Essay: Rolls Royce

This report will explore and critically evaluate key issues facing the board of directors of Roll Royce with the purpose of outlining some recommendations. The aim of this report is to achieve the following:-
1. Identify and evaluate on an area of demonstrating corporate governance within Rolls Royce
2. Justify and explain whether perceiving no engagement with institutional shareholders will have an impact on the long term performance of Rolls Royce
3. Explain and perform a risk identification and appraisal and present a summary of key risks the board of directors at Rolls Royce should be aware of
4. A proposed risk strategy on how the risks could be communicated to the employees within Rolls Royce
Corporate governance identifies issues connected to transparency, integrity, effectiveness and accountability in the management of activities. You as board of directors should be concerned with the management on how Rolls Royce operates functions and financial performance. Corporate governance aims to involve the quality of assurance of the operations of the board itself. A good development of corporate governance delivers good results and generates business profit. The Cadbury report (1992) describes Corporate Governance as ‘the system by which companies are directed and controlled.’ (Soloman J 2013 p30)
In the past audit committees have failed to take responsibility and accountability for audits and accounting functions. Examples of large organizations which have failed in corporate governance practises are Enron and Maxwell Communications. It has been identified the problem is not a failure to comply with rules but a failure in governance practises. (Fernando A 2012 p302)
An area to evaluate Corporate Governance is to monitor accountability and transparency within Roll Royce as you as board of directors should be responsible for presenting fair balance of the position within the external markets and future prospects. It also helps to monitor who is in control understanding the key players in the process. Studies have shown that the possibilities of conflict between investors and management has been with us for centuries and will continue to be a matter of concern as company performance improves when investors have greater confidence in observing some core values as there is evidence of good discipline and having regards for shareholders views. (Cheffins B 2011)
Agency theory contributes to the development of practises on issues in accountability and transparency as the relationship between shareholders and directors is relevant in order to achieve levels of success as the interests between both are aligned and should not be at the expense of one another.
Accountability with Rolls Royce
Accountability is critical as it demonstrates the enhancement of ensuring management are answerable towards their actions and helps to increase business performance maintaining a positive culture. (Keasey K 2005) For Rolls Royce it is ensuring they are answerable towards their actions and that they are readdressed when duties and commitments are not met against the Corporate Governance code.
Management is accountable towards the shareholders in using their resources in the most efficient and desirable manner. The audit committee needs to develop and nurture the responsibility to give reliable and accurate information to the board of directors at Rolls Royce.
An example of accountability at Rolls Royce is their Global conduct of code. Rolls Royce emphasizes the importance of their corporate values. The code indicates that they are complying against all the laws and regulations within the specific clauses in the code. (Tricker B 2014 p20) The code also shows how they are setting the behaviour which they are judged against from the Corporate Governance code. By having this code implanted in place the investors can explore whether Rolls Royce have met the standards expected of them.
Transparency with Rolls Royce
Transparency is the characteristic of companies being open in the clear of any disclosure of information rules and processes. Lack of transparency in financial information can result in mislead of public trust and confidence. For example in the case of Enron auditors fail to fulfil their professional responsibility to report accurate financial statements and audit functions as they manipulated providing the opportunity for unscrupulous and produce results that serve a particular interest.
Many have the intentions to hide relevant information about their performance. This can make it difficult for investors to recognise warnings signals if the company is facing financial problems. (Soloman J 2007 p36)
For Rolls Royce simply making the information available is not sufficient for them to achieve transparency. The information needs to ensure that disclosure is made on all relevant and accessible on all matters within Rolls Royce. All disclosure needs to be made on a timely basics ensure that all shareholders have time to analyse and process the information. Transparency can facilitate the engagement of new clients and demand for the products and services in Rolls Royce. It also helps to achieve trust as the openness helps to provide evidence of high standards in business practices. Not only is it the best interests of Rolls Royce to be transparent and open but it can improve the significate in society as a whole, as the interest of the business can often clash with the interest of society which may not align with the business strategy and goals.
From the Rolls Royce annual report in 2013 it indicates that you have considered a fair balance and provides all the information necessary for the shareholders to access about performance, business models and strategy however you have been criticised on not disclosing information on bribery and corruption in the annual report. The causes and effects could lead to the data being mismanaged from the annual report as the data presented must be efficient and meaningful. Also it indicates to investors on uncertainty levels as it obscures Rolls Royce is debt levels. As Rolls Royce do not disclose any of their bribery and corruption cases it is debatable to say they are transparent in their annual reports.
