Corporate Governance at Starbucks

Corporate governance has gained a lot of importance in recent times; businesses derive great value from it. Corporate governance involves the use of structures that are used in the control of organizations; the effectiveness of corporate governance is exceedingly valuable to the function of a firm. The management of a company facilitates actions of corporate governance while the board of directors gives the necessary directions towards the control of the company. Effectiveness in corporate governance has resulted to the tremendous changes seen in different market-leading companies. It is predicted that corporate governance will led to further changes in the future. This paper aims to look at the corporate governance issues relating to the coffee shop market.

Get Your Economic Essay for a Few Clicks

The coffee market has continued to grow despite all the challenges in the economy. The major two market leaders are Starbucks and Costa. These companies have a very promising future analysing the recent performance. However, the companies require high level of corporate responsibility, high level of ethics and continuously engaging the shareholders. The case study of this paper is Starbucks.

Starbucks is a coffee company based in Washington, United States of America. The company was formed in 1971 in Seattle, Washington. It started as a roaster and retailer of local coffee bean. The company was founded by three friends; Jerry Baldwin, Zev Siegl and Gordon Bowker. Starbucks Company has grown immensely since its inception. It has grown to become the largest coffee company in the world. The company has more than 20,366 stores in 61 countries.

 The company is concerned with the production of various products including coffee beans, cold and hot drinks, hot and cold salads, hot and cold sandwiches, snacks, sweet pastries and mugs and tumblers. The company has also diversified its area of production to other goods; this includes marketing books, music and films. There is also an entertainment division, which focuses on Hear Music Brand. Some of its products are seasonal or specific to certain areas.

Corporate Social Responsibility

The corporate governance is a term that has been widely used in the business world since 1990’s. The term shows the relationship that exists between the corporation and the stakeholders. It entails directing and controlling of companies. Corporate governance is based on certain aspects, which include efficient leadership, probity leadership, and responsible leadership, transparent and accountable leadership. It entails a set of rules which controls and directs administration and governance of a company. The recognition of the CSR is important as it shows that the company is accountable to all its stakeholders due of its actions. The commitment to the CSR shows the value that the company attaches to the surrounding environment of the work place. The concept of the CSR is been stimulated by the stakeholders because they believe that it creates customer value hence the business becomes sustainable and thrives.

Carroll came up with a summary of corporate social responsibity. The pyramid involves different levels which include; economic, legal, ethical and discretionary responsibilities.

Globally, the structures in which businesses operate have changed over the years. The large companies are becoming more globally integrated than before due to the advancement in technology and globalization. Starbucks Company has been actively involved in the CSR activities. The company has been involved in numerous community development programs within United States of America. These community based programs include building up of schools and health centres not only in the U.S. but around the world. These programs ensure that the livelihood of many people around the world is improved. Other programs that ensure that the quality of life amongst people is improved include giving grants to parks, donating coffee, money and other donations, economic investment in under-served communities and supporting violence-free programs to fight violence.

The company actively participates in community work. The service includes giving donations in terms of money to organizations engaged in voluntary work. The informal initiatives include AIDS day walk, Earth Day and literacy organizations. Each and every year Starbucks Company is involved in a program that gives a report on the corporate social responsibility that is involved at. The report on the performance in the year 2006 is indicated below:

1. Explored opportunities in Asia Pacific where they opened Farmer Support Centre (FSC). During that time, they organized training sessions to farmers in Indonesia and Papua New Guinea.
2. They worked with African Wildlife (AWF) where they conducted training and encouraged sustainable coffee practices. During the same year, Kenyans also benefited from the training that was conducted by the company.

Corporate Governance

The company has a well-defined structure of corporate governance. The board has nine directors where a good number of them have already met the requirements that are needed by NASDA; the composition has one Latino, two African-Americans, where one is a female. The CEO of the company is called Schultz. There are clear guidelines on how a selection of new directors is done. It is usually done on the basis of personal integrity and ethics. Some of the basic guidelines include professional backgrounds, gender, members’ personality, race, ethnicity and other standing out characteristics. The board has three committees that have independent directors. In 2007, the board of directors’ amended company’s bylaw to allow shareholders to actively participate in the election of the directors, they are elected on the basis of majority votes.

There is a program whereby the shareholders and partners actively participate in the running process of the company. This is achieved through the Business Helpline and Audit line. They provide their views and suggestions. Written correspondence can also be sent to the directors or the independent board committees of Starbucks. On the website Starbucks.com there is detailed information on the committee charters, the directors’ nomination policy, the governance principles and the profile of each director and members of the board. These crafts direct information about the company because one can access it from any part of the world. The corporate governance is based on four theoretical foundations which include; Agency theory, Transaction cost economics, Resource dependency theory and Stakeholder theory.

Agency Theory

The theory is characterized by a large number of shareholders or owners who are separate from the management. The people who manage the business are professionals and offer their skills in the management of the corporate (Bacon, 2010). The theory is characterized by agency problem. This is a problem where it is difficult to separate the owners and the management. The managers are usually the agents whereas the shareholders are the principals. There is also moral hazard that can be brought about by the agency theory (Autry, 2004). Moral hazard occurs after the contract where the principal is not in a position to monitor the agent. A good example is when the manager skips duties in order to enjoy leisure or hiding inefficiency or to avoid being credited as a poor performer.

