Governance Arrangements at the BAT Company

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Table of Contents

Introduction
Overview of Governance Theories
Conformance vs. Opportunity (Performance) Approaches to Governance
Key Governance Risks and Controls within BAT
BAT’s Ethical Leadership and CSR Position: CSR in Action
Recommendations for Governance and CSR Improvements within BAT
References

Introduction

Corporate social responsibility (CRS) refers to the obligations that companies have not only to act to serve their interests but also the interests of the society. For organisations to achieve this purpose, regulatory agencies have developed various codes that are collectively termed as corporate governance guidelines. Similarly, organisations have their internal systems and arrangements for ensuring that they behave in socially responsible ways through their employees and leaders. Corporate governance involves all aspects of organisational control of interests. Some of the particular areas of concern when it comes to corporate governance entail composition and remuneration of organisations’ board of directors.

However, corporate governance addresses issues that relate to finance, regulations, and ownership systems. As Denis and McConnell (2003, p. 7) reckon, ‘Corporate governance is of immense significance in the current economic climate, and the current malaise in the financial system owes much to governance and regulatory failures’. At the heart of corporate governance is the need to mitigate or enact conflict of interest control and prevention mechanisms among stakeholders. The alleviation of these clashes of interests is more often accomplished through the enactment of various traditions, rulings, procedures, guidelines, and associations, which assess the manner in which organisations are managed (Madhani 2016). Using BAT as the case in point, this paper discusses various corporate governance arrangements.

Overview of Governance Theories

Organisations are constantly put under pressure to behave as good corporate citizens. Consistent with this call, various theories have been established to explain how this goal can be achieved. However, Rezaee (2008) reveals how corporate governance aims at ensuring that an organisation adopts the philosophy of corporate social responsibility in its operational strategies. CSR refers to financial, lawful, principled, and flexible prospects that the public has for companies at any time (Carroll & Buchholtz 2003). Examination of CSR is essentially provided through the analysis of stakeholders. Indeed, stakeholder theory constitutes one of the most important presumptions of corporate governance. Stakeholders encompass all groups and specific individuals who either benefit and/or even are harmed by decisions made by an organisation.

The stakeholder hypothesis has three main elements that justify its appropriateness: normative soundness, expressive precision, and its ability to possess influential supremacy. The theory holds that a mutual relationship exists between a corporation and its stakeholders. For instance, stockholders provide a corporation with the necessary capital. In turn, they (stockholders) ‘expect the firm to maximise the risk-adjusted return on their investment’ (Hill & Jones 2002, p.133). Therefore, a corporation must ensure that the interests of stakeholders are protected by managing effectively any potential risks for their investments. The stakeholder theory advances largely beyond traditional classical conceptualisation of corporations’ obligations. Friedman (2000) asserts that the societal duty of any company is to capitalise on returns. Such an assertion has now lost relevance in the modern business operations in which an organisation is considered to have an additional responsibility of ensuring that it delivers benefits even to the environment.

Therefore, apart from focusing on profit maximisation initiatives, it must refrain from activities, which might lead to additional indirect costs to both the communities and the environment within which it is established. Indeed, even with the consideration of the need to protect the interest of stakeholders, there is still a debate on whether it is actually sensible to discuss the stakeholder theory singly or as a composition of different alternative theories or perhaps its corollaries. For example, the agency theory prescribes possible entities to which an organisation must ensure it remains accountable. In line with Solomon’s (2010) arguments, the theory holds that a corporation has a duty to its stakeholders, among them creditors, employees, suppliers, and stockholders. Companies that experience frequent troubles in their operations have a high chance of involving themselves in illicit business affairs. However, Dayanandan, Donker, and Ivanoff (2014) confirm that any party caught in illegal trade has a duty to reimburse any losses incurred, including a fine that matches the misconduct.

One of the alternative theories to the stakeholder presumption is the corporate law. The hypothesis is all about ‘how the traditional corporate law should be amended to reflect the principles and practices favoured by ontological deontology and governance approaches to the stakeholder theory’ (Norman 2004, p.251). One of the problems associated with putting this theory into practice is that tackling business rulings based on the way the theory recommends makes administrators who support non-profit capitalisation tactics while dealing with investors end up being secured from the applicability of monetary market demands and investors’ anger. In this context, Norman (2004) asserts that such an approach would bestow administrators with the capacity to fend off unreceptive occupations when other shareholders suppose that they may make high proceeds by shifting executives and policies. The stakeholder regulatory theory claims that the privileges and desires of particular investors should be safeguarded amicably through the enactment of government-led business regulations. Putting this theory into practice implies that corporations deserve to maximise profits while observing laws that persuade corporations to uphold CSR practices (Rezaee 2008). However, putting this theory into practice is problematic in the sense that most of the decisions to confer maximum benefits to some stakeholders cannot be achieved precisely without harming others.

