Strategic Financial Analysis
Concept of Financial Statements
Financial statement refers to a formal financial record of a company including aspects like balance sheet, income statement, equity statement, cash flow statement and more. According to Lewellen and Lewellen (2016), financial statement can be applied to provide data regarding financial position changes and performances of an organization in order to make economic decisions. This implies that financial statement is relevant to measure financial position of a company that deeply relies on company assets, income and liabilities.
Trading and profit and loss account are applied in financial analysis to show income that has been generated from sales and also direct costs of those sales. This includes stock balance as observed at the beginning and at the end of year. According to Weber (2018), balance sheet is used to report a list of organizational liabilities, assets and owner's equity as observed in a given period of time. Cash flows help in providing a sum of money that has been transferred into or from the company. Statement of changes in equity is utilized to explain the shifts in share capital of a company. Finally, fund flow statement helps in disclosing analytical information regarding different funding sources to understand the changing transactions.
Background of Company
Wolseley has a proud and rich history which was founded in 1887 by Frederick York Wolseley in UK. Wolseley is the world largest distributor of heating products and plumbing and is also the supplier of building materials and is also the leading supplier in the world. Wolseley is the subsidiary of Ferguson plc and they have expertise professionals in field of construction (wolseley.co.uk, 2018).
Wolseley is the market leader with good reputations in the construction business. Company undergoes large-scale investment is in procuring software for supply chain and in information technology. It also invests on its employees to give proper training to its employees to develop, efficiency and skills of its employees and also rewards them with awards and pensions.
Similarly, Admiral Organization is one of the top three insurance providers of car in UK launched in 1990 by Henry Engelhardt. Company operates in a number of popular brands such as Admiral insurance, diamond insurance, gladiator for especially commercially vehicles (admiralorganization.co.uk, 2018). They are the fast-growing and profitable financial services corporation with almost operations in eight countries. They have almost 6 organization customers throughout the world and continuously launching new products and brands in UK and also overseas.
Cost behavior and forecasting
According to Lewellen and Lewellen (2016, p. 1135), cost behavior provides an understanding how operating cost changes to a change in the level of organizational activities. Wolseley operating cost in 2015 was 3172 million dollars and in 2016 it was 3312 million dollars and in 2017 it was 3184 million dollars which refer that the company variable cost increases in the year 2016 and 2017 compared to 2015 variable cost keeping fixed same. This implies that in 2016 and in 2017 the company profit has been increased as compared to 2015. [Refer to Appendix 1, 2]
In comparison, the total operating cost of Admiral in the year 2015 was 548 million dollars and in 2016 was 648.8 million dollars. In 2017 it recorded a staggering 753.5 million dollars. This means that the variable cost of the company in the year 2016 and 2017 has been increased keeping the fixed cost constant. This means that in the year 2016 and 2017 the company has earned more profit as compared to 2015. [Refer to appendix 4, 5]. In comparison among the two companies, Wolseley has earned more profit than Admiral Group in all the three years.
Ratio analysis and market reactions
Ratio analysis is the quick analysis of the firm financial position such as its liquidity, solvency, profitability and its efficiency
Analysis of company performance
The noncurrent assets of Wolseley in the year 2015 was 2559 million dollars which were increased to 2920 million dollars and its current assets in the year 2015 was 4772 million dollars which imply that company has a low proportions of noncurrent assets to current assets. It is an indicator of high liquidity, and no amount of investment will be required in noncurrent assets in the upcoming years. In the year 2016 Wolseley noncurrent assets were 2920 million dollars and current was 5175 million dollars which means the proportion of current assets is high as compared to noncurrent assets. It is an indicator of high liquidity and the company is not required to invest any amount in noncurrent assets in the upcoming year. In 2017 the noncurrent assets of Wolseley were 2378 organization dollar and the current assets were 5827 million dollars which also implies that the company has high liquidity and there is no risk which is associated with noncurrent assets.
According to Weber (2018, p.486), total liabilities of a company can be divided into three parts such as long terms, short-term and other liabilities. Wolseley total liabilities in 2015, 2016, and in 2017 was 4875, 5250, 6067 million dollars respectively. This implies that the current liabilities were increased in the year 2016 and 2017. This is definitely not a good sign for the company because its credit payment has been increased. Its outstanding liabilities, bank loans, provisions, deferred tax liabilities, other payables also increased as compared to 2015. This is the amount which company has to pay. The profit after tax of Wolseley in the year 2015, 2016, 2017, was 321, 496, 888 million dollars which imply that the company is utilizing its assets properly, and the company is also utilizing its financial resources properly without wasting its resources to earn high profits. [Refer to appendix 1, 2]
In comparison with the Wolseley organization, Admiral organization total noncurrent assets in the year 2015, 2016, 2017 was 3400, 3749.3, 4526.4 million dollars and its total current assets in the year 2015, 2016, 2017 was 4202.4, 4860.8, 589.1 which implies that in all the three years admiral organization has a high proportion of current assets to noncurrent assets which means the company has a high liquidity and there is no risk associated with noncurrent assets. Admiral organization net profit after tax in the year 2015, 2016, 2017 was 291.8, 214.1, 331.6 million dollars which implies that the company net profit after tax was increased in the year 2016 as compared to 2015 by 77.7 million dollars that means in the year 2016 company does not utilize its assets properly and also its total liabilities get increased in all the three years. [Refer to appendix 4,5]. However, from the above analysis, Wolseley has larger proportion of noncurrent assets than Admiral group of companies.
