Costco Wholesale Corporation: Analysis of Background, Corporate Governance, Internal Environment and Objective Setting

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Company’s Background

Costco was first opened in San Diego in 1976 and opened in Seattle in 1983. Since launching its service, Costco became the first company to make $3 billion in sales in just six years. To further connect to more consumers, Costco merged with Price Club and became PriceCostco in 1993 and had 203 locations which generate $16 billion in annual sales.

Costco’s plan of action is to create high sales volumes and quick stock turnover by offering members low costs on a restricted determination of broadly marked and chose private name items in a wide scope of product. Costco’s plan of action is based upon client memberships, who join and renew every year.

Costco has a vision to be a platform for members to enjoy unmatched savings with their efficient supply chain & business model and a mission to provide members with highly cost effective, high quality products.

Elements of Corporate Governance in Costco

The Board of Directors of Costco Wholesale Corporation have adopted the Corporate Governance guidelines in which it has many elements. The two elements that we would like to highlight are the Board Compensation and Audit Committee.

Compensation Committee

The purpose behind the Compensation Committee is to discharge the duties of the Board of Directors concerning compensation matters for the Company’s executive officers and other employees and consultants. (the compensation committee is set up to ensure that the remuneration of the entire staff,including the BOD, is fair based on their performance in the company.)

The Compensation Committee’s capacity is to survey the pay rates, rewards and stock-based pay given to executive officers of the Company and to regulate overall administration of the Company’s pay and stock-based compensation programs. Their responsibilities include incorporating yearly announcement to Costco’s investors on executive compensation matters, administering the company’s equity and other compensation plans and address other matters as the Board may from time to time authorise. (The compensation committee’s role is to ensure that the CEO must not be present in the meeting when his remuneration is done

Having a Compensation Committee which consists of independent members would likely have the ability to scrutinize executive proposals unbiasedly because of less pressure from management. Besides, they will determine an appropriate compensation package that repays with the measure of work done by the management which is objective and would impossible reason any debate among Board members. They will devise a transparent and independent procedure in developing policy on director and executive remuneration, which strongly aligns with the company’s objective and on the basis of the adequacy and effectiveness of the director or executive personnel’s duty that is discharged to meet those objective(s).

Audit Committee

The purpose of the Audit Committee in Costco is to provide oversight of the monetary revealing procedure, the audit process, the organization’s arrangement of inner controls and the organization’s consistency with laws and guidelines.

The duties of the Audit Committee are to appoint and accommodate the remuneration of the Company’s independent auditor, manage and assess their work, instructs the independent auditor and internal auditor to prompt the Committee if there are any uncommon subjects that require special attention. The Committee will meet with management and the independent auditor to discuss the annual financial statements and the report of the independent auditor, and to discuss significant issues encountered in the course of the audit work.

Some other responsibilities includes:

Review significant changes to the Company’s accounting principles and practices
Review the scope and results of internal audits
Evaluate the performance of the internal auditor
Provide minutes of Committee meetings to the Board, and report to the Board on any significant matters arising from the Committee’s work
Evaluate the performance of the Committee, review and reassess the Charter
Prepare the Committee report required by the SEC to be included in the Company’s annual proxy statement
Conduct or authorize such inquiries into matters within the Committee’s scope of responsibility as the Committee deems appropriate

Having an Audit Committee would ensure that Costco significant risks are identified and ensure that the Board is completely assessed of these risks. In addition, Costco’s Board executes its hazard oversight obligations fundamentally through the Audit Committee which receives management reports on the potentially significant risks, including (without limitation) cybersecurity matters, that the Company faces and how the Company is seeking to control risk where appropriate and oversees internal control over financial reporting. The Audit Committee reports to the full board on its risk-management tasks, including the enterprise risk management review.

Costco Internal Environment and Objective Setting

Internal Environment

Risk Management Culture

To facilitate effective communication of issues raised at all levels management, Costco introduced an “Open Door Policy” to empower employees to make them feel that their opinion is valued and to gain insights from issued face by employees from the ground level, middle management to senior management. This policy motivates the employees to communicate with management about any problems they face. Costco also includes a private number for the employees to call if they are not comfortable to talk to their management. By having employees feel their importance and are well-respected by the company so that they would be more likely to voice out any misconduct, oversight or loophole and have more loyalty to the company.

Costco believes that building a culture with values of passion, pride, integrity, treating and empowering employees goodly will drive prosperity and growth to the company. With their philosophy as such, Costco continues to attract, train and retain high performing and experienced employees in the company by providing them with good welfare benefits such as medical insurance covering extensive healthcare needs from life and disability to dependant care, encouraging employee development by providing college student retention programme and competitive compensation among many others.

Costco values all their employees, be it part-time or full-time employees, to create a culture of non-discrimination, by having a equal standardised payscale which are competitve in the industry as well as other employee benefits to encourage retention, improve employee productivity, engagement and faithfulness to the company.

Costco has recognised that the Human Resource and Risk Management functions are closely related as the Human Resource can help to set a good risk management culture so that the job of the Risk Management of identifying the risk of the company much easier. That is why the Human Resource and the Risk Management are put together as one department.

https://mitsloan.mit.edu/ideas-made-to-matter/how-costcos-obsession-culture-drove-success
https://www.hrfuture.net/strategy/risk-management/what-is-risk-management-in-hr/

Risk Management Organisational Structure

Costco has a structure that supports risk management. The Audit Committee primarily oversees the risk management function on behalf of the board. It does not have a risk committee that specifically manages risk, but delegates the responsibility to the management. The management is responsible for developing short and long term objectives and to manage all operating & business risks, which includes identifying, evaluating, managing and mitigating risks that are inherent to achieve those objectives. The risk management function at the management’s level would be managed by the Human Resources and Risk Management department lead the department’s Senior Vice President. The Audit committee will access the adequacy and efficacy of risk management handled by the management and reports it to the full board. However, when addressing the risks of new market entrance, it will be directly handled by the full board and the Chief Executive Officer in the oversight and execution of all risk management governance and policy matters. Costco takes reference from the OECD framework for risk management to ensure its due diligence effectively addresses and mitigates its risks (1a). In 2019, Costco has recognised the increased need to invest in the risk management function and has engaged Citi to provide risk management services by seconding Patricia Pistelli, as Costco’s Chief Risk Officer.

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