University Governance, Risk, and Ethics: Amazon Case Study Analysis

This case study provides a comprehensive analysis of Amazon's corporate governance, risk management, and ethical considerations. It examines the company's incentive and remuneration system, highlighting the issues related to executive compensation and its impact on performance. The study also delves into Amazon's risk management practices, identifying shortcomings in risk identification, control, and communication. Furthermore, it scrutinizes the role and effectiveness of Amazon's board of directors, assessing their ability to address governance challenges and protect shareholder interests. The case study incorporates relevant corporate governance theories and literature to provide a well-rounded understanding of the issues, concluding with an evaluation of the company's overall governance framework and recommendations for improvement.

GOVERNANCE RISK AND ETHICS
University
GOVERNANCE RISK AND ETHICS
ASSESSMENT
CASE STUDY AND ANALYSIS: AMAZON
Name
ID
Unite Title
Code Number
Lecturer’s name
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Table of Contents
Introduction......................................................................................................................................3
1.0 Selecting the company...............................................................................................................3
2.0 Analysis of main corporate governance and ethical issues.......................................................3
The incentive and remuneration system of Amazon: New form with Old issue.............................4
Risk management standards and Practices of Amazon: the Missing Element................................6
Points to Board of Amazon: Are they coping?................................................................................8
Shareholders of Amazon protecting their interests..........................................................................9
3.0 Theories relevant to this case...................................................................................................10
4.0 Literatures relevant to the case................................................................................................13
5.0 Conclusion...............................................................................................................................17
Reference List................................................................................................................................18
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Introduction
Corporate Governance has been a major concerning issue for managers and directors of many
companies. Through focusing on the main areas, an organization ensures that company is
controlled or directed properly and the director acts on behalf of their shareholders. This study
encompasses with the different corporate governance and ethical issues faced in a selected
organization in order to highlight the key areas that have been affecting the growth graph of a
company.
1.0 Selecting the company
In order to meet with desired outcome of the study, Amazon UK has been selected in context of
underlining the different governance issues faced by the company. Based on the nature of
governing committee of company, the selection has been done so that existing barriers and
loopholes could be underlined along with key factors affecting and responsible for rapid growth
of these issues.
2.0 Analysis of main corporate governance and ethical issues
As opined by Berle and Means (2011), corporate governance can be referred as the system
through which companies are controlled and directed. Further, he added that a good corporate
governance system allows the Board of directors to enhance their capability for driving the
company forward but exercising freedom within an effective accountability framework. As
suggested by Thompson (2012), corporate governance can be considered as highly increasing
crucial issue for companies due to following reasons:
1) The requirement of management control and separate ownership, meaning that many
companies operate within a pre-defined hierarchy or chain of the governance and this particular
chain are represented to the different groups impacts the organizational process.
2) The Increasing tendency for making organization more visible, responsive and accountable for
not only managers or owners in the corporate governance chain but also focused to the wider
stakeholder range (including community widely).
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Case Study of Amazon
The charter (Corporate governance committee charter and nomination) governs operation of
Nomination and the committee of Board of Directors of the Amazon. Board has appointed the
committee consist at least two managers and directors where each of the director is responsible
for meeting with Nasdaq Stock Market (NASDAQ) needs in respect to the independency
determined by Board. The responsibilities of this committee includes reviewing the charter
periodically and to recommend the relevant changes to Board (NASDAQ 2017).
The following are the main purpose or responsibility of Committee:
 Reviewing and assessing composition of Board,
 Assisting to recognize the potential new applicant for the Director,
 Recommending the applicants for the election such as Directors, and
 Providing the role of leadership in respect to the corporate governance of the Amazon
The incentive and remuneration system of Amazon: New form with Old issue
Governance of incentive or remuneration system at Amazon has often been observed failed due
to the decisions and negotiations those are not properly carried out at their arm’s length.
Managers have had high influence over conditions and level for the performance based incentive
or remuneration with the Boards incapable to exercise the objective and independent judgment.
The usage of organizational stock price as single measure does not allows the company to
benchmark the industry specific performance with the market or industry average.
For testing, whether organization has an effective system of corporate governance has highly
related to the judgments related to incentive or remuneration system. For example, Wheelen et
al. (2013) suggested that in judging about Amazon whether Corporate governance in UK is
serious towards reforming itself, CEO (Chief Executive Office) pays fir acid test. However, the
Chairman of Amazon has stated that one of the crucial unsolved problems in company is the
executive compensation and its determination process. It becomes easier to understand the
differences in the chart of incentive or remuneration system of Amazon presented in the figure 1.
It can be seen that compensation of CEO has rapidly increased comparing to an average worker
since 1994. Based on the different opinions made by authors, it can be said that the ratio remains
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neutral even if the company size is increasing daily (Shorter and Labonte, 2013). Another
instance that can be taken into consideration is the implementation of performance based
incentive or remuneration in early 1995.
