Corporate Governance - Starbucks

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Diversity in board members creates a balance of the board’s ability to cover different areas with sufficient experience, knowledge, and skills. Subramanian (2015) states that, “In exchange for the right to run the company for the long term, boards have an obligation to ensure the proper mix of skills and perspectives in the boardroom”. Boards can have executive directors or non-executive directors. An executive director is a board member that also has responsibilities as an executive manager in the company. An independent non-executive director is a member of the board that has no relationship or affiliation with the company, other than being a board member, and is usually viewed to have more objective and independent judgement.

4.1 Board Types

4.11 Solely executive

The solely executive board structure consists only of executive directors, in other words, directors that have a direct relationship or responsibilities within the corporation. This structure is, typically, only seen in small family firms.

4.12 Majority executive

The majority executive board structure consists mainly of executive board members but will have a minority of non-executive board members.

4.13 Majority non-executive

The majority non-executive board structure consists mainly of non-executive members but will have a minority of executive board members.

4.14 Solely non-executive

The solely non-executive board structure consists solely of non-executive board members that have no relationship or responsibilities within or to the corporation other than their duties as a board member. This is typically seen as the best representation from a shareholder’s or other stakeholder’s perspective.

The culture and activities of the different board structures, particularly the solely executive and solely non-executive, can be significant.

Starbucks has a board of directors that consists of 12 directors, two of which are executive directors with a direct relation to the company and the other 10 are independent directors with no relation to the company. According to Hermalin and Weisback (cited in Joseph 2014), “underlying this proposition is the idea that outside directors can more capably monitor the CEO’s activities, whereas inside directors are prone to capture, and ill-equipped to contravene the CEO’s inclinations”. This will help to ensure that shareholders’ interests are not overridden by personal self-interest of the directors with an investment in the company. Starbucks has achieved a board quite diverse in director experience and abilities.

5. Board Committees

Formalization of board committees has been an important corporate governance development over the past years. There are three committees which are generally found in all boards that have been established for particular purposes. These are the audit committee, the remuneration committee, and the nominating committee. The audit committee should consist of independent members only as the aim of the committee is to ensure an independent audit system that has integrity and also serves as a channel between the board and the external auditor. The remuneration committee should also be made up solely of independent members as their responsibilities usually include performance appraisals/objectives and overseeing the remuneration packages of senior management of the corporation. The nominating committee will consist either solely or mostly of independent directors and make recommendations when a board member needs to be added or replaced for varying reasons.

Starbucks board of directors consists of 12 directors, the majority of which are non-executive directors. Two of the 12 are Starbucks executives, namely Howard Schultz who serves as the chair and chief executive officer and Kevin Johnson who serves as the president and chief operating officer. Creating a board with a majority of non-executive directors serves to provide the best representation for shareholders, as these directors are not as likely to act in their own personal best interest. The board is responsible for performance goals and monitoring the management of the company.

Starbucks has three committees that include an audit and compliance committee, which is made up of five non-executive directors, a compensation and management development committee, which is also made up of five non-executive directors, and a nominating and corporate governance committee, which is made up of six non-executive directors. They have developed corporate governance principles and practices for the board of directors to ensure better long-term performance and that their corporate governance has a positive effect on profitability.

The audit and compliance committee assumes responsibility for the internal and external audit processes and is responsible for the financial reporting.

The compensation and management development committee assumes responsibility for establishing fair and appropriate compensation for executive management of the company.

The nominating and corporate governance committee develops and implements the policies and procedures for the board of directors. They annually review the corporate governance principles and practices and evaluate board committee’s performance and effectiveness.

6. Theories

The principals, otherwise known as shareholders, and their economic agents, otherwise known as the company’s directors, can have important conflicts of interest. There are three theories that address and explain these issues.

6.1 Agency Theory

These conflicting interests are described or referred to as the Agency Dilemma (or agency problem). Kultys (2016) states that, “Firstly, it is simple, because it reduces large corporations to two groups of participants – managers and shareholders – whose divergent interests are clearly defined. Secondly, it makes a very common assumption that a man is an intrinsic egoist, and therefore every rational individual pursues his or her own interests.” It exists due to the possible disconnection between the financing and management of a company. Often, due to shareholders being insufficiently informed and likely not qualified in everyday operations, the rights of control end up with the company’s directors. The sociological perspective of ‘instrumental rationality’