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Analysis of income statement
In words of Barberis (2015, p.1), income statement depicts the expenses, net income, revenue generated by the company over a particular period. The gross profit margin of Wolseley in the years 2015, 2016, 2017 was 27.96%, 28.27%, 28.95% respectively. The net profit margin Wolseley for the year 2015, 2016, and 2017 was 1.60%, 4.50%, 5.14% as follows. Similarly, revenue growth in 2015, 2016, and 2017 as compared to previous year growth was 8.65%, 8.23%, and 5.50%. The gross profit margin and net profit margin has increased constantly in all the three years while the revenue has been decreased in all the three years as compared to their previous years. [Refer to appendix 1, 2]. The company is not performing as per its expectation.
In comparison, the gross profit margin of Admiral Organization in the year 2015, 2016, and 2017 was 74.97%, 61.19%, 69.25%. The net profit margin of Admiral Organization in the year 2015, 2016, and 2017 was 32.15%, 23.71%, 7.93%. Revenue growth in the year 2015, 2016, 2017 as compared to their previous year are 2.28%, 12.37%, and 11.024%. The gross profit margin, net profit margin has been declined as compared to their previous year but the revenue has shown a high growth rate in the year 2016 as compared to 2015 and in the year 2017 it has declined by 1.346%. [Refer to appendix 4, 5]. In this analysis however, Admiral Group has higher gross profit margin than Wolseley in all the three years.
Use of management accounting in decision making
According to Aazam and Huh (2015, p.687), management accounting identifies, analyze, measure, interpret and communicate information for the success of organizational goals. Wolseley can improve its financial decision by applying management accounting so that the company can take important decision to improve the financial position of the company and will also ascertain the managers of Wolseley to formulate the policies of the business. In comparison, Admiral Organization uses management accounting as an important decision-making tool for the company and slots to control and monitor the performance of the policies implemented. In words of KUEHN et al. (2017, p.2131) managerial accounting gives detailed segment reports of the company and is also flexible in comparison to financial accounting.
Descriptions of traditional approaches of analyzing methods- [corporate financial statements –ratios
According to Petruzzo (2015, p. 2213), traditional approaches to analyzing financial statements analyze the financial data by applying traditional tools such as intra firm comparison, inter-firm comparison percentage, accounting ratios. It also includes vertical comparison and horizontal comparison of financial statements of the firm. According to Sujan (2017, p. 2404), vertical analysis compare the same line of items in the financial statements of the company The vertical analysis of total current assets Wolseley financial statements for the year 2015, 2016, 2017 are;
2015 Total current assets in 2015 were 4722 million dollars, Inventory: 35.74% (1688/ 4722*100 organization dollar) Trade receivables: 35.74% (1646/4722*100 million dollars) Other receivables: 5.69% (269/4722*100 million dollars) Current tax receivables: .084% (4/4722*100 million dollars) Cash and cash equivalents: 23.40% (1105/4722*100 million dollars)
2016 Total current assets in 2016 were 5175 million dollars, Inventory: 38.97% (2017/5175*100 million dollars) Trade receivables: 36.59% (1894/5175*100 million dollars) Other receivables: 6.04% (313/5175*100 million dollars) Current tax receivables: Nil Cash and cash equivalents: .019% (940/5175*100 million dollars)
2017 Total current assets in 2017 were 5827 million dollars, Inventory: 31.16 (1816/5827*100 million dollars) Trade receivables: 30.39% (1771/5827*100 million dollars) Other receivables: 5.525% (322/5827*100 million dollars) Current tax receivables: .137% (2/5827*100 million dollars) Cash and cash equivalents: 32.79% (1911/5827*100 million dollars) [Refer to appendix 1, 2, 3]
As compared to Wolseley, vertical analysis of Admiral Organization of current assets for the year 2015, 2016, 2017 are
2015 Total current was 802.4 million dollars, Trade and other receivables: 66.94% (537.1/802.4*100 million dollars) Cash and cash equivalents: 33.06% (265.3/802.4*100 million dollars)
2016 Total current was 1111.5 million dollars, Trade and other receivables: 70.62% (784.9/1111.5*100 million dollars) Cash and cash equivalents: 29.38% (326.6/1111.5*100 million dollars)
2017 Total current was 5859.1 million dollars, Trade and other receivables: 17.16% (1005.9/5859.1*100 million dollars) Cash and cash equivalents: 55.47% (326.8/589.1*100 million dollars) [Refer to appendix 4, 5, 6]
Critical assessment of methods of analyzing
Both the company can adapt the technique to analyze the financial statement so that they can present to the stakeholders of the company on the annual meeting of the company. According to Xu (2014, p. 59), the tools or techniques are fund flow analysis, cash flow analysis, ratio analysis, comparative statement, statement in changes of working capital, cost volume profit analysis method.
