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Starbucks: Corporate Governance

MacPhail P3 IDC4U, by Shannon, Kalina, and Anna
by

Shannon Wong

on 12 May 2013

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Transcript of Starbucks: Corporate Governance

By Kalina, Anna, and Shannon Corporate Governance What is corporate governance? A set system of rules by which the company is ruled and controlled.
Involves balancing the interest of all stakeholders in the company.
Shareholders, management, suppliers, financiers, management, etc.
Provides the framework in order to attain company objectives. Why is corporate governance important? Keeps corporations honest and responsible for their actions.
Assurance of what the company must follow.
Fairness within the company’s environment.
Affects individuals: employees, shareholders, customers and investors. Investors’ impression of how the company is managed.
The transparency of the company’s activities will affect the investors’ decision. How does corporate governance affect the average investor? Why should investors be aware of their company’s corporate governance policies? Basics of corporate governance should be listed.
No surprises if the company gets sued. About the Company: American global coffee company and coffeehouse chain based in Seattle.
Largest coffee company in the world, with over 20,000 stores worldwide in 62 counties.
Trade under NASDAQ: SBUX.
Current CEO is Howard Schultz.
Products includes coffee, tea, and pastries.
Since 1987, Starbucks has opened on average two new stores every day. The Classic Caramel Iced Mocha... S S T A K C U R B Board Mission and Responsibilities of Directors are Clearly Outlined CRITERIA: 1 1. Establishes clear goals, performance objectives, and operational policies.
2. Responsibilities and goals of the directors are realistic and strategic.
3. Past company earnings and results are analyzed by the board each quarter.
4. Board monitors company’s corporate performance and integrity (esp. compensation decisions). Why It’s Important for Publicly Traded Companies: Concise statement of where the company is headed.
Responsibilities that are clearly outlined make sure that the corporation has all its bases covered.
Keep everything running smoothly. Part 1: Establishes goals and performance objectives that are clearly outlined and available to the public. Our Starbucks Mission Statement: “To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.”
In regards to its coffee, partners, customers, stores, neighbourhood, and shareholders.
Goals: global responsibility, clearly outlined in the Global Responsibility Report.
Its main focuses are Ethical Sourcing, Reducing Environmental Impact, and Community. Source: http://www.starbucks.com/assets/581d72979ef0486682a5190eca573fef.pdf "CORPORATE GOVERNANCE PRINCIPLES AND PRACTICES FOR THE BOARD OF DIRECTORS":
Outlines the general goal of the directors - their responsibility for making business decisions, overseeing management, and to ensure that the long-term interests of the stockholders are being served. Source: http://www.starbucks.com/assets/b1ae885c7c804ae9a80b850c71f9f776.pdf Part 2: Responsibilities and goals of the directors are realistic and strategic. Part 3: Past company earnings and results are carefully analyzed by the board each quarter to see where changes can be made. Source: http://investor.starbucks.com/phoenix.zhtml?c=99518&p=quarterlyearnings Source: http://media.corporate-ir.net/media_files/IROL/99/99518/asm13/ASM_SHOW_FINAL_HowardSchultz.pdf Part 4: Board monitors company’s corporate performance and integrity, and is especially concerned with compensation decisions. The Compensation Committee annually reviews the compensation package of the chairman, president, CEO, and other executive officers.
Attract and maintain top talent.
Pay for performance.
Be true to its values. Annual Incentive Plan: Result of operating income and earnings measures exceeding the target goals.
Performance-based Restricted Stock Units: Result of the Company’s actual fiscal 2011 adjusted earnings per share exceeding the target performance goal.
Special Retention Awards: In recognition of leadership in driving record 2011 performance. Source: http://www.starbucks.com/assets/b1ae885c7c804ae9a80b850c71f9f776.pdf GRADE: B+ Why This Is Important to Shareholders: Easier for potential shareholders to find out what they could be investing in.
Keep the directors accountable to the shareholders, which in turn keeps the executives and other employees accountable.
Primary way of making sure that the company operates in an efficient and effective manner.
An excellent board of directors gives current and potential investors more faith in the company, making the company more profitable.
Noting strengths and weaknesses is integral so that the investors see points of growth and development. 2 Every factor of production is legal and ethical. CRITERIA: 1.Follow all local labour laws and Acts
a. United states labour Law
b. Canadian Labour code
c. Meet the standards set by the UN agency: International Labour Organization in all factors of production overseas

2. Restrict the use of child labour, sweatshops and harmful working environment for all workers
a. Follow all guidelines set by the ILO
b. Only purchase raw materials from suppliers that follows the ILO

