasing the effectiveness of the corporate governance system of the company.

Develop Feedback Collection Mechanism:

Starbucks can develop an online portal for all its employees wherein employees can place respective concerns, issues or complaints. Similarly, a separate section for customer feedback collection can be developed on the website of Starbucks to encourage customers to share feedback on the products and services offered by Starbucks. 

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