“Marks and Spencer (M&S), known colloquially as Marks and Sparks in some part of United Kingdom, is a British retailer, with 760 stores in more than 30 countries around the world. It is one of the most iconic and widely recognized chain stores in the U.K with 520 stores. www.marksandspencer.com.
Marks and Spencer is equally the largest clothing retailer in the country, as well as being a multi billion pound food retailer. Most of its shops sell both of these categories. It has recently started selling home wares such as bed linen. In 1998, mark and Spencer became the first British retailer to make a pre-tax profit of over 1 billion pounds, though a few years later it plunged into crisis which lasted for several years. As of 2007, it was growing again and rapidly increasing profitability.
THEORETICAL FRAME WORK
This aspect of our work sets out principles to address a simple question; what should owners expect from UK public companies and what should these companies expect from their owners. This aspect tends to create a common understanding, between managers and owners, of the proper goals of a public company. This work sets out a number of expectations which Hermes believe should exist between owners and managers. By being clear about appropriate expectations, we aim to get a better framework for communication and dialogue between broads and shareholders and so help boards’ manager their companies better.
The ultimate goal of every company is to create wealth for its shareholders. This in turn suggests a number of actions which it is reasonable for shareholders to expect of companies.
This work thus reveals Hermes’s extensive experience as an active and engaged shareholder on behalf of its pension fund clients. According to www.hermes.co.uk/pdf/corporate, Hermes invests in some of the best companies that already deliver shareholder value according to these principles. This experience, together with that of similar firms around the globe with which Hermes has established relationships, has some lesson about why companies do fail in their primary goal of delivering long-term value.
According to governance/Hermes principles PDF “Those who control the largest blocks of shares in the UK, are the investment institutions”. Those who benefit majority from most institutional investment activity are those who hold pensions and life insurance policies. In Hermes’ case, several million people depend on our investment to secure their income in old age. Hermes’ clients have liabilities which extend for a long period of time. A typical ‘coverage’ liability would be well over a quarter of a century it is these liabilities that we seek to cover by investing in and becoming the part owners of public companies.
The interest of shareholders are not delivered by formal contract, as the interest of Bond holders, consumers for even employees are. The shareholders’ interest is the objective of the company. The definition and implications of this interest is the aim of this work. It is therefore pertinent to note that the primary goal of most UK listed companies is to be run in the long term interests of its shareholders to generate value for them.
Summarily thus, a company’s primary consideration should be the generation of long-term shareholder value, and this should be based on appropriate financial disciplines, competitive advantage, the within framework which is economically, ethically and socially responsible and substantial.
Hermes in his principle believes that these goals should be divided among other long-term investors such as pension funds and life insurance companies. In a general experience, some managers have said that their discussion with the investment community does not always focus on these issues. They demand to know how a company can be expected to show absolute commitment to long-term shareholder value when the majority of its investors fail to demonstrate adequately that this is what they require, or express whether they consider the company as seen from their perspective is achieving it. Some of these issues can be better understood by thinking bout the behavior of the capital market.
The document Governance/Hermes-principles PDF confirms that “Hermes” overriding requirement is that companies be run in long term interest of shareholders. Companies holding unto this principle will not only benefit their shareholders, but also we would argue the wider economy in which the company and its shareholders participate. It is equally believed that company run in the long term interest of shareholders will need to manage effectively relationships with its employees, supplies and customers, to behave ethically and have regard for the environment and society as a whole.
The following are x-rays of Hermes’ principles;
Principle 1 Companies should seek an honest, open and ongoing dialogue with shareholders. They should clearly communicate the plans they are pursuing and the likely financial and wider consequences of those plans. Ideally, goals plans and progress should be discussed in the manual report and accounts.
Principle 2 Companies should have appropriate measures and systems in place to ensure that they know which activities and competencies contribute most to maiming shareholders value.
Principle 3 Company should ensure all investment plans have been honestly and critically tested in terms of their ability to deliver long-term shareholders values.
Principle 4 Companies should allocate capital for investment by seeking fully and creatively to exploit opportunities for growth within their care businesses rather than seeking unrelated diversification. This is particularly true when considering acquisitive growth.
Principles 5 Companies should have performance evaluation and inventive systems designed cost-effectively to incentives managers to deliver long-term shareholder values.