The agency problem could be minimized through two steps; the principal-agent risk bearing mechanism and monitoring of design through the organization and contract. Various empirical studies have been put forward to identify solutions to the agency problem. A good example is an empirical study that was conducted by Kehoe in 1996. He suggested that the agency theory can be curbed through the application of agency costs, where the agents are monitored.

 Starbucks Company suffered the agency problem especially during early 1990s. This was a time when the company was undergoing massive expansion. The company was expanding, and it was moving out of the original country U.S to other countries. The problem arose when the managers who were hired considered their own interests first instead of the interests of the company. The managers also lacked enough expertise in the management of the company. The results were devastating and affected the company’s growth.

In agency theory, the agents are sometimes driven by their own self- interests, opportunist behaviour and sometimes falling out with their principal. When this happens, the losers are usually the owners of the company. Sometimes the managers do not let the real owners of the company to have direct access hence the company is left under the control of the people who are not its owners. This in turn results to managers pursuing their own interests instead of those of the company.

The solution to the agency problem is that, firms should structure their corporate governance in order to cub the agency problem caused by the separation of control and ownership. In large enterprises, the agency problem is monitored by the internal and external devices. There should be a clear separation of powers between different stakeholders in the company. External devices include auditors and the market system. In decision making, the decision management should be clearly monitored to ensure good strategies are initiated that aims at maximizing the shareholders wealth.

Stakeholder’s Theory

According to this theory, the stakeholder can put the manager to task if he fails to perform the duties that he is entrusted with. The theory is categorized as normative and descriptive. In normative stakeholder theory, the stakeholders have some guidelines on what is expected of them, and they are basing on ethical principle. The other theory, descriptive stakeholder theory is concerned with the behaviour of both the stakeholder and the manager, and how they view their actions. Stakeholders are a group of people in an organization who have a classified relationship with one another. They include customers, local communities, shareholders, suppliers and distributors and employees. According to the modern definition of the stakeholders it can go further to include media, government, competitors, trade unions, financiers or any group or organization that has an interest in the subject matter.

Further analysis of stake holder’s theory indicates that they are four types of stakeholders. The classification depends on power and interests. This is what is called the Mendelow’s matrix. Those that are satisfied will be valuable players if they develop interest while those that are informed will become valuable if they access more information.

Starbucks Company has many stakeholders. This is as a result of the extensive network that it has created through partnerships, contracts and investments. The stakeholders include the farmers, governments, customers, activists, environmental groups, forex, Shareholders suppliers and employees. The company has business relationship with them, and hence it is obliged to be engaged to them and their interests.

The Anosoff matrix can best describe Starbucks company:

The above structure shows how different aspects of the corporate governance are structured and how the market is organized, and its ambition is well presented. In the first tab, it shows areas of market penetration. These market areas include Hotels, Grocery stores, Schools, industries, Cafeteria and Airlines. On the right hand at the top, it shows the products that are directly produced by the Starbucks Company. They include Fiesta chicken salad. On the left hand side at the bottom, it shows available opportunity for investments. On the right side, it shows how the company has diversified its products.

The company enjoyed rapid growth in 1990s until the market reached a saturation point. The United States market could not hold the market, and hence it had to expand to other countries. The company entered into other countries through either one of these three ways; joint venture, licensing or owning the subsidiaries wholly. However, the expansive growth of the company experienced a lot of challenges. This is because extensive training in management was needed in order to ensure smooth running of the subsidiary companies. The transfer of technology was also a major challenge that was witnessed because different parts of the world differed in the technological development. Also, another challenge facing the massive expansion of the company is poor coordination of activities from different parts of the world.

The success of Starbucks is attributed to both its aggressiveness and the innovations. Over the years, the company has differentiated and diversified their products in order to attract customers to buy its products. This is evident as the company has become the leading coffee company in the world. It serves differentiated coffee, in addition to other products related to the mother product. In the year 1995, the company started selling CDs and also entered into partnership with various companies which include; The Canadian Air Lines, Barnes & Noble’s Inc. and Starwood Hotels in order to serve them with Starbucks coffee.

For the company to remain competitive there are various factors that have been advanced by Micheal Porter; the threat of a new competitor, substitute, bargaining power of the supplier or the customers and competition intensity in the industry (Cross, 2009). The company faces the real threat of substitute product. This is because many companies are capable of offering the quality coffee that the Starbucks offers. The threat of rival competition is also evident, and for the company to remain competitive and viable in the industry it must move along the way to differentiate its products and services.

Starbucks Company is not immune to economic setbacks that face countries due to financial crises or during recessions. In the year 2000, there was an economic recession in countries like Japan, Switzerland and Germany. The company suffered a major loss in revenues and sales. The success of the company can also be attributed to technological innovations that have been experienced by the company. Technological innovations make the work easier to all the stake holders that are involved. A good example of technological innovation is the introduction of the Starbucks card. This technology enables customers to access the Starbucks products in a quick, cheap and convenient way. Also, the company has ensured that all the locations of the company have WI-FI to enhance easier accessibility to the company’s products.