Identifying performance indicators (financial risk and operating risk)
According to Sujan (2017, p. 2404) Financial indicators measures and track the progress of the company performance in essential area of the financial statements. The operating cash flow of Wolseley in the year 2015, 2016, 2017 are 684,787 and 752 which implies that in 2016 the operating cash flow sufficient cash for the business and in 2017 the operating cash flow was reduced by 35 million dollars as compared to 2016 which means that the company has not generated sufficient cash for the year 2017 to expand the business. The current ratio for Wolseley for the year 2015, 2016 and 2017 was; Current ratio = current assets/current liabilities
2015 Current ratio = 4722/3431*100 = 137.62% 2016
Current ratio = 5175/3537*100 = 146.31% 2017
Current ratio = 5827/4086*100 = 142.60% The company's current ratio was 146.31% in the year 2016 which means that the company has 1.46 times the current assets to meet its current liabilities. In the year 2017, the company's current ratio was 142.60% which means that the company has 1.426 times the current assets to meets its current liabilities. [Refer to appendix 1, 2, and 3]
As compared to Wolseley, the current ratio for Admiral Organization for the year 2015, 2016, 2017 are:
2015 Current ratio = 802.4/1050.6*100 = 76.37%
2016 Current ratio = 1111.5/1305.6*100 = 85.13%
2017 Current ratio = 1332.7/1665.4*100 = 80.02%
The current ratio of all the year for Admiral Organization below 100% which means that the current assets is not sufficient to meet its current liabilities. [Refer to appendix 4, 5, 6]
Introduction to financial market
According to Xu et al. (2014, p. 59), financial market is a place where both the sellers and buyers participate for trading of bonds, equity, derivatives, and currencies. Financial markets are of two types’ capital market and money markets. Wolseley Company has both equity and bank loan in their capital structure in all the three years which means that Wolseley Company is not an all-equity company. It keeps bank borrowing and also equity share capital in its capital structure to run the business. So, Wolseley Company has to pay both the equity shareholders and bank lenders as dividend and interest from their earning.
As compared to Wolseley, Admiral Organization is an all-equity company as it has been analyzed from its capital structures which mean that Admiral Organization does not want debentures or any kind of debt in its capital structures. Admiral organization is an insurance company of motor car so it does not like to leverage in its capital structure and has to pay only to its equity shareholders.
Pricing model
The role of capital assets pricing model is to describe the relationship between expected return and systematic risk for assets, especially stocks. Wolseley capital structure in all the three years consist of 25% bank loans and 75% equity which means the company has been financed by most of the equity. The company does not rely much on long-term borrowings still they are taking the advantage of tax benefits as debenture or bank loans do not attract tax. However, Admiral Organization takes 100% equity in its capital structure and is not relying upon bank loans or debentures in its capital structures.
Economic value added
Economic value added measure the economic profits of a company based on residual income of the company. Economic value added is the value addition of what shareholders expect from a company. Economic value is an indicator of how profitable the company business is in relation to performance of the business.
Importance of cash flow analysis technique
The significance of this relies on the fact that this helps in attaining cash outflows and inflows. In order to be more specific, this helps in showing the areas where cash entities have been generated and where they have been spent. Direct method of cash flow analysis is highly important as it is capable of revealing payments and cash receipts related to operations of a company (Barberis et al. 2015). On the other hand, indirect method of cash flow analysis is relevant because this makes it easier to assemble the information that is required for this analysis.
Comparison and contrast of contemporary and traditional methods of financial analysis
Both the traditional and contemporary methods of financial analysis are highly applicable for financial analysis of a company. In this regard, it can be said that traditional approach has some amount of faults for which the modern methods had been developed later (Liu et al. 2015). In order to be more specific, it can be mentioned that preparation of contemporary financial analysis methods is simpler and less time consuming than the traditional methods. Moreover, contemporary methods are more useful in analyzing specifications of financial statements such as liquidity position.
Recommendations
It is to be recommended to both the company to use more of debenture in its capital structures as the gearing increases the equity cost. Gearing can help the company to offset the effect of debt so that the weighted average cost of capital remains the same. Both companies should use debenture to take the tax advantage on interest by the government and debenture is also cheap source to use in the capital structure. To maintain the gearing ratio both the company should use both debenture and equity in its capital structure. Wolseley revenue growth margin has declined in all the three years so; Wolseley should use different methods or technique in its strategy to increase the revenue so that the company would be able to meet all its possible obligations. It is to be recommended to Admiral Organization to utilize the current assets in an effective manner. It can help the company to meet its short-term obligations such as payment to creditors, suppliers, and meeting all its other outstanding liabilities.
Conclusion
From the above analysis of both the company financial statements it has been derived that both the company focus only on issuing equity capital and does not like to gear in its capital structure. Both the company invest huge amount in financing activities which gives them high amount of cash inflow from the business. Both the company keeps high amount of cash in hand which is not good for the companies rather they should invest in shares or securities or purchase new assets for the business or invest in modifying products. Keeping idle cash is not good for the company as it will not result in any increase or decrease in profits. Wolseley Company pays dividend every year and Admiral Organization do not declare dividend in all the three years. Wolseley Company should not declare the dividend every year rather it should retain it to invest in the business.
