A Case Study: Barratt Annual Report and Accounts 2018
The article critically analyzes the financial and non-financial reporting constrains based on the need to meet corporate governance and control issues in Barratt Developments Plc. The company has been in existence since 1959 has primarily focused on building excellence with the aim of maintaining an excellent reputation in the market characterized by quality and satisfaction of their customers. The onset to provide quality homes, better locations, and serene environments is a fundamental aspect of Barratt Developments Plc. The article analyzes the Annual Report and Accounts 2018 of Barratt Developments Plc to assess the importance of corporate governance, control issues raised by the company, and focus on achieving the highest performance in the industry. The application of corporate governance and control mechanism are essential to enhancing Barratt’s Developments Plc capacity to sufficiently meet its strategic priorities, putting their customer first by investing in their people through ascertaining safety, being a trusted partner, maintaining leading constructions, safeguard the environment, bring stronger community relations, ascertain financial health, and adequately inform risk management.
The article comprehensively outlines the overview of the Barratt Developments Plc as a leading company in the construction and home development industry. The key focus of the article is to analyze the corporate governance and control issues that impact on the performance of the company. The analysis is based on the assessment of Barratt’s annual report and accounts in the financial year (FY) 2018. This is fundamental to assess the best applicable corporate governance theories that suit the needs and functionalities of the company. As well, an analysis of the application of disclosure is fundamental to assess how the company relates with the key stakeholders and how are their needs and expectations addressed by the company. Furthermore, the article will analyze both the positive and negative aspects of the report.
Overview of Barratt Developments Plc
Barratt Developments Plc has been in existence for over the past sixty 60 years since 1959. The company serves with a vision to “led the future of housing by putting customers at the heart of everything it does through quality and customer service” (Barratt Development Plc Report, 2018, 3). In the past sixty (60) years, the company has seen the construction of 450,000 homes. Won HBF 5 Star award for nine consecutive years – a show of excellence and high performance. Also, innovation has been paramount in the construction of high-quality homes to address Britain’s housing shortage which, for instance, in FYs 2018 and 2017, the company completed 17,579 and 17,395 units with an average active outlet of 368 and 366 units respectively. The geographical of Barratt Development Plc projects are spread across Britain including locations such as Scotland (1,729 units), London and Southern (3,448 units), East (3,540 units), West (2,639 units), Central (3,258 units) and Northern (2,965 units) informed by people’s preference of locations to live. In FY 2018, Barratt Developments Plc introduced operating margin as a key financial KPIs to assess the profitability of the company. The gross margin generated in FY 2018 was 20.7% from FY 2017’s 20.0%, the operating margin was FY 2018 17.7% from FY 2017’s 17.2%, and the performance before tax in FY 2018 was £835.5m from FY 2017’s £765.1m (a 9.2% increase) (Barratt Development Plc Report, 2018, 8). Therefore, the performance of Barratt Developments Plc over the years has witnessed tremendous growth year after year owing to the application of effective corporate governance practices, financial reporting standards, and application disclosure tools.
Corporate Governance Issues
The functionalities and performance of Barratt Developments Plc recognize that the application of “good corporate governance is the foundation of any successful company.” In John Allan, the Chairman’s statement he notes that the company “embeds good corporate governance practices through our policies, processes, and procedures across our business that emphasize on the application of the provisions of corporate governance regulations and best practices in the operations of the company” (Barratt Development Plc Report, 2018, 14). According to Cadbury Report, 1992, para. 2.5, the application of corporate governance comprises a system by which companies are directed and controlled to ascertain high performance. The application of corporate governance constitutes the framework of regulations, relationships, rules, processes, and systems in which authority in an organization is exercised and controlled (Rankin et al., 2017, 54). Thus, the application of corporate governance in an organization exceeds the codes and sets of principles that direct the operations and conduct of an organization, also, include upholding ethics and accountability (IFRC, 2018b).
The provisions of corporate governance in Barratt Developments Plc comprise of five (5) key features including; leadership, accountability, effectiveness, remuneration, and ensuring effective engagements with the stakeholders (Barratt Developments Plc Report, 2018, 60). The leadership component outlines the expectations of the company Executive Directors who have the mandate to maintain long-term success of its functionalities and performance (KPMG, 2018b). The accountability component informs any decision making in the company to ensure the maintenance of sound risk management approaches, efficient internal control systems, and review of regulatory laws that direct the relationship with the stakeholders (IFRC, 2018). The effectiveness feature provides the continuity of the business and performance of the company in the industry. By meeting the credo and principles of performance, effectiveness in the performance of Barratt Development performance is ascertained leading to future competitiveness. The component of remuneration comprises of the formal and transparent procedures that inform the development of policies and strategies in the company (The Cadbury Code, 1992). The remuneration component of corporate governance stipulates the promotion of the long-term success of the company through transparent financial reporting, accountability, and responsibility (KPMG, 2018a). Finally, effective engagement with the stakeholders serves to manage the expectations and needs of the stakeholders without causing adverse ripple effects on the company. Thus, is guided by maintaining open dialogue to reach on various agreements between the company and the stakeholders.
