Corporate governance and shareholders’ wealth has been closely related in history. The two concepts are closely related with different scholars coming up with their impacts in the organization. Corporate governance refers to a systematic method of providing oversight and direction to the manner in which an organization operates. According to Ruiz-Porras and Lopez-Mateo, corporate governance is concerned with responsibilities and rights of an organization’s management, shareholders and other stakeholders such as customers and employees. Corporate governance impacts investment decisions of an organization. Therefore, effective corporate governance maximizes shareholders wealth and has to be considered when investing (Karel et al. 2004). Additionally, Michaelas et al pointed out that effective corporate governance manages the company internal and external factors which contribute to shareholders’ wealth. The authors argued that, firms with effective corporate governance prosper in global and domestic market which ultimately maximizes shareholders’ wealth (Michaelas, et al, 1999).
Premier Oil is involved in the production of oil and gas, exploration and development. The company is interested in oil and gas in North Sea, Africa, Asia and the Middle East. It has its headquarters in the UK, London and has 638 employees by December 2011 (Doyle et al. 2000). It recorded £827 million as revenue in the fiscal year ending December 2011, an increment of 8% as compared to year 2001. It made a profit of £175 million in the year 2011 an increment of 38% as compared to year 2010, and a net profit of £171 million during the year 2011, an increment of 32% as compared to year 2010 (Direct 2010).
This report is looking at if corporate governance maximizes shareholders wealth of the Premier Oil PCL. It also examines its performance over a period of four years that is 2008 through 2011. This is done by putting in to consideration the company’s balance sheet, income statement, cash flows statement and the ratios statement. Over the years there has been recorded an improvement in the cash inflows verses outflows as well as an improved profit and company liquidity (Aswath 2007).
Even if liabilities as compared to capital increased, during the previous financial year to 44 %, the company is within the Gas, Consumable Fuels and Oil industry's norms. Secondly, although the liquid assets cannot satisfy current liability obligations, the Profits that were realized are adequate to cater for the debts. According to the cash inflows recorded, the company is effective as in comparison to others in that industry. By December 31 2011, the company had £205M as uncollected receivable (Doyle Et al. 2000).
The stakeholders of this company are the shareholders, debtors, creditors, management; Board of Director, suppliers, clients the government, and the general public. Each of these has a distinct role to play, as per the organization’s policies. Premier company is a profit-making organization whose primary goal is to maximize the wealth of the shareholders. Therefore, the shareholders have to ensure that they have met the company’s capital contribution requirements (Gray 2000). In other words, a part from providing finances, they directly and indirectly participate in the management process of the company. This implies that they oversee the recruitment process for the executive and non-executive directors. At the same time, it is their responsibility to make effective and feasible decisions in the company (Graham 2010).
As already highlighted, the company has an Executive Board of Directors. This is under the chairmanship of Sir David John. This is the top most organized part in this organization, which is carefully appointed by the shareholders. Their major role is to provide the organization with professional and experiential advice before making any major decision which affects the entire company (Simons 2000). This is a noble idea because it provides the organization with the ability to acquire the service of these experts cheaply. Engaging them as part-time workers enables the company to enjoy such services, which would otherwise be more expensive that it is today. The executive board works in conjunction with the non-executive board, which is headed by Mike Welt and Joe Darbi (Mintzberg 1994).
At the same time, Premier Company regards the interest of other players, as well. Although, the major objective is to maximize profit, it has become the company’s policy to safeguard the interest of all the other stakeholders. Therefore, in its governance, the company consults groups like the suppliers, customers, public, and government. Oil and gas trade are becoming very lucrative. Thus, it has attracted a lot of players making competition stiffer than ever. In this regard, the company’s management involves each of these in major decision-making. The suppliers are timely and effectively paid their dues; no clients are given quantity products as per their expectation. Meanwhile, government policies are implemented to avoid legal tussle (Larson et al., 1996).
Corporate governance principles are discussed below. Equitable treatment and rights of shareholders: the organization ought to respect the shareholders rights and help them to exercise the rights by effectively and openly encouraging shareholders to take part in meetings. Other stakeholders’ interests: the organization ought to acknowledge that it has contractual, legal, social, creditors, investors, suppliers, customers, local communities, policy makers and employees (Mintzberg 1994). The board responsibilities and role: the members of the board need to be equipped with the relevant skills to challenge and review the performance of the management (Thomas 2005).