IT Infrastructure Audit for Compliance
Scope
The cloud services provided by AWS includes a set of services such as computing power, infrastructure services, networking, storage, and databases. These services are delivered to the client on a need basis, on-demand basis, and also on a pay-as-you-go basis (Willcocks & Lacity, Eds. 2016). Different use cases are considered by the service provider. In this context, AWS provides over 50 different types of services. The company takes into consideration the security needs of its clients. To this extent, it has put in place an infrastructure that ensures that the security is better than on-premise security. To offer the best services, the company also puts into consideration the regulations put in place by the government and other relevant bodies. It offers its services to small and large organizations.
Goals and Objectives
AWS’ main goals are to offer services, guidance, and consultation to the client on cloud technology. To accomplish this, the company has consultants that relate to and educate the client on cloud technology. The company seeks to transform the IT sector through the provision of second to none services and products. In this effort, the organization has setup 53 availability zones all over the world. These are located in 18 geographic regions. Notably, there are plans to increase this number by 12 more regions. With strict adherence to the set guidelines and regulations, the organization is making good inroads in the industry and has a steadily growing client base.
To determine whether the operations of AWS are in line with the industry recommended standards, an audit has to be undertaken of its operations. Such an audit should include the determination whether the organization is adhering to the set laws that are associated with cloud technology. The audit should also seek to determine whether the privacy laws are followed. The IT security should also be analyzed, through the determination of the plans put in place for mitigating and dealing with possible threats and risks. The audit should also seek to determine the policies put in place by the organization on security and other operations associated with the provision of cloud services.
The frequency of the Audit
The proposed audit should be conducted once in a while. It is recommended that the audit should be conducted in phases and to a different extent. An overall audit could be conducted once in a year. However, departmental audits could be conducted periodically after every three months. These audits would shed light on what needs immediate attention and what the overall audit might miss due to the generalization that would be incorporated in such an audit (Armbrust et al., 2010). The periodical audits would also help the organization to know whether it is in the right direction and whether it is improving on previously mentioned issues.
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Duration
The periodic audits could be scheduled to last for a week. The main audit or what could be referred to as the overall audit could be scheduled to last for two weeks. Nonetheless, the periods are not fixed such that if the auditors were to require more time, they should be allowed to complete their work.
Requirements
Certain requirements are necessary for the audit process to be carried out. Firstly, the team of auditors would have to be constituted. In this case, it has to be determined whether they will be internal or external auditors. More so, there are specific issues that will be considered when the audit is being undertaken. These include the technical expertise and experience of the key personnel in the organization, the compliance to government policies and regulations, the frequency and quality of any security and awareness training undertaken, and the issues to do with accountability.
The rate at which new technologies are being used is also critical. On the same note, the management of change as a result of new procedures and processes associated with new technology is also critical. The factors mentioned above are important to the organization due to their influence on the overall wellbeing of the organization regarding its provision of cloud services. If the organization is responsible enough to take care of these issues and to have plans in place to mitigate these issues, then it would be determined to be in the right direction since these aspects are bound to better its performance and service delivery.
Privacy Laws
On personal data, privacy laws have to be adhered to. Most of the time, privacy is also associated with security. Since AWS is a public service provider, there are certain key security and privacy issues that have to be put into consideration. Firstly, it would be important to determine the governance of AWS regarding how oversight and control in the organization are managed by the standards, policies, and procedures put in place. Secondly, it would also be important to consider the compliance of the organization in line with the set regulations and policies. In this context, privacy laws come to play.
The privacy laws include the Privacy Act which dictates how the collection, use, dissemination and maintenance of personal information in a system where records are maintained. In as much as this regulation is mostly determined to be for Federal Agencies, they are also good standards and should be considered by private entities. Under this context, the organization is expected to undertake a Privacy Impact Assessment (PIA) (Krutz & Vines, 2010). This assessment should be performed on the different technologies that are used to collect, maintain, disseminate personal information.
In the same context of dealing with privacy laws, organization is expected to practice some level of restraining and control over the data. It is expected that an organization which is handling PII should have adequate security for the information it holds. The information should be kept away from any unauthorized personnel. It should also not be disclosed disrupted, used, modified or even destructed by unauthorized persons (Kandukuri & Rakshit, 2009). This involves the protection of the information systems that are used to relay and handle the data.
IT Security Assessment Plan
To have a thorough assessment of the IT security of the organization, it has to be in the context of the risk management, threat analysis, vulnerability analysis, and risk assessment analysis.
Risk Management
The risk management plan of the organization has to be strategic, and it has to conform to modern standards. To assess the risk management of the organization, it is important to first consider the kinds of risk that the organization is prone to. Risk management will also be determined through the analysis of the compliance of the organization with PCI standards. It would also be critical to determine whether the organization is ensuring that SAS 70 Type II standards are being adhered to (Kandukuri & Rakshit, 2009). Other factors to consider when looking into the risk management is the issue of data loss and recovery. Although most of the time the data that is contained in the cloud is often encrypted, it is usually harder to decrypt and recover such kind of data. In this context, it would be important to consider the plans that the organization has put in place to help recover the lost data. It is also critical that the performance of the systems and procedure put in place be determined in regards the management of risk.