Political stability in the U.S is one of the factors that could be attributed to the smooth development of the company. The company has been facing hostile environment in other parts of the country. In the year 2003, the U.S declared war on Iraq. The company was hard hit by this war. The company was making massive losses in Iraq due to this war. It took several years before the company got back to normalcy in this country. However, the subsidiary company in Iraq used to get reinforcement from other sister companies that were doing well in other parts of the country. In July 2002, the Arab students boycotted on buying goods from America, and they called upon their people to boycott. This was due to the American close association with Israel when they were warring. Starbucks is an American company, and as a result it suffered huge losses.

Starbucks Company has been able to stand out amongst the relative companies that they compete with. There are factors that are attributed to the success of Starbucks. One of the factors is the effective leadership that has been driving the company forward. Currently, the company is being run by Howard Schultz who took the role as the CEO. He replaced Jim Donald who stepped down in favour of Schultz after sales slowed in the year 2007. Schultz has a policy he calls ‘distinctive Starbucks experience.’ The stepping down of the former CEO shows the commitment the company has in order to succeed.

The quality of the products of Starbucks Company has also been a crucial factor that can be attributed to the success of the company. The good quality of coffee has earned the company its brand name. The company is privileged to be listed as the best company in the world. The competition in the industry is very stiff. This requires the companies that are there in the industry to always be at toe when they are producing their products. Failure to produce quality products may make the company lose its market share and run out of business.

The company has shown social responsibility through commitment to origins. The company makes investments that improve the livelihood of the people in the surrounding environment, communities and families. The Company also extends social responsibility to its environment. The environment offers a conducive place for the growth and development of the company. The company has a responsibility to take care of the environment. The company has both positive and negative externality towards the environment. The positive externality is the benefit to the environment, surrounding community and the company itself. The negative externality is a cost to the community. The company has a responsibility to take care of this cost.

The Board

The company is organized to have a board of twelve members. The chairperson of the board is the CEO, Howard Schultz. The company is committed to maintaining uncompromising principles during their time of growth. The company is led by the governance principles or practices and committee charters. The following are the names of the current board of governors; Howard Schutlz, William Bradley, Robert gate, Kelvin Johnson, Olden Lee, Joshua Cooper Ramo, Clara Shih, Javier Teruel, Myron Ullman III and Craig Weatherup. The company comprises of three committees that are independent of the board members.

The board is effective as it is the one that undertakes major decisions involving the company. The board members usually meet and deliberate on the best way forward for the benefit of the company. The board is also involved in the daily administration of the company. Under the leadership of the chairman of the board, corporate governance is strengthened. The board members monitor the management so that they do not deviate from the normal course of action. The board’s committee are of great significance because they are composed of a few number of people, and their mandate is to listen to views from outside which can be of importance in decision making of the company. These committees look into an issue in a more diverse manner so that they would help the management when they are making their decisions. The committees are independent of any internal or external influences.

Recommendations

The Starbucks Company is a highly successful entity. It is a company that has stood up above its competitors. The company has had remarkable performance because it has been able to be rated as the best-selling coffee in the world. To continue being the most competitive organization the company should continue embracing technology. For over the years, it has been in existence, and it has continually been involved with a lot of innovations.

Due to the stiff competition in the industry, it is hard for the company to continue differentiating its products or competing in price. The only way that the company can ensure that it remains competitive is when it offers quality services and products. Also, another way to enhance competitiveness is to create good contracts that are negotiable to the customers.

Conclusion

Starbucks Company is the leading coffee company based in Seattle, Washington. The company has subsidiary companies in other countries. The company manufactures various products despite the coffee. These products include coffee beans, cold and hot drinks, hot and cold salads, hot and cold sandwiches, snacks, sweet pastries and mugs and tumblers. It also manufactures beer.

The administration structure of the company is well organized. There are nine board members that are headed by CEO Schultz. The position of the board members is earned through professional skills, experience, race and vote by the shareholders.

Corporate governance refers to set rules that govern the activities and direct the operation of an institution or the company. Efficiency and effective corporate governance are the backbones of any successful organization. Good corporate governance ensures that the set standards are achievable and are achieved. Corporate governance goes close with corporate social responsibility (CSR). CSR is a business term that means self-regulating, whereby the company is able to follow the set law, ethics, and is also concerned with the environment, community, employees and any other stake-holder that is involved. The Starbucks Company has done tremendous work when it comes to CSR. The company has used its funds to initiate programs such as training farmers on how to grow coffee in countries like Indonesia and Kenya. The company has also been involved in giving grants to projects that lack financial support.

Despite the enormous growth, the company faces very many challenges in its quest to development. These challenges include a lack of enough and skilled personnel to manage the fast growing subsidiary companies. There is also the agency problem that comes about with the separation of ownership and control. There is always a conflict of interest between the management and the owners of the company. Another challenge that the company faces is stiff competition from the competing companies that have the same capacity as the Starbucks Company. The existence of substitute products is also a problem that these industries face. To remain competitive the company needs to continue producing quality products.