Examining Corporate Governance Structure of Lovisa Holdings Limited

This report examines the corporate governance structure of Lovisa Holdings Limited and its impact on organizational legitimacy. It analyzes the composition of the board, information from the reports of the chairman and CEO, the remuneration report, and the board orientation. The report also discusses the use of legitimacy theory in interpreting company communications.

Ethics and Governance
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Executive Summary
This report has been developed for the purpose of examining the corporate governance
structure of a selected ASX listed corporation that is Lovisa Holdings Limited. It has been
identified by the report that although it possess an adequate corporate governance structure by
having a shareholder-agency orientation of Board but do not incorporate the use of any type of
social and environmental disclosures that can negatively impact its organizational legitimacy in
the long-term.
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Contents
Part 1: Introduction and Company Summary..................................................................................4
Introduction..................................................................................................................................4
Company Summary......................................................................................................................4
Description of Company..........................................................................................................4
Company Industry....................................................................................................................4
Recent History..........................................................................................................................5
Part 2: Brief overview of corporate governance at Lovisa Holdings Limited.................................5
Composition of Board Members..................................................................................................5
Information from the reports of Chairman and CEO...................................................................6
Remuneration Report...................................................................................................................7
Immediate priorities of the company and actions taken............................................................10
Part 3: Board Orientation of Lovisa Holding Limited...................................................................11
Part 4: Interpretation of company communications using Legitimacy Theory.............................13
Conclusion.....................................................................................................................................14
References......................................................................................................................................15
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Part 1: Introduction and Company Summary
Introduction
The purpose of the report is to provide an overall research into the governance and ethical
outlook of a company by analysis of the information present within its annual report. It aims to
examine the corporate governance system of the selected company for promoting its sustainable
growth and development. It also examines the ethical outlook of the company by examining the
orientation of Board and also examining its ways of communication with the use of legitimacy
theory. The company selected for analysis purpose is Lovisa Holdings Limited, a fast fashion
jewelry retailer involved in developing, designing and sourcing of fashion jewelry and
accessories under the Lovisa brand name.
In this context, the report has conducted research in relation to the core activities of the
company, its corporate governance structure, orientation of the board and the different
communication report developed for providing information for conveying the ethical outlook of
the company. The theories that have been applied in the context of the report are agency and
legitimacy theory for discussing the corporate governance structure and ethical context of the
company. The outcomes of the report is stating the effectiveness of the corporate governance
system of the selected company by examination of its key corporate governance policies, board
orientation and examination of the key communication report in accordance with the legitimacy
theory.
Company Summary
Description of Company
Lovisa Holdings Limited is an ASX listed entity involved in retailing of fashion jewelry
and accessories. It is involved in development, designing and merchandising of fashion jewelry
products. The company has the presence of about 326 retail stores across Australia, New
Zealand, Singapore, Malaysia, South Africa, UK, US and many other parts of the world. It is an
ASX listed entity that is being headquartered within Australia (Company Overview, 2019).
Company Industry
The company operates within the fast fashion retail industry of Australia. It has been
established in the year 2010 but has shown quick growth and is presently being recognized as
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one of the leading fast fashion jewelry retailer across the country. It has achieved a distinct
position within the retail industry of Australia owing to the quality of its products range. It has
adopted the use of a vertical business model within the fast fashion industry of Australia for
development, designing, sourcing and merchandising of its Lovisa branded products (IBIS
World, 2019).
Recent History
The company is delivering strong financial results since its establishment and is
delivering good financial results in the areas of sales, profits, cash flow and dividends since its
origination. The international expansion of the company has resulted in increasing its sales and
profitability with deriving large revenue from stores located in Australia as well as in markets
outside Australia. The strong operating cash flows of the company is attributing to supporting its
international growth plans and thus supporting its continuous growth and development. The
higher cash flows position of the company is due to growth in sales momentum in its stores
network within Australia and also in its stores located in other countries (Company Background,
2019).
Part 2: Brief overview of corporate governance at Lovisa Holdings Limited
Composition of Board Members
Lovisa Holdings Limited had six directors on its Board but one director Paul Cave had
resigned on 31 October 2017. Now Board comprises five directors. It has been seen in the report
that out of the five directors, three directors are appointed as independent directors and the
Chairman of Lovisa Holdings Limited Michael Kay is also an independent non-executive
director. The below table give a brief about composition of board and their appointment. Below
table provide information on name of directors, independent or dependent and their position.
Name Position Independent Date of Appointment
Michael Kay Independent on-executive director
and Chairman Yes 13-Apr-16
Shane Falischeer Managing Director No 06-Nov-14
Tracey Blundy Non-executive director Yes 06-Nov-14
James King Independent non-executive
director Yes 17-May-16
Brett Blundy Alternate director for Tracey No 16-Apr-18
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Blundey
On the basis of information gather from the annual report and corporate governance
report it can be said that ratio of independent to dependent directors is 3:2. It means there are 3
independent and 2 dependent directors (Corporate Governance Statement, 2017).