Threat Analysis
As far as threat analysis is concerned, it is important to determine what kinds of threats the organization is able to handle and more so which threats it is likely to come under. It is also important to determine from the client’s point of view, the types of threats that they are likely to face. Once the threats are determined the organization should be able to detail the plans it has in place to help mitigate the threats.
Vulnerability Analysis
An analysis of the vulnerabilities the company is likely to face is essential. In this context, the physical security will be analyzed to determine whether the people, activities equipment, and operations are safeguarded against possible threats. The organization will also be audited to determine whether it is prepared to deal with the loss of data. It is also important to consider issues such as data lockout. There is the risk of data lockout that could affect the activities, people, information and operations of the organization to a great extent. Other vulnerabilities that have to be looked into include identity management, issues to do with authorization, execution control, external and internal cloud application interaction.
Risk Assessment Analysis
The risk assessment analysis should be carried out by answering the following questions. It would be important to determine what the threat categorization is at the organization. The other analysis that should be done is the analysis of the threat impact regarding how severe the threats would be. The threat frequency should also be determined as well as the uncertainty factor.
Resources for the Audit
The information and resources for the audit process shall be acquired from the organization upon acquiring permission from the management to access the systems and data. The auditors will work together with the organization’s staff in the process. The organization’s staffs shall be expected to provide all the necessary resources and information.
Seven Domains
1. User domain – the users of the cloud technology. The audit will seek to determine whether the users are authenticated before they are allowed access to the cloud.
2. Workstation domain – these are the computers as other devices that could be used to access the cloud. The audit of the security policies and regulations will be associated with the workstations that are allowed to access the cloud.
3. LAN domain – The equipment that is connected to a LAN at the client’s organization. The audit will seek to determine whether the policies that are put in place help with the regulation of the devices connected to the LAN which might affect the security of the cloud.
4. WAN domain – The equipment connected to the cloud service. Policies dictating the connection to the cloud are associated with this domain.
5. LAN-WAN domain – The equipment that connects the cloud to the devices operated by the client. The security policies and regulations, as well as controls set in place, affect this domain.
6. Remote Access domain – includes the encryption technology that is put in place to protect the cloud service. The audit of the encryption and other security policies and systems will be in line with this domain.
7. System/Application domain – includes the technologies that are used by the cloud service users to conduct their business and are also associated with the audit of the security policies associate with the use of the cloud service.
Policies and Procedures
The audit process shall put into consideration the security policies and procedures that have been put in place by the organization. To determine these, the organization’s liaison will be required to provide documentation on the policies that have been put in place. On the same note, the audit team can decide to carry out some tests to determine how effective the policies and procedures that have been put in place are. The organization should have procedures in place on how to deal with security threats. These should be tested to determine how effective they are in dealing with the security threats.
The policies should also be checked to determine whether there are controls that have been put in place to support them. There should be documentation on the controls. If there are none, some will be recommended with the depiction of the possible scenario of when the controls would come in handy being enacted. The effective implementation of the monitoring controls shall be checked. The monitoring process and tools of these controls shall also be checked to determine whether they are effective.
Security Control Points
It is important to have several security control points in the cloud service provider’s system. These points include the access, management, manipulation, storage, and relay of information in the cloud service. These points should be verified since they are gateways that can be used maliciously to access and manipulate the data by unauthorized parties. To determine whether these points are secured, an analysis should be done on all of them. This analysis should be done with real data and real users.
What is Directors Renumeration Package
The director remunerations may vary from different companies, but usually, it's always a mixture of salaries, bonuses, call options, shares benefits, and prerequisites. It is determined by corporate size, corporate performance, board compensation, ownership structure and human capital features (Mnzava, 2012 p 43). These remunerations are usually configured in such a way that it takes into account the normal government regulations, tax laws and the executives desires in the organization and lastly the reward for performance (Geller and Renneboog, 2016 p 48). The origin of the director’s remunerations can be traced back to the 1980s that experienced a general overwhelming rise in the salaries of the directors relative to average workers wage in the United States of America. These trends were replicated in some countries on a small scale. There are pieces of literature that have asserted that these raise was occasioned by the competition for the lesser brilliant talents that were available during the period of the 1980s that could add value to the stakeholders' values in the multinational companies (Sheridan, 2017). However, another dissenting view has asserted that these raise were occasioned by the emergence of a socially dangerous phenomenon that were brought about by the social and political changes that had left so much power in the hands of the executives which included the powers to control their remunerations. Other studies have however found the middle ground and asserted that indeed the executives should be aligned with social objectives. Therefore in most cases, the executive goals is an important part of the corporate governance and should always be determined in most cases by the company’s board of directors. The company law requires that directors should be effectively compensated for the services they offer to an organization The following essay is critically going to examine merit and drawback of using directors' remuneration packages and how to solve the deficiencies with corporate governance strategies.