Principle 6 Companies should have an efficient capital structure which will minimize the long term of capital cost.
Principle 7 Companies should have and continue to develop coherent strategies for each business unit. These should ideally be expressed in terms of market prospects and of the competitive advantage the business has in exploiting these prospects. The company should understand the factors which drive market growth and the particular strengths which underpin its competitive position.
Position 8 Companies should be able to explain why they are the “best parent” of the business they run. Where they are not best parent they should be developing plans to resolve the issue.
SOCIAL, ETHICAL AND ENVIRONMENTAL
Principle 9 Companies should manage effectively relationships with their employees, suppliers and customer in the company activities. Companies should behave ethically and have regard for the environment and society as a whole.
Principle 10 Companies should support voluntary and statutory measures which minimize the externalization of costs to the detriment of society at large.
The above examination will act as the theoretical framework to our evaluation.
AN EVALUATION OF HERMES PRINCIPLES IN MARKS AND SPENCER OVER THE LAST FIVE YEARS
Marks and Spencer over the last five years has employed Hermes principles in the naming of the company. This is evident from the following;
In 2004, M&S was in the throes of an attempted takeover by arcadia group and Bhs boss, Philip Green. On July 12 a recovery plan was announced which would involve selling off the financial services business to HSBC Bank Plc, buying control of the per UNA range, closing the Gates head Life head Life store and stopping the expansion of its simply food line of stores. Philip Green withdrew his takeover bid after failing to get sufficient back from the shareholders. Philip Green’s offer to the shareholders in 2004 of E-4 a share has been recently made to look feeble by M&S’s current revival. Since June 2005, the share price has almost doubled from 319p a share to a high of 766 in May 2007. This is in line with principle 1 (Communication) of Hermes principles which states that companies should seek an honest open and ongoing dialogue with shareholders. The company also used the financial principle (2) which states “that companies should have appropriate measures and systems in place to ensure that they know which activities and competence contribute most to maximizing shareholder value’. This is clear from the measure that M&S employ in ensuring its market recovery was achieved in 2004. Here, we see the withdrawal of Philip Green to take over bid after failing to get sufficient backing of the shareholders. Therefore the employment of principle 1 and principle 2 has contributed to the steady growth and business success of Marks and Spencer.
“In 2006, the look behind the label marketing campaign was introduced” www.marksand spencer.com. The aim of this campaign was to highlight to customers, the various ethical and environmental friendly aspects, of production and sourcing methods engaged in by M&S including Fair-trade products, sustainable fishing and environmentally friendly textile dyes. All coffee and tea sold in M&S stores is now Fair-trade, in addition the company offers clothing lines made from Fair-trade cotton in selected departments.
This is equally in line with principle (9) which is on social, ethical and environment. This principle as employed in Marks and Spencer states that company should have ethically and have regard for the environment and society as a whole. With this Marks and Spencer goes further in the same year (2006) to ensure that the companies is also looking at how stress can be made more environmentally friendly and in a particular the materials used when fitting out stores, for example using flooring made from natural rubber. As well as looking to source electricity from environmentally friends sources.
Marks and Spencer employed principle 4 under financial which states that companies should allocate capital for investment by seeking fully and creatively to exploit opportunities for growth within their core business rather than seeking unrelated diversification. This is particularly true when considering acquisitive growth. This principle, Marks and Spencer employed when in the same 2006, their considerable saving are achieved via a combination of powering the store with green renewable energy, improving air tightness to minimize heat and energy loss and installing more efficient systems and equipment across lighting, refrigeration and heating and ventilation. As well as the ‘EC-features’, all suppliers who were contracted to the project worked in a greener, more efficient way. These include operating a green travel plan for all construction traffic and managing waste materials to ensure that they were recycled where possible. Thus, Bournemouth store re-launched on 4 October 2007. This principle employed for the growth of business is basically in line with principle (4).
Marks and Spencer also in 2004 employ the strategic principle, thus principle (7). This principle states that companies should have and continue to develop coherent strategies for each business unit. In relation to the above, when Steve sharp joined as marketing director in 2004, after being hired by New Chief Executive Sir Stuart Rose, he introduced a new promotional brand under the your M&S banner, with a corresponding logo. This has now become the company’s main brand in its advertising, online presence and in-store merchandising and modern colors of new image are somewhat incongruous alongside the traditional M&S signage and associated fittings that still adorn many of the un modernized “core” stores themselves. The only thing they have in common is the use of M&S traditional green in the ampersand of the new logo. The “your M&S” tagline and logo is not used on new stores fascias however, as it is a fixed-term marketing tool, rather than a re brand of the company name. New stores or those that are remodeled features either the M&S portion of this logo or the full Marks and Spencer name in the same type face and color way.