Information from the reports of Chairman and CEO
The members on the Board of Lovisa Holdings Limited are responsible to comply with
the requirement of corporate governance of the group. The policies, principles and guidelines
followed by the company are in accordance with the ASX Corporate Governance Council's
Corporate Governance Principles and Recommendations. Lovisa Holdings Limited had disclosed
the roles and responsibilities of respective directors and management and that matter set aside to
be decided by the Board. Company has acted ethically and responsibly towards the society.
Lovisa Holdings Limited has Code of Conduct for management and safeguards the integrity in
corporate reporting. Company has made relevant disclosures and taken note of the rights of
security holders. The corporate governance policy can be understand through the below table
(Annual Report, 2018).
(Annual Report, 2018)
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(Annual Report, 2018)
Remuneration Report
The Board of directors aim to achieve an attractive remuneration policy that retain team
members at all levels of the business by establishing executive remuneration packages and offer
rewards to the deserved person. The packages are hybrid of fixed remuneration, short term and
long term incentives. Below is the list of directors and executives included in the remuneration
report (Annual Report, 2018).
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(Annual Report, 2018)
Lovisa Holdings Limited's remuneration strategy is -
 That highly capable person should be given an attractive remuneration comprising
rewards to retain them.
 To give remuneration on performance basis
 Ensure the remuneration is given in accordance with the size and position of executives
considering market benchmark and individual performance.
 To protect shareholders interest and make it in a line employee engagement and
management through ownership of shares.
 The remuneration structure of the company can be understand by the below table (Annual
Report, 2018).
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(Annual Report, 2018)
Below table give knowledge of the remuneration paid to members of the board and executives
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(Annual Report, 2018)
Company’s long term plans and actions taken
Lovisa Holding Limited's earnings before interest and taxes has been up by 26% and
NPAT by 24%.The future sales of the company is likely to be increased by 6.8%. The company
has increased its store network to 326 stores across all existing markets in the current year 2018.
The company has declared final dividend of 14.0 cents per share fully franked for the year.
Lovisa is aiming to continue the cycle with particularly strong comparable store sales with target
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range. Company's long target range is 3-5%. Company will continue to invest in planned
structure ahead to support company’s growth by expansion of stores. Company is aiming to offer
fast fashion jewelry to its customers supported by talented and enthusiastic team (Annual Report,
2018).
Part 3: Board Orientation of Lovisa Holding Limited
Board Orientation is regarded as the process of providing information regarding the
composition of the Board and their significant roles and responsibilities. The different types of
board orientation that are present within a company include shareholder-agency, shareholder-
stewardship, stakeholder-managerial, stakeholder-ethical and resources. The shareholder-agency
orientation refers to the Board which has composition of mainly independent directors appointed
by shareholders (O’Donovan, 2012). The focus of the Board is to meet the needs and
expectations of shareholders by increasing the growth, profits and dividends. The key
communication strategy that is used by a company in their type of orientation is remuneration
report, income statement and balance sheet. The shareholder-stewardship orientation refers to the
presence of majority of non-independent directors and the focus of the Board is to enhance the
internal growth and better management of capital (Desender, 2009). The key communications
developed by the Board includes chairperson’s report, balance sheet and cash flows. The
stakeholder-managerial orientation refers to the presence of large number of independent
directors who are appointed for satisfying the needs of most powerful stakeholders. The key
focus is on managing the stakeholders and the key communications used include voluntary
disclosures that include providing information regarding the social and environmental measures
undertaken by the company (Hussain, 2017). Lastly, the resources orientation of Board refers to
developing an adequate mix of independent and non-independent directors and the key focus is
to manage the external flow of resources. The major communication disclosures include the type
of information that best suits in providing details regarding the external resources of a company
(Zhao, 2011).
As analyzed from the corporate governance statement of Lovisa Holdings Limited, it
possess majority of independent directors or non-executive directors in comparison to non-
independent directors and therefore represents shareholder-agency orientation. The majority of
the directors are independent which means that they will not possess any interest within company
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operations and appointed by the shareholders mainly for driving the business growth through
increasing profitability and dividend returns (Heracleous, 2010). The Board appointed by the
shareholders holds the responsibility of driving business growth through appointing key
management personnel for conducting different business activities. The business managers are
appointed by Board for conducting various types of business operations on the behalf of the
shareholders and meeting their goals and objectives. This type of Board orientation can be
adequately explained with the use of agency theory (Annual Report, 2018).