Merits of directors’ remuneration package
The first reason why many scholars have supported hefty director's remunerations package is to attract and retain the best talent and hold on to existing top performers in an organization. Thus, it will require a company to have an attractive director compensation package to attract and retain the best directors. It is argued that corporations that don't pay well usually lose their top available skills to the best companies that offer the best remunerations. Therefore for any company to attract new talent and hold on to the existing talent the company must have the best remunerations package within the staff remuneration and the hiring plan. A case study of the United States shows that the companies in this state have competitive remuneration package for the directors and this has enabled the companies in the US attract and retain talents and high performers in their organizations. This goes a long way of shareholders where they want to attract talents who can help in maximizing shareholder value (Budd, Naastepad, and van).
Another reason why the director remunerations are very important is the fact that skilled top-quality labor are scarce and therefore in high demand. Therefore many companies are competing with each other to make sure that they get the most senior qualified talent that they can get (Aslam, 2019). Thus they have to tailor the compensation package in a way that attracts these few personnel to their organization. Strong remuneration adds to the employers branding, it makes the business to appear more attractive, and it is this that enables organizations to get hold of those brilliant brains at the expense of their competitors. Therefore it important to know that directors will always love to go to areas where the remuneration package is one of the best. This was illustrated through a Review of Banks in 2009 in the western countries a case of the United Kingdom which depicts that highly skilled personnel to fit into a particular executive company role are limited, and many companies are competing for the available talents.
Having a directors compensation package also serves as a tool for motivating and encouraging the directors. When they know that their organization is concerned about what they gain from the skills and services they are offering to the company, they will be motivated to do their work excellently and competently. This will, in turn, bring about an improved performance by the directors (Rahim and Nelson, 2018). The directors will be sure to work hard and give their best into the organization. Another reason why the directors should be given the best remunerations is that it can increase the happy moments of the individual during work. When a director is pleased with the remuneration package that he is receiving he is motivated to work harder for the company. Some scholars have asserted that happy employees are more likely to be more productive than more satisfied employees. These employees are more satisfied and are productive; they achieve almost all the targets that the company has set. These employees are more likely to view themselves as part of the companies just as these rules work on the employees they are most likely to work on the directors such that the directors that are satisfied with the remuneration package will be motivated to work even harder. In another research that was carried in London, almost 37% of the employees asserted that they would indeed leave a current job for equivalents responsibilities as longs as the remunerations were better. These statistics indicated that a remuneration package was essential in any organization. This will enhance the satisfaction of both the directors and the shareholders (Goh, 2016).
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Challenges of the directors’ remuneration package
Issues have been raised concerning excessive compensation in the print and electronic media as well as in academic literature. One of the major drawbacks of directors’ remuneration package is that it encourages laxity of the directors. This has a great impact on the performance of an organization. According to Aslam, (2019), remuneration is highly tied to performance. Thus directors should be compensated based on their performance. However, this is not usually the case. The package is designed in a way that it attracts people to an organization and some may come in for the sake of their interest. Many people pursue these positions due to the privileges that come along with them; thus they make themselves appear fit for those positions (Budd and Naestpad). When they get into the organization, however, they forget that they are there to deliver thus a decline in their performance is noted. These positions also attract corruption and bribery and so some directors get to these positions not on merit but out of ‘favors.' This will, in turn, increase the chances of unproductivity and success of the organization. A case of Pakistan shows that many of the non-board directors in the organizations did not get those positions through the legit means. Thus, they lack in knowledge of the tasks they are expected to carry out in those firms and so they cannot make any impact to the firms they are in (Aslam, Haron and Tahir, 2019 p 8). It was realized that those directors were attracted to the positions by the remuneration package and after getting into these positions, they only lavished themselves with the firms’ luxuries at the expense of the firm.
These compensation package has also been noted to bring an increase in the global financial crisis. This is because companies use a lot of money in compensating their directors who hardly bring any economic gains to the companies. The directors have been noted to have an adverse effect on the financial status of a company. Many companies have to secure loans to compensate the directors, and this leads to high debts on equity which affects an organization's financial performance (Aslam, Haron, and Tahir, 2019 p 17). A case study of the United Kingdom indicated that between 1998 and 2010, the UK employee remuneration had grown by 4.7%. This showed that with the passing years, the finances organization incur in remunerating their directors keeps on increasing. Director remuneration was viewed as a total and complete scandal to the economy of a country because it led to the capitalism crisis which in turn brought about inflation (Koutsoukis and Roukanas, 2014). This will be against the desire of the shareholders whose main aim in business in maximizing profits and capital. Ntim, Lindop Osei and Thomas (2015) in their study conducted in South Africa stated that the relationship between the executive remuneration and organization financial performance had been decreasing due to a shift from performance related components to compensation of CEOs which created a disconnect between the CEO and organizational performance. Another study found out that the propensity of executives to enhance their remuneration influenced remuneration contracts for directors and shareholders making them be no longer optimal (Bussin and Modau, 2015).