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0
50
100
150
200
250
300
Ratio of Average Worker pay to CEO of Amazon
from 2001-2010
CEO
Average Worker
Figure No. 1
(Source: Ryan and Wiggins, 2012)
It has been noticed not only in Amazon but also to some major organizations in UK as
economical or political acute. Another data was significant to denote the development and
growth of CEO comparing to average worker that has drastically the business process of
Amazon. However, the fact was never denying that the moderate growth ratio that has caused
competitors to peer into political and economical invention in the company. The concept of
‘Paying for Performance’ was nevertheless concerned as significant reason behind the rumors.
However, in most of the cases, the failed performance of an executive was documented very well
to frame the salary and bonus structure annually. On the other hand, performance measurement
process of an average worker underneath the expected solution. Based on the opinion made by
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Sants (2010), it can be interpreted that ‘Under Water’ option (option when strike price is higher
compared to existing market price) has been re-priced or replaced for preserving compensation
value.
Risk management standards and Practices of Amazon: the Missing Element
Perhaps a great shock from financial crisis has been widely spread due to the failure in risk
management of Amazon at UK market. As opined by Acharya and Franks (2017), many cases
are the evident of underlined failure due to the lack of risk managing skills and capabilities of
managers at the company. Risk managers have been separated from the management not
regarded themselves as unessential part of organizational strategy. In most of the cases, risk
managers lacked the status for enforcing policy and accumulating the red flags on top caused for
the ultimate consequences behind the wall.
There are two sources widely used to assess the risk management of an organization such as
Internal Control (integrated framework 1992) and Enterprise Risk Assessing management
(integrated framework 2004). Based on the recent reports analyzed the mechanism Amazon
recently used in order to improve their risk management and shield from the competitors.
Controlled Environment
Amazon had recently tried taking control over the work environment and the tried to influence
the ample number of customer. However, the steps taken to control the work environment could
not produce the positive consequences for the company and resulted into lack of employee
satisfaction and high competitive threat.
Risk identification
In order to address the market risks, Amazon has appointed a committee. Committee was
responsible for recognizing the risks and challenges assessing the existing business process.
Committee members included the high-level managers, experts and business analyst. This
committee was intended to bring the estimated outcome and therefore, playing crucial role in
enhancing current business operations. However, the consequences of step taken by the company
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Monitoring
Comms & Information
Risk Assessment
Controlled Environment
Operations
Financial
Compliance
Sales/marketing 2
Sales/Marketing 1
Manufacturing
Head Office
Controlled activities
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could not be fruitful and resulted into higher risk for Amazon with 3.1% ratio. Moreover, drastic
consequences were noticed while risks were assessed based the assumptions only.
Controlling the activities
Activity control was based upon finding or identifying of risks associated with in business
processes. It was the responses against the risks, which could have either detective or preventive
controls. The management was lacking the resources for controlling their activity due to the big
failure in identification of the risks.
Communication and Information
The communication and information was tried to enhance in order to influence the lack of
business communication at Amazon. As stated by Becht (2012), the existing barriers in verbal
and non-verbal communication at Amazon had negative impact over increased sales and
empowering the employees to gain the knowledge sharing at the workplace. Furthermore, these
barriers were also a wall between the high-level managers and normal staffs.
Monitoring
Monitoring the project has been less fruitful for Amazon that was corresponded only with the
managers. As opined by Boone (2012), monitoring a project or operation is relied over the
outcomes on other components while dealing with customer retention. However, the barriers in
project monitoring were a big challenge due to the lack to active participation of each staffs in
the project. For example, the communication and information sharing was not effective at the
workplace so that the person responsible for monitoring the project could not able to identify
each employee perception about the project or business process.
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Figure No. 2
(Source: Bujaki and McConomy, 2016)
Points to Board of Amazon: Are they coping?
The role of Board members is as important as customer buying behavior in enhancing sales and
marketing of an organization. As opined by Shleifer and Vishny (2015), it seems very difficult to
find out the “Silver bullet” for an organization in form of regulation and laws for improving the
board performance. It leaves private sector to carry out the crucial responsibility for improving
board practices by implementing the voluntary standards.
In this section, authors have highlighted how the negative assessment regarding both risk
management and remuneration has been continuously pointing to the boards and rising potential
threats as well as difficulty in identifying the direct regulation for sorting out the problem. Based
on the functionality of Committee established by Amazon, the following purpose was proposed
to carry out for improving the organizational potential.
Purpose of the Committee
1) Assessing and reviewing the board composition
This committee is presently recommending to Board assignment of chairs and committee
members for each committee. It also reviews qualifications of each director for continuous
services on a Board. Apart from that, the Committee helps Board in their annual Director and
CEO self-evaluation.