Other alternative theories to the investor conjecture include the ontological stakeholder hypothesis, strategic stakeholder premise, explanatory stakeholder supposition, the corporate culture and branding stakeholder presumption, deontological investor presumption, stakeholder theory of governance, and the managerial stakeholder speculation. Managerial stakeholder hypothesis integrates management theories of leadership, HRM, leadership, CRM, and accounting among others. It avails mechanisms for corporation managers to identify a myriad of strategic benefits while at the same time satisfying numerous deontological demands of the stakeholder theory. However, this theory is problematic to implement. Explaining the difficulty, Donaldson and Preston (2005, p. 157) assert, ‘stakeholder administration requires, as its key attribute, simultaneous attention to the legitimate interests of all appropriate stakeholders, both in the establishment of organisational structures and general policies and in case-by-case decision making’. As revealed before, corporations cannot deliver optimal benefits to all stakeholders. While others may benefit optimally from some of the strategic managerial decisions, the interests of some of the stakeholders may be compromised. Considering the concerns of these alternatives or corollaries of the stakeholder theory, the unified stakeholder theory collectively embraces all the above theories.

Despite the non-scholarly agreement on the theory of corporate governance that best suits practical applications in general corporations, the initiatives of corporate governance must be adopted, especially after considering incidents such as Enron and Marconi scandals. Concerns of corporate governance largely for BAT depend on three major documents that have been enacted since 1990. The documents include Cadbury report in 1992 (the UK), Sarbanes–Oxley Act of 2002 (the US), and the OECD principles of corporate governance (enacted in 1998 and revised in 2004). OECD and Cadbury’s documents spell out the various principles that are applicable for the realisation of good corporate governance initiatives within an organisation. In this context, La Porta, Lopez, and Shleifer (2009, p. 471) posit, ‘Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the United States to legislate several of the principles recommended in the Cadbury and OECD reports’. Internationally, the concerns of corporate governance are guided by five principles.

The principle of equitable treatment and observance of the civil liberties of all investors calls corporations to observe their (investors) privileges while aiding them to apply their fundamental privileges. Corporations achieve this goal by promoting efficient contact and/or persuading all investors to take part in general conventions. Corporations are required to consider all the interests of all other stakeholders. This call demands businesses to be aware that they possess lawful, contractual, societal, and sale-focused duties to non-investors and investors, including workers, creditors, brokers, neighbouring societies, clients, and strategy developers (William 2009). The corporate board has noble roles and responsibilities to facilitate proper corporate governance. In this context, the board needs to have adequate competencies that enable it to understand all the corporate performance challenges. In addition, a board requires total commitment and remarkable independence while executing its mandates. Moreover, ethical behaviour and high levels of integrity form a central principle of subtle corporate governance (Solomon 2010). The last principle holds that admission and intelligibility go a long way in preventing fraudulent conducts by corporation managers and other influential individuals around the globe. Indeed, this code forms an important principle of critical importance from an accountant’s perspective.

Conformance vs. Opportunity (Performance) Approaches to Governance

According to Pearce (2009), the flexible state of authority calls for a corresponding supple and suitable structure of corporate governance. Such a structure has to uphold the explicit demands of every business within its individual situation. The British American Tobacco (BAT) engages in the business of manufacturing and selling of tobacco products in the global market. The company has established a CSR committee that receives support at local and regional platforms. The structure of the company’s CSR committee ‘supports the embedding of CSR and sustainability principles across the business and allows performance against those principles to be monitored’ (British American Tobacco 2011, para. 3). The company operates under guidelines that require strict compliance to achieve its CSR initiatives that are anchored on three main pillars: corporate conduct, mutual benefit, and responsible production (British American Tobacco 2011). However, it ensures that such conformity does not prejudice its performance opportunities.

Considering the different interests that the corporation must fulfil and satisfy the regulatory and internally developed conformance guidelines to corporate governance, BAT is caught in a dilemma on whether to focus on initiatives that uphold performance or conformance. However, since these situations are necessary and appropriate, it attempts to balance them. Indeed, Financial Reporting Council (2008) recommends that first-class corporate control should lead to superior business output by assisting the board to undertake its tasks in the best welfare of all investors. The organisation further asserts that in case a corporation ignores its shareholders, it becomes vulnerable to poor performance. To mitigate this challenge, BAT ensures that its governance approaches guarantee efficiency and effectiveness of all its entrepreneurial activities with the main objective of facilitating the creation of long-term value for shareholders and other stakeholders. It accomplishes this plan by deploying three main approaches.