Corruption exposes Rolls Royce to significant risks and it can cause losses occurring additional costs and reputational risks for Rolls Royce. It can also lead to your directors or managers resulting in criminal prosecutions or imprisonment. This has been exposed in the financial times when you were accused of bribery within Petrobras in Brazil. This has led to a serious fraud investigation. (Pearson et all 2015)
Another example was when Rolls Royce were forced into bankruptcy because their accounting polices allowed them to be capitalise expenditure on developing jet engines and treating research and development spending as an addition to the company’s asset based rather than taking it through the profit and loss accounts and reducing earnings. This has kept the earnings high however it has reduced transparency. (Bloomfield S 2013 p315)
In the 2014 annual report it has been quoted from Lewis Booth that you have been working on standardising the internal financial framework against the assessment made. This will create consistency and reinforce accountability which demonstrates you are bridging the gap on being accountable and transparent. This also complies with the Corporate Governance code under C11 about the performance, business model and strategy.
Over previous years Rolls Royce have demonstrated bad corporate governance. They have managed to overcome and demonstrate good corporate governance by updated their polices and produces and making sure they are compliant and accountable for their actions. The recommendations which would be suitable for accountability and transparency are refining the accountability and transparency budget and policy.
Engagement with Institutional Shareholders
Shareholders influence has increased over the last decade. Ownership is now more concreated in the hands of institutional shareholders. Institutional shareholders have a considerable amount of power to influence Rolls Royce. The role of an institutional shareholder has risen from the conflict of interest between the manager and shareholders. The Higgs report suggest that ‘Institutional shareholder should enter into a dialogue with companies based on mutual understanding of objectives’ (Soloman J 2013 p39). The statement indicates that institutional shareholder should get involved and take responsibility towards their action.
An activist shareholder will help engage Rolls Royce in enhancing performance and market expectations as this will provide outside perspective of the company’s performance. These views can be potentially valuable for Rolls Royce when understanding and developing the company’s strategy as it will help identify potential early warning signs of danger. Another viewpoint of considering engagement with shareholders is they are a source of potential strategy for Rolls Royce. As institutional shareholders have a board spectrum of companies and business strategies in a specific sector they can compare and contrast Rolls Royce towards their competitors which will help bring forward suggestions which may not have been considered by the company.
Shareholder engagement can also help board credibility at Rolls Royce by providing goodwill and trust. This could lead to an increase in long term investment. As Rolls Royce are still facing financial difficulties it is essential that they communicate effectively and engage with their institutional shareholders as they have the knowledge and expertise to minimise risks and improve the financial position of the company.
To provide an example of the engagement of shareholder activist a recent study conducted by the Hermes UK fund stated a high correlation between enhanced corporate value and institutional shareholders. The Hermes fund found a correlation between increased share returns and shareholder engagement by Hermes. (Gong B 2014 p28) A positive example within Rolls Royce is regularly updating and changing their accounting policies on revenue sharing arrangements with partner suppliers such as KPMG. This helps to reduce the key risks and gives access to providing findings in the audit process.
The Stewardship code helps institutional investors have a firm robust policy on managing conflict and establishing clear guidelines on how the activities will be managed and also protect the enhancement of shareholder value. It also helps to act collectively with other institutional shareholders. From the supporters it was stated that ‘if you don’t vocalise your concerns companies cannot be expected to try and address them. This would neglect the duties from customers. (Grene 2010)
If you do not engage with your shareholders then the consequences you could face would be making the wrong decisions as they would be a lack of transparency within the organisation. This could cause any new inventions at Rolls Royce lead to dissipation of management time and profits decreasing and the board being disengaged and there could be potential conflict in relationships amongst the directors. This could potentially lead to involvement within the headlines in the newspapers. This links back to agency theory as the directors and managers do not always make decision in the best interest of the shareholders as they want to maximise their own wealth at the expense of the shareholders. This refers back to shareholders engagement as managers have better expertise in meeting the shareholders objectives.
Overall you should engage with their institutional shareholders as this could cause conflict on pay and will help to gain specialist knowledge to handle complex issues. This will also help to decrease issues down the line and will influence the value of performance in the long term.
Risk Identification within Central Asia
This report has utilised the COSO framework which determines the internal environment of Rolls Royce in respect of the identified risk. Appendix 2 shows the risk management cube. Rolls Royce should evaluate the anticipated consequences for strategy, tactics, operations and compliance. To fulfil this approach Rolls Royce should apply the five components of the cube. The risk is then viewed and addressed by the ethical values and the environment in which Rolls Royce will operate in. Afterwards objectives are set before the management can identify potential event which will affect achieving Rolls Royce aims and objectives.
The purpose of the risk identification and risk appraisal will help to consider a series of operations as part of the supply chain in Central Asia. A risk can be an event or condition that if it occurs that could have a positive or negative effect on Rolls Royce
is strategy.
The TARA approach helps to transfer avoid reduce and accept risk. The perception grid in appendix 1 identifies the risks associated with establishing a series of operations if Rolls Royce were to move into Central Asia and will outline a summary and justification on why these risks are important. The remainder of this report will outline a response strategy which will be implemented ahead of establishing the operations and demonstrate how the strategies will be communicated to the employee of Rolls Royce.