Models of Corporate Governance
The key models of corporate governance analyzed in relation to Barratt Developments Plc case study includes the agency theory and the stakeholder theory. The analysis of corporate governance is essential to inform companies are controlled and run to impact on performance and profitability of the organization. In Barratt Developments Plc, corporate governance is essential in running house supply, mortgage availability, meeting housing outlook demands, regulate house prices, and help customers to buy the houses across Britain. This is in line with address the fact that Britain needs more homes fundamental to meet the high housing shortage in the country (Barratt Developments Plc Report, 2018, 27). The management of corporate governance informs customer satisfaction, the reputation of the company, energy efficiency – environmental implications, and the long-term success of the company.
Agency Theory. The Agency Theory as a model of corporate governance is fundamental as it helps reduce the conflicts in the various company relationships. The Agency Theory is a result of finance and economics in the company seeking transparency and accountability (Jensen and Meckling, 1976, 305). The Agency Theory manages the relationship between the board of directions, the executive, the management, and the shareholders on the financial and economic performance of the company. The Agency Theory is fundamental for the functionality of Barratt Developments Plc in which helps manage the behavior of the owners and the managers in the firm to impact on the benefits of the respective stakeholders. The firm’s existence solely based on the need to benefit the shareholders requires effective management to generate more profits for high incentive compensation (Deegan, 2013). In turn, conflicts are adequately reduced and resolved in the company by meeting the demands of the shareholders.
The regulation of the corporate governance through executive committees and regional managing directions, the board of directors, and auditing impacts to more accountability in the company. The financial statements of comprehensive income, cash flows, balance, and profits facilitate conflict reduction through the transparency of the financial performance of the company. The Agency Theory leads to the contentment of the shareholders as a result of the understanding by putting all information public for their review and analysis (Jensen and Meckling, 1976, 306). This presents the openness of the company impacting on its capacity to build a good reputation and trust among its shareholders. Consequently, the Agency theory supports the continued concentration of the shareholders’ efforts towards the enhanced performance of the company. Thus, guarantee future competitiveness and existence of the company in the industry.
Stakeholder Theory. The Stakeholder Theory outlines the managerial and normative branch which arises from social-oriented perspectives on the application of corporate governance in the company (Barone et al., 2013, 163). The enormous impacts of Barratt Developments Plc on society requires the company’s commitment to discharge accountability and transparency in its functionalities beyond the interests of its shareholder (Solomon, 2013, 7). Serving the British nationals with the growing demand for good homes, Barratt Developments Plc commits to ensuring customer first, quality building, maintaining trust and good reputation, as well as, serving as a leader in the construction and housing industry. Barratt Developments Plc serving in a highly demanding industry, its impacts on the society are enormous Gendron et al., 2016, 549). Therefore, being a leader is essential to set the precedent of what others should practice in serving the community.
The branches of the Stakeholder theory including the managerial and the ethical/normative branch stipulates the functionality objectives and expectations of the company. The managerial emphasize exercising transparent practices that might influence the actions of the organization. That is, a managerial branch of the Stakeholder theory emphasizes on the need to streamline decision making and actions taken by the company for the benefit of the community they serve and industry at large (Barone et al., 2013, 165). The ethical/normative branch of Stakeholder Theory emphasizes on the need of moral practices and treatment of the organizational stakeholders. This outlines the intrinsic right of the stakeholders which should not be violated. For example, the intrinsic right of the customers to have a quality home built by the company, health financial commitments, and a good environment (Freeman et al., 2004, 364). Therefore, emphasizes on the need to uphold accountability as the primary aspect of the functionality of the company.