This may seen confusing, yet the new look has been highly instrumental in the company’s recent resurgence, particularly with the success of a new clothing campaign featuring the celebrated model. Twiggy and Younger model associated with the bohemian style of 2005-2006, and the new TV ad campaign for its food range. This is in no doubt in the line with strategic principle. Here, we see Marks and Spencer employ several strategies with particular emphasis on promotion so as to sell its products.
The strategies employed by Marks and Spencer Company includes the new store format, M&S online, Internet revenue etc all in 2007 have contributed greatly to turn over business.
It is therefore important to have a graphic historical share price performance chart for M&S.
HISTORICAL SHARE PRICE PERFORMANCE CHART M&S; FOR FIVE YAERS
MARKS AND SPENCER GROUP PLC ORD 25P
5 YEAR VOLUME HISTORY FOR M&S
Number of Trade
www.marks&spnecer.uk/generated on 7-Apr-2003 at 09:27
WWW.MARKS&sPENCER.uk/ generated on 7 –Apr-2008 at 09:27
The above figs are representations of five years profile of Mark and Spencer. This would aid our understanding of the company’s modus operandi.
THE USEFULNESS HERMSES PRINCIPLES ON MARKS AND SPENCER:
The usefulness of Hermes principles on Mark and Spencer can in no way be over emphasized. This is because, the company has witnessed a steady growth through the employment of the various principles provided by Hermes. It is against this background we conclude without fear of contradiction that the principles of Hermes which range from communication, financial, strategic, social, ethical and environmental are all applicable and functional in Mark and Spencer as a company as can be seen from our earlier works.
Therefore, Hermes has explained what we expected from the company we invest in. This has implications for financial returns, for strategy and for wider responsibility of business. These principles have helped set a framework of what Mark and Spencer should expect from responsible investors. We believe that if Mark and Spencer involves shareholders behaving as owners, they might likely achieve superior long term returns than companies without, hence shareholders use this forum to discuss and question management behavior.
Marks and Spencer which may in long term interest shareholders can be confident of Hermes’ support, including the expectation that we will support them in a hostile fall over situation and in rising capital.
In drawing the expectations for Marks &Spencer, we are not seeking to limit management scope or creatively. Still less are we seeking to micromanage the company. The disciplines we have outlined are the natural disciplines we would expect of Marks & Spencer which seek no maximize long term value for their shareholders.
The primary goal of a company should be to maximize shareholders value in financial terms this is best measured by the present value of cash flows of capital. The best companies are demonstrably aware of the importance of the weighted Average cost of capital (WACC) to all decision making. If a company set it too high, it will discount too heavily the value it created, particularly over the long term. If it set it too low, it will invest in a way which destroys value.
At all times Hermes stands ready to discuss these expectations with companies. If there are circumstances where they are too rigid, we will of course be flexible in responding to particular circumstances. But barring those specific occasions we do expect companies to seek to exercise the discipline that have been outlined in this work. For most, those disciplines will already be in place. Others will seek to introduce them. Those companies which do not meet our expectations should anticipate that, as engaged owners on behalf of our clients, we will wish to pursue why they have failed to do so.
A corporation is a joint enterprise between it providers of capital and those boards who manage the business. It cannot be right that investors in companies have neglected to behave like owners and instead appear more like spectators observing events without any sense of being able to help determine outcome. We believe these principles have significant implication. We would like to replace the damaging finger-pointing which has characterized the city industry debate in the past, with a positive dialogue between managers and owners about the proper purpose of the corporation.
Responsible behavior by boards requires responsible investors. A company that is demonstrating commitment to believing long term shareholder value should expect ongoing support from its shareholders. Hermes has thus given an ending support to companies which demonstrated such a commitment.
1. http://www.MarksandSpencer.com/gg/node/n/43850031?i.e =uif8&mnsBrand=core
2. http//www.Londonstockexchange.com/engh/concernedprices/system/detailed prices.htm? ti=mks.