In today’s competitive business environment Rolls Royce are faced with greater uncertainties such as risk and opportunities as they have striven to create value. It is therefore of great importance for Rolls Royce to make appropriate strategic decisions on uncertain outcomes as Rolls Royce are facing financial difficulties and improving profitability to seek new opportunities. As Rolls Royce has global operations they have clients in every time zone however they all have different culture and preferences of working. These are important factors to consider as what sells in one country may not sell in another.
Central Asia have a shared interest as the UK in regional stability and achieving a stable transition and security for the future. The UK is actively looking at ways to support the supply lines in Central Asia. You as board of directors need to be clear in recognising deficiencies with Central Asia. (Gov.uk 2012) Appendix 4 shows the figure of corruption in Kazakhstan.
As Rolls Royce would like to consider establishing a series of operations in Central Asia it will involve a variety of financial and operational difficulties. There are different types of risks existing in the economic market. Each risk carries out different implications. Risks can also result from economic conditions. The risks which are identified as high impacts through the grid are supply chain, reputation risk, political and product risk.
Supply chains are growing more global and complex. This can be driven by customer expectation to reduce costs and increase flexibility. The challenges for mitigating supply chain risks are controlling the boundary between Rolls Royce and for the coming partners in Central Asia. For Rolls Royce to be successful in migrating risks within supply chains they must ensure information flows and security is a key enabler. They also need to ensure that there is agility in their supply chain by collaborating sharing polices. The table identifies risks within supply chain and the long term benefits for Rolls Royce.
Areas of supply chain risk How Rolls Royce can mitigate the risk Benefits to Rolls Royce in the long term
Global sourcing
Risk sharing contracts
Low cost sourcing
Can establish long term relationships
Diverse Supply base Sustainable logistic models Reducing transport delays
Helps to transfer the risk
Product complexity Making quality products standardised Reduces the cost of quality
The climate variability in Kazakhstan changes considerable during related disasters as the heritage is complex and likes to compose considerable risks to human welfare and the environment. (UNPD 2015) This could be a potential risk towards Rolls Royce especially for moving products to various countries within Central Asia.
Reputational risk is linked with customer expectations regarding Rolls Royce is ability to conduct business securely and responsibility. Rolls Royce corporate reputation is critical to the profitability of the business. It is important because a damaged reputation will impact sales and the ability to attract and retain top talent and this will reflect the culture and long term performance of Rolls Royce. It will also affect the shareholder value as it will give a competitive advantage on the shares within Rolls Royce. The benefits for Rolls Royce maintaining reputational risk are that it can ensure effective communication and disclosure to all the stakeholders. It can also promote commitment and trust between all the stakeholders and can promote a good working culture.
Another major risk is product failure. Product failure occurs when the product do not meet the safety standards or causes significant impact to customers and the environment through failure in the quality controls. To manage this risk we recommend that you need to know what makes your customers buy the product, what problems need to be identified and how much they will pay for the problem to be solved.
Another important risk is political risk within Central Asia. Kazakhstan and Uzbekistan are the region biggest economy and are still ruled by presidents in the 70s. Most of the economic structure is based on loyalty and personal networks around the presidents which means that rules and regulations do not get updated often. (Mueser 2012)
Overall these risks need to be considered when establishing a series of operations in Central Asia. It is also important to know how to make these risks more viable as this could affect the profitability of Rolls Royce in the future. Also you need to be able to understand the culture of Central Asia as you will be working with the employees in that region.
Implementing and Communicating Strategies the risks within Rolls Royce
The information and communication are considered the next step within the risk management framework. The relevant information needs to be identified, captured and communicated in a timeframe which enables people to carry out responsibilities. (COSO 2004 p8)
To communicate the strategy with Rolls Royce to the employees, internal communications would be the best option to implement it successfully. Communication is important as it will help promote motivation by informing and clarifying the employees about their given responsibilities and how they should be performing the tasks. It will also help improve performance if they are under achieving. Another impact of communication is it helps the decision making process as it will help identify an alternative action. (Everse 2011)
Communication can also be a vital assisting controlling process as this will help to identify behaviour in various ways amongst employees within Rolls Royce. For example there are various principles and guidelines which employees must follow. They must comply with the polices and perform their job efficiently and communicate any problems with management. You also need to ensure that all disclaimers and disclosure are signed from employees ensuring they understand what it required from them. (Hopkins P 2013 p139)
An impact of not communicating a strategy effectively could lead to discrimination as managers need to ensure they comply with professional regulatory bodies and this will ensure correct training information and employees being aware of all the guidelines an polices on where to find them.
Another failure to communicate would lead to a negative shift to all benefits and will have a serious detrimental effect not only for Rolls Royce is operational efficiency but also customer satisfaction and ultimately your profits and market share will decrease.
Overall good communication of risk will achieve a positive impact within Rolls Royce.
Clearly this is important as you are providing essential information which will
impact the motivation of the employees within Rolls Royce. It will also provide a structure and plan to mitigate the risks for the future.