3. Practice and regulate workplace safety with both over sea suppliers and on North American soil
a. Provide basic safety training in all factors of production internationally Why It's Important for Publicly Traded Companies: Shows the corporate citizenship of the company, not only locally but internationally
Changes people’s opinion of the company
Violation of laws and ethics may cause the company civil and legal complications in the long run
The business’s part in the international market must be transparent to showcase good ethics to profit the company and attract customers 1. Starbucks follows the Coffee and Farmer Equity Practices, which states that Starbucks will not hire anyone under the age of 14, and will not pay below the minimum wage.
Starbucks also scored full points on the evaluation for workplace safety against chemicals for producers.
Source: http://www.scscertified.com/retail/docs/CAFE_GUI_EvaluationGuidelines_V2.0_093009.pdf 2. Starbucks scored full points on their Social responsibility sector which is evaluated by a third party.
Starbucks is Fair Trade Certified, which empowers small-scale farmers organized in cooperatives to invest in their farms and communities, protect the environment, and develop the business skills necessary to compete in the global marketplace.
Source: http://www.starbucks.ca/responsibility/sourcing/coffee 3. Starbucks is a Fair-trade Labelling Organization (FLO). FLO is comprised of 24 organizations that work to secure better deals for producers and establish international Fair-trade standards.
Source: http://www.fairtrade.net/single-view.html?&cHash=fc1c0085d4a7b3dbc53eb7ad394fa48f&tx_ttnews%5Btt_news%5D=111 Regardless of everything they claimed, in their 2012 annual Global Responsibility Report, only 93% of their coffee were ethically sourced and have a projected date of 2015 for full ethically sourced coffee.
Source: http://www.starbucks.com/assets/581d72979ef0486682a5190eca573fef.pdf 4. $15.9 million invested into farmers loans. GRADE: B Why This Is Important to Shareholders: The average investor should care because this shows the company’s standpoint on their ethics and showcases the company’s ability to follow up their claims
The lack of ethical and legal problems will save the company from trouble in the long run
The company showcases good ethics in their treatment of the their workers, and therefore gives investors confidence on their investment 3 Fair and reasonable Human Resource regulations CRITERIA: 1. Workers are promoted to full time after a set period of time fit for the position at a satisfactory productivity level
a. Workers are not restricted from promotions.
i.e. purposely giving 39 work hours per week
b. Fair evaluation of performance.

2. Distribution channels are treated legally, and ethically and are given a fair evaluation annually
a. Overseas suppliers are evaluated regularly based on their performance, code of conduct, and the fair treatment of workers