The theory of agency has stated that there is a principal-agent relation between the
shareholders and the business managers. The shareholders are the principal and the business
managers are the agent who works for the shareholders and increase business profits for meeting
their interests and objectives. The Board members who are appointed by shareholders elect the
business managers who works as an agent to meet the varying interests and needs of principal,
that are, the shareholders (Deegan, 2012). The Board tends to align the interests of both principal
and agent with each other through the use of remuneration plans. The use of incentives and
rewards are used by Board for improving the performance of business managers through linking
their remuneration with the long-term performance and growth of the company. This helps in
meeting the interests of both shareholders and business managers by linking the remuneration of
the business managers with the achievement of long-term growth objectives of the company. The
Board as per the theory of agency occupies the major role of reducing the agency cost between
the shareholders and managers by aligning their interests and thus maximizing the business
growth and profitability. The focus of the Board is to drive the business growth through
increasing the profits and dividends for meeting the interests of the shareholders (Rezaee, 2008).
The major objective of the Board of Lovisa Holdings Limited is to increase the profits
generated for shareholders. This is carried out by the Board through selection and appointment of
key management personnel for performing different business activities. It also provides
assistance to the management personnel’s such as Managing Director (MD), and Chief Executive
Officer (CEO) for developing corporate strategy by determination of the performance objectives
and approving the budgets. The Board also provides approval regarding the capital expenditure
and monitors the capital management (Crowther & Seifi, 2017). It also reviews the performance
of management personnel from time to time for identifying the gaps and taking corrective actions
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for enhancing the performance to achieve the strategic goals and objectives (Reda, Reifler &
Stevens, 2014). The Board also developed governance policies and framework to ensure integrity
in its different operations. The audit committee is developed for reviewing the integrity in the
financial reporting and thus ensuring that financial results are developed as per the standard
accounting policies (Corporate Governance Statement, 2017).
The key communication that is provided by the Board in this type of orientation includes
disclosure regarding the remuneration policies and the financial results through development of
financial statements. This is because this type of disclosures helps the shareholders to assess that
the company is able to meet its strategic goals and objectives and is able to create profits for
them (Pickett, 2010). The remuneration report ensures that the interest of the shareholders are
aligned with that of the business managers while income statement and balance sheet helps in
reviewing the profits and equity growth acquired by the company that drives the shareholders
growth (Annual Report, 2018).
Part 4: Interpretation of company communications using Legitimacy Theory
As per Deegan (2002), there is an important role of social and environmental reporting in
developing an organizational legitimacy. The motivation for the disclosure of social and
environmental performance is directly linked to the desire of an organization for legitimizing its
operations in the mind of stakeholders. In this context, the company Lovisa Holdings Limited is
also required to develop and present sustainable reports for providing information about the
social and environmental measures undertaken by it to ensure that it is conducting its activities
by gaining continuo’s support from society and environment. The motivation for business
managers is to promote the accountability and reliability within the business operations and thus
legitimizing them in the mind of all its stakeholders.
On the other hand, Deegan, Rankin and Tobin (2002) has examined the social and
environmental disclosures of BHP for ascertaining the type of social and environmental
disclosures provided within its annual report and also examining them on the basis of concepts of
social contract and legitimacy theory. It has been identified by the researcher in this context that
businesses tend to disclose such type of sustainable information that helps them to develop a
legitimate position in the community and society at large. In this context, Lovisa Holdings
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Limited does not provide any communication related to its sustainability information in the
annual report. The company is recommended to provide such disclosures in the annual report so
as to ascertain that its various operations do not have any negative impact on the mind of
stakeholders.
Milne & Pattern (2002) has also depicted in this context that environmental disclosures
might play an essential role in producing a legitimizing effect on the investors in the context of
certain industries. The fact has been depicted by citing the example from chemical industry. This
is because chemical industry is associated with emission of various types of toxic materials and
substances that can degrade the quality of environment. Therefore, it is very necessary for such
industries to provide information relating to the various measures that have been adopted for
reducing the negative impact of their operations on the environment (Fagan & Ansón, 2012).
This type of information disclosed is having a legitimate impact on a company and helps it to
meet the various needs and expectations of its investors. This helps in seeking investor’s interest
and thus releasing continuous funds for fostering a company sustaible growth. Lovisa Holdings
Limited operates in fashion jewelry market and therefore is associated with emission of various
types of waste materials that can negatively impact the environment quality. Therefore, it is
highly necessary for the company to provide environmental disclosures for seeking investor’s
interests by maintaining accountability in its various operational activities.
Conclusion
It can be said on the basis of discussion held that business entities need to recognize the
importance of maintaining an ethical outlook by developing a strong corporate governance
system. The can be achieved by development and establishment of ethical policies and
framework by ensuring the presence of an adequate Beard orientation and composition. Also, it
is necessary for a business entity to provide disclosures about the measure it undertakes to
improve its social and environmental performance.
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References
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_2017_5.pdf?15007220070831679569
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