Directors’ remuneration package is also portrayed to have high aspects of unfairness. This is noted in the cases where we are comparing remuneration of directors to that of other employees in the organization. The ratio of the chief executive officer compensation is noted to be far much higher than that of the average workers. A case of the UK in 2009 showed that the CEO is paid an amount that is 81 times that of an average worker. In the same year, a report from the US indicated that the CEO was paid 271 times what an average worker got. These are but a few examples that depict the unfairness in these remuneration packages. A study conducted by Petrin (2015) p 4 showed that this resulted in complicated broader societal issues of distributive justice and fairness. The concern of unfair compensation brought about by the hefty directors’ remuneration can discourage other employees leading to underperformance which negatively impacts the success and productivity of a firm. This is unlike what the shareholders expect that is fairness and transparency.
Addressing directors’ remuneration package challenges through corporate governance
Corporate governance refers to a system of rules, processes, and practices by which an organization is directed. It involves ensuring equity of interest of the shareholders, management, suppliers, financiers’ customers, community and the government (Ticker, 2015). Several corporate governance mechanisms can be employed to help address the challenges originating from directors’ remuneration package.
To begin with, the corporate governance team should build a reliable and qualified board of directors and evaluate their performance before giving them any tasks and before giving them the directors’ remuneration packages. This means that the grant of remuneration package should be strictly based on performance and qualification to prevent financial constraints and to be in debt by the organization which mainly occurs when directors are using much of the organization's resources, yet they are performing poorly.
The team should also set directors’ fees that will attract suitable talented candidates and which will not create conflicts between their duties and independence. They should also ensure that they have transparently laid down recruitment procedures which cannot be interfered with. Measures to deal with corruption and bribery should be stipulated, and strict rules against those who may be involved should be laid down. This will help to acquire qualified directors based on merit rightfully.
The board of directors should establish measures of performance for the directors and other executive officers. They should set targets and evaluate the directors based on the goals set for them. They should conduct regular assessment and evaluation of their performance and this way they can tie directors’ remuneration to performance. This will help improve directors’ performance which in turn will positively influence the performance of the entire organization. Effective board monitoring limits the managerial tendency to pursue personal interests and agendas such as pursuit for director remuneration packages and instead focus on organization performance (Ghouma, 2017; Garcia, 2016 and Saad, 2016).
It should ensure that the organization has come up with a remuneration committee comprised of independent directors who will develop and oversee the compensation plans and procedures. This committee should be given the task of evaluating the systems of directors' remuneration in that organization (Garcia, 2016). They should determine the factors to be considered when remunerating the directors and should ensure that the directors’ package is fair compared to that of other employees in the organization. The committee should also come up with a clear policy that says that the underperforming directors shall not be entitled to some benefits that are contained in the package. It should also state that in case a director is laid off due to poor performance, they have no right to claim these benefits. This will help create transparency and accountability between shareholders and directors regarding remuneration.
Corporate governance will also help directors understand the need of having shareholders interest before theirs for the sake of the organization. With this understanding, the directors will know that the interest of the shareholders is to see their company succeed and that the success of the company is for the benefit of them all. This will help deal with the challenge of directors being in positions for their gain. The directors will not be there for the luxuries they are gaining, but they will put efforts to see that the company succeeds.
Cryptocurrencies
Political Aspect
Cryptocurrencies are a contemporary factor that was developed to facilitate digital asset portfolio development. There are many who still do not understand the way the cryptocurrencies function. The currency is also referred to as crypto money. It is used as a medium of exchange just as the government issues currencies are used in standard trade. The currencies are considered to be secure as they are used in the digital platform. The currency is considered and designed to be entirely self-controlled system. As such, it is designed to follow up on all the currencies that are being traded on the internet. In other words, all the units are designed to interconnect with each other and as such are in a network.
The use of the cryptocurrencies comes with some political impact. Interestingly, there is an ideology that cryptocurrencies could be the start of authoritarianism. Certain aspects and factors can be considered to sign for this to come in the future. For instance, certain physical services are now being paid for online. For instance, the physical parking meters that were once visible in almost all street corners are disappearing slowly. More and more services are being paid for using applications. This is a situation where the computers are taking more and more responsibility in the society.
Cryptocurrencies such as blockchain were invented with the intention of decentralizing government. The other main reason for the creation and invention of blockchain is the decentralization of the power of the corporations. Nonetheless, after the innovation was put in play, different things have come to be, and now more and more libertarians are convinced that the cryptocurrencies are consolidating the power of the governments and corporations. For instance, the creation of the bitcoin is considered to be quite libertarian. The ideology behind the libertarians is the need to decentralize power from the states and relaying this power to the individual.
Those that are in support of the libertarian school of thought believe that the states do not always have the best interest of the individual at heart. As such, the libertarians think that the individual ought to make their stand against the state. The libertarians think that when the individual is empowered instead of the state, then the society is made better since there will be a free-market economy that is driven by the individuals in the community that own property. The corporations and governments are shunned in this case. There is an argument on the issue of how the cryptocurrencies are considered to be better than the money used in the markets.
Money is considered to be efficient when it comes to application and use. However, the issue of currency is not highly regarded by the market anarchists. The money supply is controlled by the central banks. In turn, these central banks are controlled by the state. On the other hand, the popular and commonly used Visas are corporation owned, and these corporations are not a better option either. As a result of the negative impact and image that these entities have already created in the world, the cryptocurrencies were developed to give more power to the individual physical currencies.