3. Benefits are given to full time workers
a.Benefits that fit local acts/laws are granted to workers

4. All worker complaints are addressed fairly

5. The workforce follows and regulates the code of ethics

6. The formation of unions are not restricted Why It's Important for Publicly Traded Companies: Shows that the company takes great initiative to address the problem within the company quickly for smooth operation
Shows that the company takes great care of internal issues, and shows organizational skills
Proves that the company is more than just profit driven, and is likely to contribute to better corporate citizenship by starting with their employees
The company is not restricting their employees from seeking fair treatment 1. Benefits for eligible workers, health care options for both full time and part time employees. http://globalassets.starbucks.com/assets/0aef9ea947bf40aa9ef3173f09b61456.pdf 2. Provide a more affordable healthcare for people working for Starbucks, and insurance for full time Starbucks workers. I.e. medical, prescription drugs, dental etc.
http://www.starbucks.ca/career-center/working-at-starbucks 3. Full time workers are provided paid leave and a free pound of coffee each week. 4. The Human Rights Campaign's (HRC) Corporate Equality Index rating - Starbucks Coffee Company earned a 100% rating for the 4th consecutive year.
http://www.starbucks.ca/career-center/career-diversity 5. To apply for a career advancement, Starbucks requests that you have been in your current job for at least 12 months. You must be performing at a Meets Expectations (ME) level or better at the time that you apply for the job and you must not have been on a Performance Improvement Plan (PIP) within the last 6 months.
http://www.starbucks.ca/career-center/starbucks-career-advancement 6. Starbucks union currently exists and is not restricted. The union has made a few successful lawsuits against the company and won
http://www.starbucksunion.org/ 7. The suppliers, CEO, and finance leaders have to sign and follow a code of ethics
http://www.starbucks.ca/about-us/company-information/corporate-governance Starbucks’ way of treating their employees reflects positively on the company’s governance
The CEO and other leaders are aware of their responsibilities - this shows the investors that the company is aware of the money that the investors put into the company, and the top executives have to follow the code of ethics
Unions are not restricted, so the investors can have confidence that the company is treating their employees fairly
There will be less long term controversies if the internal governance is organized and fair GRADE: A Why This Is Important to Shareholders: 4 No Discrimination CRITERIA: 1. Equal gender rights
2. Equal pay for both genders
3. No age discrimination
4. Immigrants are allowed to work full time
5. No records of discrimination or harassment towards immigrant employees Importance for any Publicly Traded Company - Diversity seen by the public: a variety of different ethnicity and age employees would target a greater range of customers
- No immigrant slavery that would cause a negative impact towards the company
- Equally treated:
Lower employee turnovers will increase productivity, quality, and profitability
Reduces recruitment costs
Attract potential employees
- These ethical factors will keep the company's share price high How Starbucks Follows This Guideline: - equal pay for both genders for the same amount of work done
- consideration for employment without regard to: race, national origin, age, sex, religion, sexual orientation, marital status, veteran status, gender identity
- equal rights GRADE: C
4. Immigrants are treated fairly and are allowed to work full time 1. Been sued by the U.S. Equal Employment Opportunity Commission for disability discrimination
Source: http://www.eeoc.gov/eeoc/newsroom/release/5-16-11d.cfm 2. Feb, 2013 Woman (65) files an Age Discrimination lawsuit against Starbucks
Source: http://starbucksgossip.typepad.com/_/2013/02/fired-starbucks-barista-65-claims-age-discrimination.html 3. Appearance Discrimination – fired two employees for wearing nose studs
Source: http://www.petitiononline.com/sansadbc/petition.html Why This Is Important to Shareholders: - Fair treatment among employees will result in fewer turnovers: more profit due to less expense
- Discrimination between employees would lead to discrimination in all parts of the company
- Discrimination would result in many lawsuits 5 Regular Auditing Procedures CRITERIA: The company designates auditors to check the financials and operations of the company.
Auditors are independent from the company.
Thorough audits conducted least once per fiscal period
Audit reports available in the proxy statement – full disclosure Why It's Important For Publicly Traded Companies: 1. Gain a strong sense of internal control.
2. Identify key areas for improvement.
3. Test out the performance of new technology.
4. Evaluate threats, economy, efficacy and quality.
5. Realize fraudulent occurrences.
6. Analyze and understand financial data. Part 1: The company designates auditors to check the financials and operations of the company. Starbucks Corporation Audit and Compliance Committee Charter: responsibility to oversee the accounting and financial reporting processes.
Communication between the Board of Directors and management. Source: http://globalassets.starbucks.com/assets/182e9158207e458b868bb5a2958108ff.pdf Part 2: Auditors are independent from the company. Committee is at least 3 members appointed by the Board of Directors.
Independent auditors are Deloitte & Touche. Part 3: Thorough audits conducted least once per fiscal period. Once per fiscal period, published in Annual Report and Proxy Statement.
Committee shall meet at least six times per year.
Possible area of improvement. Part 4: Audit reports available in the proxy statement. Deloitte & Touche concluded that the Company was able to maintain internal control over the financial reporting through the fiscal year ending on October 3, 2012. GRADE: A Why It's Important For Investors: The financial statements are the primary mechanism for shareholders to monitor the performance of directors.
An audit can maintain confidence and reinforce trust in the company. 6 Consideration of Customers CRITERIA: 1. No action has negatively affected the customers
2. Customer suggestions and opinions are taken into consideration
3. Customer’s loyalty benefits
4. Customer service Why It's Important for Any Publicly Traded Company: - High customer satisfaction = increase in sales
- The customers could be potential investors
- A service for customer complaints will help improve the management sector
- A better view of the company by giving back to the customers How Starbucks Follows This Guideline: 1. Customer reward card
- http://www.starbucks.ca/card/rewards
2. Product improvement for Starbucks customers - http://www.starbucks.ca/responsibility/environment/recycling
3. Customer service could be reached by calling GRADE: A 1. Developed their recycled-content cup sleeve as a way to protect customers from hot beverages and avoid the waste of “double cupping”
- An eco-friendly development for the customers’ safety 3. Beverage personalization considering customer’s taste preferences 4. Self-serve extra ingredients counter 2. 10 cents discount when they bring their own reusable cup 5. Comfortable atmosphere: Wi-Fi 6. Approachable/friendly employees: A better way to start off their day 7. Misspelled name on cups: offensive and customers resent going again Why It's Important for Shareholders: A positive attitude from the employees towards their customers will increase sales
Environmental promotion:
- positive public imagine
- customer loyalty
Customers come first to meet customer satisfaction - they are likely to return 7 Rights and equitable treatment of shareholders CRITERIA: 1. The right to vote as owners of the company.
2. Disclosure of quarterly and annual financial reports (necessary information)
3. Holding general meetings at least once a year Why It's Important for Any Publicly Traded Company: - The opinions of the shareholders being taken into consideration would only benefit the company
- encouraging shareholders to participate in general meetings
- decisions are made by voting
- respecting the rights of the shareholders and helping shareholders to exercise those rights will attract other investors (supply and demand fluctuates according to the factor of management)