Firstly, BAT’s governance arrangements focus on sustainability, public life, and empowerment. These three pillars recognise the fact that acting as a good corporate citizen is the basis for building long-term performing organisation. In the effort to improve biodiversity, prevent child labour, and/or increase accessibility to water, BAT invests heavily in agricultural sustainability. It gives grants for training coupled with farmers’ education on the mechanisms for optimising the growing of non-tobacco crops. Under the pillar of civic life, BAT participates in activities that enrich the community and public life. This process entails the restoration of public spaces, conservation of traditional cultures, support of art, and the participation of educational institutions (British American Tobacco 2011). The last pillar is empowerment. To this extent, BAT offers people an opportunity to learn through scholarships and training on IT in any other programme that can support or encourage the flourishing of entrepreneurial activities within communities in which it operates. Its group companies also participate in meeting local needs such as offering aid in case of natural catastrophes and programmes for managing HIV and AIDS.

Accountants are overly interested in quantifiable figures of any financial resources that are committed to philanthropic courses. This strategy is necessary during the evaluation of how efforts to comply with corporate responsibility roles of an organisation may influence the financial performance of an organisation. BAT gave out £15.5 million in 2010 and £13.7 million in 2011 for charitable purposes (British American Tobacco 2011). From an accountant perspective, although these huge sums of money should have been invested in projects that generate internal incomes, BAT’s commitment to supporting its communities has indirect benefits such as earning a good reputation and reducing conflicts with communities. The company’s move has the merit of ensuring long-standing competitive advantage, which is necessary for its continuous performance.

Key Governance Risks and Controls within BAT

Corporate governance is given a major role to play in BAT’s risk management. Customers are the chief stakeholders that keep BAT’s business successful. Apart from ensuring their satisfaction with the products that the company produces, the business has other ethical and moral obligations. The degree to which the reputation of an organisation is maintained depends on customers’ perceptions about the way BAT treats them. Treating customers with courtesy guarantees better reputation of the name of the business and hence more sales. This outcome translates into more returns on investment to the investors. However, the company fails in terms of ethical and moral requirements of producing and selling products or services that cannot harm customers. Adequate evidence is available that tobacco is a health risk factor. Therefore, the company fails in terms of ensuring controls for negative effects of its products on the health of consumers.

The biggest risk for BAT is that it lacks a well-functioning control of health risks that are associated with its products. Tobacco companies such as BAT are not similar to other organisations. For instance, they trade in legal but lethal products. Tobacco is the only product that kills about 50% of its users (World Health Organisation 2004). Despite this risk, BAT still promotes its products. The challenge here is that any control such as advertising in disfavour of its products makes no economic sense. Indeed, despite claims that tobacco companies have changed their old practices to incorporate CSR, ‘they continue to use a vast of array unethical and irresponsible strategies to promote its products, expand markets and increase profits’ (World Health Organisation 2004, p.7). This observation suggests that the only control to this risk can emanate externally, for instance, tobacco control in nations that form the UN and the legal statutory controls for promoting tobacco products.

Employees form part of BAT stakeholders. They help in the process of converting raw materials into finished products and services through value addition. They are also involved in the collection of raw materials from farmers. Thus, they are central to BAT’s CSR programme. The main issue is that apart from treating them with courtesy and offering them career opportunities, they are exposed to an environment that may cause harm to their health while working in the company’s production plants. This case gives rise to various human rights issues, a key risk that calls BAT to put in place mechanisms for its control. To avoid any legal liability that may arise from claims of exposure to an environment that is potentially dangerous to their health, the company emphasise strict compliance with the applicable local and statutory regulations on the work environment. Any organisation is prone to the risk of loss of its financial resources through unethical practices such as corruption and fraud. Therefore, BAT complies with statutory guidelines on reporting and preparation of financial statements. For example, in the US, BAT strictly complies with the Sarbanes–Oxley Act of 2002 as the necessary corporate governance risk control policy. In its UK operations, Cadbury Report of 1992 (UK) and other newer legislations are adopted as fraud risk control strategies.

BAT’s Ethical Leadership and CSR Position: CSR in Action

BAT has ethical, discretionary, economic, and legal expectations from people, including the society and communities that it must meet. These expectations define its range of CSR initiatives that it must adopt to behave in a socially responsible manner to guarantee its sustainability. The expectations need to consider BAT’s stakeholders who may benefit and/or be harmed by the organisations’ decisions or its products. At BAT, stakeholders include consumers, workers, the environment, and the community. The key principle of CSR and ethical leadership rests on the fact that corporations have charitable, decent, and honourable duties to play, apart from providing profits to shareholders. Such roles are owned to other people in addition to the owners. BAT’s leadership fully recognises that CSR encompasses one of the strategies that may aid in achieving its dream of becoming environmentally responsible. However, the company’s lobbies to the World Health Organisation are inconsistent with the concerns of social corporate responsibility (World Health Organisation 2004).

