This paper evaluates the strategic decisions that Marks and Spencer’s Financial Management policies and practices had used for the years 2003 to 2007 by looking at them from the mirror of Hermes principles. The paper also aims to have a critical understanding of the specific analytical skills in key decision making areas within strategy and finance at the local and international level as well as a critical understanding of the current state of financial theory in making strategic business decisions.
The valuation concepts and methodologies for financial decision making will also be explored to determine what contributes to wider decision making for Marks and Spencer. To attain this paper’s objectives into realization, this paper used financial information of Marks and Spencer plc for the last five years and compared with usefulness of Hermes principles. Necessarily an evaluation of Hermes principles as basis for evaluating financial policies and practices will also be done in terms of internal consistency and accomplishment of the overall corporate goals and objectives.
2. Evaluation 2. 1 Part A – Critical evaluation of the Financial and Management policies and practices of Marks and Spencer plc over the last five years using the Hermes Principles. It is proper to discuss first the Hermes principles before an evaluation of the policies and practices could be done for the last five years. The Hermes principles are grouped into communication, financial, strategic and social, ethical and environmental categories.
Under the communication category, is the first principle which requires companies to seek an honest, open and ongoing dialogue with shareholders where there should be clear communication of the company plans being pursued and the likely financial and wider consequences of these plans. There is therefore the need for these goals, plans and progress to be discussed in the annual reports and accounts. As far as the first principle is concerned the company may be deemed to have complied as the company has indeed discussed its plans in its 2007 annual report (Marks and Spencer, 2008).
The second category is financial which consists of the second through sixth principle. The second principle requires companies to have appropriate measures and systems in place to make certain that they are aware of on what activities and competencies contribute most to maximizing shareholder value. The third principle on the other requires companies to make certain all its investment plans passed an honestly and critical test in terms still of their ability to deliver long-term shareholder value in relation to the second principle (Hermes, 2008).
The activities and competencies that Marks and Spencer must do in maximizing shareholder value require awareness with measurement tools that have direct relation to increasing stock price. This is where the company’s financial statements become material and relevant. The company’s financial statements consist of the balance sheet, incomes statement and cash flow statements from which application of the second and third principles may be evaluated. Incidentally the financial statements will reveal the investment plans used by the company.
But since there is a need to determine whether these plans are critically tested in their ability to deliver long-term shareholder value under third principle, there is need to go beyond the financial statements which are only reflective of historical information. The determination of cost of capital and what constitutes long-term value must come in into the picture. Thus the subsequent section will have to deal with discounting future values as cost of capital refers to the opportunity cost of doing business and which demands an estimate of the future.
The target of maximized long-term shareholder value as explained under the second and third principle is now complemented with seemingly related principles. The fourth principle therefore requires companies to allocate capital investment by seeking fully and creatively to exploit opportunities for growth within their core business rather than seeking diversification that are unrelated to said core business particularly when considering acquisitive growth.
Whether Marks and Spencer was ready to comply with this part requires an evaluation of financial strategies adopted by the company. The company announces into its 2007 Annual Report that the company has spent about ? 479 million in modernizing and redeveloping its stores as well as some ? 120million on new space. It claims a total expenditure to be ? 792m. Said modernization projects are evidence of the company’s allocating its capital investments and it is one that would exploit it core business of retailing. This is therefore a consistency with fourth Hermes principle
The fifth principle under the finance category requires companies to have performance evaluation and incentive systems which are tailored to incentivize managers in deliver long-term shareholder value but the same must be cost effective. This appears to have consistency with the existing finance theory where cost benefit analysis should always be a consideration in implementing or choosing strategies. No matter how good a strategy maybe but if the cost to implement cannot be compensated by higher returns, then, it is useless to have those strategies.
Closely related with the fifth principle is the sixth principle which requires companies to have an efficient capital structure which will minimize the long term cost of capital. The objective of performance evaluation and incentive system may be to delivery long-term value but if the capital structure is not supportive, the there could just wastage of efforts and resources for these incentive systems. Performance evaluation and incentive programs should move people into action into producing more less the conflict of interest between management and stockholders.
This has the implication that management must not be motivated to leave the investors at a losing end of the deal. Rewarding management efforts in relation to stock price is one of the best options. Truly, Chairman Lord Burns declared in the company’s 2007 annual report that the company’s remuneration of compensation policy is closely tied to related to the interests of stockholders. Thus the company’s way of giving reward to its executive teams for their leadership is focused on the long-term growth in company’s earnings or shareholder value.
It is also the company’s belief that sharing the benefits of success to its employers on wide basis was way to thanking all the staff for hard work. This company’s practice is also consistent with the ninth principle of Hermes that require companies to manage effectively relationships with their employees, suppliers and customers and with others who have legitimate interests in the company’s activities (Marks and Spencer, 2008). The gearing ratio which is part of financial ratios will show whether the company has a good capital structure and whether the same is in balance with the company’s cost of capital