- To disclose necessary information to the public to assist outside reviewers of financial information for the purpose of making investments in the business
- a stable fiscal report will benefit the company as demand will increase, pushing the share price up
- a bad fiscal period will hurt the business, pushing the share price down How Does Starbucks Follow This Guideline: They hold annual meetings
All shareholders are invited to participate speak out for their proposals
- http://www.starbucks.ca/about-us/company-information/shareholders-meeting
Shareholders have voting rights
- http://www.reuters.com/article/2013/03/20/starbucks-politics-idUSL1N0CC42120130320
Financial reports
- http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-reportsannual GRADE: A - Annual shareholder meetings are held around March every year
- Provide food to attract the shareholders to attend their meetings
- Right to vote no matter where they are (at the meeting or online form)
- All financial reports that shareholders review before they buy/sell are provided on the company’s website Why It's Important to Shareholders: - To let the shareholders recognize their power as owners of the company by voting
- Shareholders receive their invitation to attend the annual general meeting that requires shareholder approval of the company’s upcoming activities
- Crucial information for possible shareholders who plan to invest in a publicly traded company
- Information to help shareholders decided whether to buy/sell 8 Environmental sustainability CRITERIA: 1. To reduce land pollution: reduce waste and/or promote recycling of used products.
2. To reduce air pollution: reduce energy use or switch to renewable sources of energy.
3. To reduce water pollution or conserve water: ensure that the production process does not release harmful substances into the water and reduce water consumption. Why It’s Important for Publicly Traded Companies: 1. Enhanced Brand and Increase Competitive Advantage
2. Increase Productivity and Reduce Costs
3. Increase Employee Retention and Recruitment PART 1: To reduce land pollution, the company should take steps to reduce waste and/or promote recycling of used products. PART 2: To reduce air pollution, the company should reduce energy use or switch to renewable sources of energy to power production/retail stores. PART 3: To reduce water pollution or conserve water, the company should ensure that the production process does not release harmful substances into the water and should take steps to reduce its water consumption. GRADE: A+ Relationships between environmental factors and financial performance.
Mutual relationship with the environment.
Directly impacts the long-term viability of investment in Starbucks. Why is this principle important to investors? At least 2% of net profit goes towards charity 9 CRITERIA: 1.Total donation exceeds 2% of net profit annually
2.Workers are encouraged to contribute to charity
a.Workers are given paid days to go volunteer to promote healthier corporate citizenship
b.Workers can choose to not go volunteer but can choose to donate money in monetary amount in a certified charity
3.Brand promotes charity causes though sponsorships and promote corporate citizenship through services and products Why Is It Important for a Publicly Traded Company? Shows the company’s international and local corporate citizenship.
Good company image, promotes sales. 1. Starbucks made the Starbucks Foundation to support commitment to the community
The foundation supports young people, access to clean water for people in developed countries, supports the coffee, tea, and cocoa community internationally, fosters education in China, and supports the rebuilding of the gulf coast.
Source: http://www.starbucks.com/responsibility/community/starbucks-foundation What Starbucks is Doing: Why is it important for Investors? Starbucks donates though their foundation, which may be interpreted as having an well established system of allocating funds for donation maturity of the company
Shows great value in improving the world
Though the exact number is unknown, this company does prove to donate more than its competitors. This shows that the company have good intentions 3. Starbucks does not encourage their workers to do volunteer work under the company’s pay.

4. The company support their own charity, the Starbucks foundation 2. Starbucks' total spending on donations and charity was not disclosed on their most recent annual report but the recent net loss was blamed on the over allocation of money into the foundation. Source: http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-reportsannual OVERALL LETTER GRADE: B+ THE GOOD: 1. Clearly outlined board mission, responsibilities.
2. Working towards 100% fair trade and ethical sourcing.
3. Treats employees very well - actually known as "partners" rather than employees.
4. No gender discrimination.
5. Thorough audits conducted regularly.
6. High level of customer satisfaction.
7. Shareholders' opinions are always valued.
8. Environmental sustainability is a huge portion of their global responsibility initiatives.
9. Starbucks makes donations. THE NOT-SO-GOOD: 1. Needs to discuss areas of improvement.
2. Not quite at a fully ethical standard of sourcing.
3. Many cases of discrimination.
4. Make charitable donations more transparent. 2013 Proxy Statement: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTY5NDc4fENoaWxkSUQ9LTF8VHlwZT0z&t=1 2012 Annual Report: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTY5NDc3fENoaWxkSUQ9LTF8VHlwZT0z&t=1 Source for all following information related to the company: http://www.starbucks.ca/responsibility/environment GRADE: B
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