The key control issues adopted by Barratt Developments Plc include the enhancement of internal control measures, risk and risk management. The internal control measures include emphasizing on the relevance of financial auditing, adopting current practices on sustainability reporting, and upholding accountability of the company. The internal controls, risk management, and audit function report in Barratt Developments Plc include the financial statements that stipulate the practice of financial transparency with readiness for scrutinizing of the information published (Barratt Developments Plc Report, 2018, 119). Practiced on an annual basis, the financial statement reports illustrate the transparency and accountability of the company to its shareholders and society. The practice of independent audits is critical for audit functions and risk management which evaluate any key feature that internal audits may have missed or omitted. Furthermore, the constitution of the audit committee, nomination committee, remuneration report, the executive committee and regional directors, as well as, the board of directors comprised of the control measure that steers the company towards maintaining effectiveness, accountability, transparency, and responsibility in all its departments.
Application of Disclosure
The application of disclosure in Barratt Developments Plc is provided to address the shareholders needs as a whole. The capacity of disclosure reports upholds the corporate governance practices in the company by demanding transparency and accountability of all the departments (Friedman, 1970, 280). The practice of disclosure is fundamental to the well-function of the corporate governance of Barratt Developments Plc as it emphasizes transparency and accountability practices. The provision of corporate disclosure done on every financial year to stipulate the company’s functionalities, spending, and commitments to key corporate features is fundamental to the evaluation of the company’s management (Solomon, 2013, 152). As a tool for transparency, disclosure reduces the agency costs which are stipulated to the expansion of accountability and responsibility of the company and its stakeholders. Hence, result in a growing reputation and high performance of the company in the industry.
In order to address the expectations of the shareholders as a whole in the functionalities of Barratt Developments Plc, the annual reports and accounts breakdown of every financial year indicate the company’s commitment to the stakeholders. The exercise of transparency through disclosure analysis reports in every financial year show the quality, i.e., relevance and reliability of the company operations in developing performance success. The disclosure reports included in the Barratt Developments Plc Annual Report and Accounts 2018 include the Director’s report, the Results and dividends, Dividends and distribution, Activities of the group, Strategic report, Directors and their interests, Disclosure of information to auditors, Shareholders authority for purchase of own shares, environmental policy, Approach to tax and tax governance, financial statements and accounting records, among others (Barratt Developments Plc Report, 2018, 112). The disclosure reports make corporate governance in the company more effective and efficient.
Financial and Non-financial Constrains
Financial KPIs. The financial constrains are stipulated on Barratt Developments Plc’s annual report and accounts 2018 to include the analysis on the gross margin which indicates a growth rate from the previous FY. FY 2016, FY 2017, and FY 2018 recorded 18.9%, 20.0%, and 20.7% respectively. The operating margin as well expects to drive further improvements from FY 2017 and FY 2018 17.2% and 17.7% respectively (Barratt Developments Plc Report, 2018, 10). The profit before tax is a major financial constrain the company has to meet ensure their shareholders access good and beneficial dividends from FY 2016, FY 2017, and FY 2018’s £682.3m, £765.1m, and £835.5m respectively (Barratt Developments Plc Report, 2018, 10). The return on capital employed is a major financial constrain that has to meet the minimum threshold of 25%. The year-end net cash is essential to ensure the company does not conclude its financial year with debts that may lower the value of the profits generated and foreign exchange swaps. As well, earnings per share need to maintain the consensus made at the start of the financial year to ensure the company projections are met. Finally, the total shareholder returns must meet the stipulated threshold to ensure the company does not plunder into losses.
Non-financial KPIs. The non-financial constrains include the number of years owned and controlled bank which impact on the prices of the products. The total completion of joint ventures poses a financial constrain to meet the obligation agreed upon on the agreement as a joint unit. The health and safety, customer service, employees, waste intensity, and carbon intensity stipulate the amount required by the company to cater for each and every aspect (Barratt Developments Plc Report, 2018, 12). The higher they are, the more expenses the company will incur. Consequently, impacting on elevating of expenses and lower profits for the company. Therefore, meeting the non-financial constraints culminate in social and environmental welfare.
Positive and Negative Aspects of the Report
The positive aspects of the report comprise on its emphasis on the significance of corporate governance in the operations of Barratt Developments Plc. The effective application of corporate governance practices has been paramount to increased performance of the company over the years. In turn, this prompted the company to become the leading home builders in Britain. The company proving 450,000 housing units shows a profound development and success in meeting its vision. The need for customer satisfaction impacts on the development of good reputation and quality building. Therefore, upholding corporate governance principles is paramount to the enhanced performance of the company and its future. However, the negative aspect of the report includes the enormous scrutiny and auditing reports that the company has to give towards the development of the report. Thus, consumer enormous time critical for the continued functionality of the company. Hence, the adoption of corporate governance and reporting practices is vital for the success of Barratt Developments Plc.