For the board to be effective, it needs commitments and adequate independence. Ethical behavior and integrity: integrity ought to be a vital requirement in the choosing of board members and corporate officers. The organization need to come up with norms to be followed by their executives and directors which promote responsible and ethical decision making (Clarke 2007). Transparency and disclosure: the organization ought to clarify and make clear the responsibilities and roles of management and the board to provide with a level of accountability the stakeholders. It also should implement independent procedures to safeguard and verify the company’s financial reporting integrity. Material matters that concern the organization ought to be disclosed so balanced and timely to that factual clear information is available to all investors (Graham 2010).
These principles operate in favor of maximizing the shareholders wealthy since when the rights of the shareholders are considered their investment capital is protected because they are given their dues of dividends and are given the say in matters of the organization. Better still when all the other stakeholders’ interest has been taken care of they are satisfied and therefore, work towards achieving the objectives of the organization one of which is maximizing the wealth of shareholders (Brassington & Pettitt 2006). When the board has some extent of freedom in the execution of its duty its efficiency is increased which boosts the productivity of the organization and in the long run maximize the shareholders wealth (Larson et al., 1996). Lastly under the principles, ethical behavior and integrity transparency and disclosure are the core factors of success in every organization. This reduces issues of embezzlement and misappropriation of company funds. If these two do not occur, the wealth of the shareholders is maximized. Control mechanisms in corporate governance also act in favor of maximizing the shareholders wealth since it keeps all the stakeholders checked. It enhances efficiency and reduces loopholes in the company’s fund (Doyle Et al. 2000).
Co-operate Governance Theories
The theories discussed below give an insight in corporate governance.
In the Premier Company, shareholders are the top most decision-making parties. As the investors, they have a direct control in all the generations of the organization (Brassington & Pettitt 2006). Because of this, they have felt it better to co-operate with agents to act on their behalf. In the structure of the organization, there is the Board of Directors; the Chief Executive Officer (CEO) and regional and country directors. Under them, there are the departmental managers supervising the operations of the finance, legal, human resource, sales, marketing, purchasing, operations, and exploration departments (Doyle Et al. 2000).
These are the professionals specialized in the areas in which they are attached. All of them are given a full time job, so as to get enough time to discharge their duties with less constraint. In order to insure the accountability and quality output, management has come up with strategies to transparently employ them on merit, supervise, monitor, and motivate them. Each of them is entitled to a good working conditions and attractive salary packages (Khalid 2011). Besides, they are involved in a lot of bureaucratic procedures to insure their boundaries are clearly outlined to make sure that there is harmony and cooperation in all departments. This is a good motive because it has helped to motivate these executives. Hence, they have gotten satisfaction in serving this organization. This has motivated them to be focused on the accomplishment of the organization’s goals (Brassington & Pettitt 2006).
Resources Dependence Theory
Premier Oil Company also relies on the Non-Executive Board. The decision to incorporate non-executive team has helped this company a great deal. It was the shareholder’s view that such a board would consist of eminent export from different fields after carefully being selected. They would steward the company towards achieving both its long and short-term goals. However, in order to do this, they would be expected to show their dedication and commitment in whatever activity they undertake (Aswath 2007). It was mindful decision because it has enabled the company realize a tremendous growth. The Non-executive Board advises and counsels the Executive Board. Moreover, in the association of this company, personalities like Welton have enabled it to rebuild its reputation. Thus, it has won the confidences (Becht et al. 2003).
Premier Oil is an energy company to admire. Its exemplary governance has expanded it from a mere public company to a multinational (Schreyogg 1980). The involvement of all the stakeholders in its affairs has enabled it to establish a good relationship with all of them. As a result, it has managed to grow tremendously, thus beating all the odds and ends up being one of the blue chip companies in London (Clarke 2007).
As per the ratios the premier oil company can be said to be sound in its liquidity although is debtors ratios were negative. In terms of capital, it can also be said to be doing well. The company is in an encouranging condition to invest in for the investors.
Acknowledging the successes of the corporate governance, it would be wise to try and implement the following recommendations.
- The management should consider diversifying its activities. Specializing in oil and gas distribution map jeopardizes the financial stability of the company. Instead, it should consider venturing in other products, such as mining. This would enable the company to handle the risks that would occur affecting the energy industry (Aswath 2007).
- Premier Oil Company should not only focus on the shareholders as the only important players in its operation. Instead, there should be a shift from this altitude. The shareholders should not necessary play a dominant role throughout the company (Clarke 2007).
- The governance strategy of this company should be reviewed. It should not be only task-oriented. Instead, there should be a more human oriented approach, so as to give the workforce free space to express they creativity, novel language, and entrepreneurial skills.