As a manager, it is important to consider the factors that are affecting the business and managing these to facilitate better performance. In this context, the current innovations in the market are essential and need to be put into consideration in line with the operations of the business from a political point of view; the cryptocurrencies could in deed me a means to an end to the controlling of the market by the major corporations. The issues around the innovation should also be looked into. It is vital to consider whether the cryptocurrencies are a good real or are likely to get the business into trouble.
Politically, the management of an organization has to be positively charged and in line with the organizational goals. The employee of an organization needs to be assured of the well-being and future of the organization that they are working for. This will motivate them to do their best. When organizations are associated with the cryptocurrencies, they have to be clear on how they will handle the investment. This is particularly serious when it comes to organizations that were not initially dealing in the cryptocurrencies or were not formed to trade in cryptocurrencies. Such organizations if not properly invested in their primary business might be affected by the cryptocurrencies. Such a status would then affect the employees of the organization.
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Economic Aspect
The economic aspect of the application and use of the cryptocurrencies displays an innovation that created an opportunity for worldwide trade and investment. Interestingly, there are some that are of the opinion that cryptocurrencies are starting to affect the real economies. There is a reported surge in the cryptocurrencies in the market. The surge has been considered by some to be a sideshow apart from the real market in the economy. The prices for most cryptocurrencies has shot up to such as that of the bitcoin. However, to the ordinary people, no impact can be felt from the trade of the cryptocurrencies. Interestingly, some companies are getting into the business of trading in cryptocurrencies.
Some companies have publicly traded stocks that are getting into the business of cryptocurrencies. The decision to do so is based on the promising future of trading in the cryptocurrencies. More so, there are evident financial benefits that are associated with the cryptocurrencies. Interestingly, already some markets are rewarding the companies on the same. The involvement of such companies in the cryptocurrencies has both good and bad effects. The concern here is associated with the impact that such a trade would have on the company and on those that are employed by the company or are shareholders that have nothing to do with the trading. If the cryptocurrencies were to suffer what is referred to as a crypto bust, then the individuals would also suffer.
Other companies that are getting into the business and are not right users of their capital and other resources. As such, they are not the best users if the cryptocurrencies as well. Such companies are noted to hire people and even use up their resources with the intention of acquiring the much gain as far as the trade in cryptocurrencies is concerned. Sadly, they also use up their funds to purchase equipment and rent office space that ends up not being utilized. The businesses make loses, and these are just some of the impacts that the cryptocurrencies have on the community around. Interestingly, most of the money that is made through the cryptocurrencies is caused by the major companies that are funding the smaller companies. These corporations benefit from the trade through the economic growth that is brought about by the trade is not long lasting.
As a manager it is very important to consider the economic activities that the organization is involved in. This consideration facilitates the strategic decision making in such organizations which enables the organization to remain stable in its business operations. As far as the cryptocurrencies are concerned, it would be any manager’s concern to want to know the impact that these currencies would have on the overall performance of the organization. The fact that the cryptocurrencies are considered to be illegal and are even banned in some countries is a serious issue that tells a manager they ought to consider the investment on such as a serious matter.
Technological Aspect
The technological aspect of the cryptocurrencies has to do with the technology that is employed in the management and operations involving the use of the currency. The technological impact of using cryptocurrencies is quite obvious. Due to its use, innovators have had to look into the issue of security since the cryptocurrencies are quite expensive and need to be highly secured. In the same context, innovations have had to be made to create awareness of how the cryptocurrencies are used.
In the context of the technological implication of the use of cryptocurrencies, a manager would most likely have to worry about how safe is the technology. The reason behind this ideology is based on the fact that the cryptocurrencies are not a physical thing that one can protect and have physical control over. The cryptocurrencies are digital and as such only digital solutions can be applied in the context of their security. The manager would naturally have to consider whether the technological implication of the investment is with it. They would have to train some of their staff members on the innovation to have some in-house understanding of the operations and management of the cryptocurrencies.
Legal Elements
Certain legal elements are associated with the investment in cryptocurrencies. Different laws have been put in place for the control and management of how businesses and organizations are managing and financing cryptocurrencies. In some countries, the cryptocurrencies are not entirely legal, and even the governments are discouraging their application. The reason for such steps is based on the notion that the cryptocurrencies are weakening and would affect the legal currencies.
The legality of the cryptocurrencies is from country to country. For instance, it is illegal to trade or invest in cryptocurrencies in Algeria, Cambodia, Nepal, Bangladesh, etc. There are different regulations on the use of the currency such as in the European Union. The EU has regulations that state the taxes to be paid by the companies which are trading in cryptocurrencies. The cryptocurrencies are also recognized by the banking sector in the EU region. As for the countries that have determined the cryptocurrencies to be illegal the law states that it is illegal to use, hold, and even trade in the cryptocurrencies. From a managerial point of view, it is very important to know the legal implications of using or investing in the cryptocurrencies. There are different reasons for this including the fact that if the organization was to be involved in such, it could be found guilty in a court of law and made to pay hefty fines. In other contexts, the organization could be forced to shut down, and in such cases, the staff members would be left suffering.