Ethical leadership requires an organisation to produce and market products that do not harm the environment, communities, and even consumers. As presented in ACCA (2015), the class notes confirm this claim by detailing the ethical practices such as integrity that individuals and organisations are expected to uphold in their day-to-day operations. Harms include costs such as those that are incurred in the treatment of diseases, which are associated with a product. Tobacco smoking is associated with lung cancer. A reduction of tobacco use implies that the contribution of lung cancer in deaths that relate to all types of cancers in the US can be minimised. However, BAT has the responsibility of increasing returns on the owners’ investments. Therefore, it must sell more products to the global market. The company is also committed to participating in projects of societal benefit such as education as part of its CSR position. The commitment of higher amounts to such projects requires the company to have more sales. Consequently, fulfilling the interests of the society and those of stakeholders, especially its owners, requires the company to participate in commercial advertisements of its products to attract more sales. However, such an initiative increases costs that relate to the treatment of diseases, which are associated with tobacco and its products.

Data from the US Department of Health and Human Services (2010) ranks cancer in the second position in the list of fatal ailments within the US. Tobacco-associated health challenges, including lung cancer, kill about 443,000 people in the US annually (The US Department of Health and Human Services 2012). Apart from causing death, tobacco also impairs a nation’s productivity while at the same time increasing expenditure on treatments. The US Department of Health and Human Services (2012) estimates that tobacco costs the US about US$96 billion through direct expenditure on treatment and an additional US $97billion through the reduction of the productivity of its addicts. From the CSR position of BAT, the environment is one of the most valued stakeholders. It is important since people work best in healthy environments (Caldwell, Hayes, & Long 2010).

Additionally, organisations gain immensely when they respect the environment in which they are established. However, questions emerge whether BAT’s leadership treats its employees and communities ethically, considering that they are exposed to nicotine, which they can inhale while working or living close to the manufacturing plants or even in the form of second-hand smoke. Despite the above criticism concerning BAT’s CSR position, communities form an important stakeholder. By valuing the role played by communities in enhancing organisational success, the company needs to commit its resources in securing a good relationship. Such a commitment will make the company a responsible neighbour who participates in creating good partnerships. Communities form the living places for customers. They are crucial since organisations are only able to perform or achieve high results when they operate with communities that receive them (organisations) positively.

Recommendations for Governance and CSR Improvements within BAT

Today, employees, organisational managers, and consumers place heavy emphasis on organisations, especially multinational companies, to extend their operations beyond their traditional roles that entail production, packaging, and marketing products to make optimal profits. Indeed, from the public perspective, complying with tax payment obligations and creating job opportunities are not the primary roles of any corporation. The private sector should also take measures to ensure that BAT participates in responsible investments. This case demands companies such as BAT to produce products that are not harmful to their consumers, including those who produce them (employees).

BAT has now changed its practices to ensure that it does its business responsibly by participating in activities that promote community empowerment (British American Tobacco 2011). However, the company faces situations that influence its CSR initiatives. It produces products, which the US Department of Health and Human Services (2010) are risk factors for lung cancer. According to the US Department of Health and Human Services (2012), such products are responsible for the large number of deaths globally. Hence, any expenditure on CSR does not deliver higher value than deaths and illnesses caused by its products. Therefore, for the company to present itself as serving good interests while operating responsibly, it should stop commercial promotion of its tobacco products. Diversification into other product lines that have no health harms is more appropriate. In its global business, BAT should deploy locally acceptable standards, but blend them with those that guarantee optimal protection of the stakeholders’ interest. The UK’s approach to corporate governance is highly recommended where its provision differs in terms of the local context. Therefore, as part of a homogenous global internal approach to governance control, BAT should use external corporate auditors.

The main principle behind the establishment of external corporate auditors is rested on the need to establish formal and transparent arrangements. With reference to the Financial Reporting Council (2010), the panel should institute official and clear engagements that define how the company needs to implement the corporate reporting, hazard administration, and in-house control doctrines that will help it to demonstrate suitable affiliation with its auditors. For a big corporation such as BAT, the 2010 UK corporate governance code provides that the board must constitute an audit committee that comprises at least three non-executive directors. As spelt out in the Financial Reporting Council (2010), various roles of audit committees have to be set out in the form of terms of reference. The main task of external auditors is to ensure that the appropriate corporate governance is based on the ability on the two independent, but agreeing audit reports, one that is compiled by corporations’ internal auditors while external auditors compile the other. In case of any disagreement in the reports, questions emerge concerning the levels of the accountability and transparency of a given corporation.

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