2) Assisting in identifying the potential candidates for Director
In order to evaluate and identify the prospective applicant for Director, the Committee has been
given the responsibility for recommending and developing the same. The periodic review of the
policy is evaluated through the Committee, recommended by the Organization’s shareholders.
The Committee is also responsible for reviewing and identifying the applicant qualification for
the Director.
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3) Recommending applicants for the election as Director
In order to reelection or election of the applicant as Director, the Committee suggest to Board
during every annual meeting with stockholders along with recommending appropriate applicant
for being elected as Director.
4) Providing the role of leadership in respect to the corporate governance of the Amazon
Considering the basic corporate governance, the Committee periodically develops and reports to
Board along with necessary changes required to the Business. The Committee is also responsible
for recommending the compensation for newly appointed Director.
However, it has been found that Amazon has attempted for reinforcing oversight function of
Board through appointing some members by their special constituency as minority stakeholders.
As opined by Short and Keasey (2010), giving independence to some members of board might
be necessary or important but not enough, or sufficient. Therefore, it can be interpreted that
along with independence of board member, they are required to provide some rights in order to
meet with business requirements and meeting with proposed target market. It has been found in
case of Amazon that Board members with lack of resources and rights incapable to meet
organizational goal. Moreover, requirements with time intension are also important in regards to
address the policy issues. Apart from that, the Board structure relies over separation of Chair
positions and CEO of Amazon that puts barrier in conveying the required message to each staffs.
It has caused lack of privacy or business discussion required to implementing business strategy
and developing the potentials for growth. Therefore, authors have suggested the authorities for
considering the business promotion independently and developing the board objectives.
As per the viewpoint of Becht (2012), small jurisdiction may face special or crucial policy issue
that may require the policy initiative. Furthermore, the sharing of information must include the
other board memberships to be indulged in independent board functions.
Shareholders of Amazon protecting their interests
The interest of management and shareholders is aligned in past period in bull market but no
sustainability was associated with it rather than dealing with short-term behavior of the staffs of
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Amazon. In the context of Amazon, shareholders have been failed for ensuring the board
accountability. As per the opinion of Holmstrom and Kaplan (2012), in order to gather
knowledge about active participation of shareholders in a business, it is important to consider
their past behavior and interest from a company. On the other hand, rather than seeing a
shareholder as only a business partner, considering and showing them as an important asset to
the business can be significant for filling the gap in past. The IMA (Invest Manager Association)
of Amazon began to quit the market of Amazon considering it less important and less interesting
in terms of discussing business with them. In many companies, sufficient (small) numbers of
shareholders have taken very significant decision about the business operation. The principle of
Amazon advocates the wide range of rights shared with Shareholders that includes their
information access from the company. During the review of principle of Amazon in 2007, it has
been found that in past 4 years, Amazon has limited their information shared with the
shareholders in order to maintain the privacy issues raised earlier. Nevertheless, the recognition
of institutional shareholders was higher compared to other varieties. Moreover, company
considered their shareholders only as a defender that deeply affected the business strategy of
Amazon. On the other hand, from the beginning of 2009, Amazon has introduced various
implementations for encouraging their shareholders and allowing them to participate in Annual
General Meeting. On the other hand, the company also reinforced their shareholder base in order
to encourage the constructive engagement.
3.0 Theories relevant to this case
Based on the study about Amazon, this study comprises with ample number of theories and
models for understanding the business potential of Amazon. It has helped in identifying the
strengths, weakness, opportunity and threats of Amazon in the UK market.
SWOT Analysis
Being a leading online retailer, Amazon has left the footprint in all over the world and spurred
physical, mortar and brick in order to realizing the online presence in global economy. However,
the success graph of Amazon is evident for stating the sufficient business operations in online
world.
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Strengths
Since being as one of the largest online retailer in the world, Amazon has been defining the wide
number of strengths in context of business operations. The business strategy of the company is
relied over three key components such as focus, differentiation and cost leadership. These
strategies has assisted Amazon in establishing the deep-rooted consumer trust over brand as well
as influenced the shareholders to derive value from company. The primary focus of Amazon has
been on competition market and gaining the benefit, company has rapidly increased their global
presence. However, it would not be wrong that customers are widely affected and associated
with online shopping that is well handled and developed by Amazon. On the other hand,
utilization of effective distribution system and superior logistic has been profiting the business of
Amazon as well affecting the customer retention significantly (Holmstrom and Kaplan, 2012).
Weaknesses
The weaknesses of business strategy of Amazon have been noticeably significant in the context
of poor risk management system and lack of governing/ethical issues at workplace. Apart from
that, the diversification strategy of Amazon has been underlined as major weakness point for the
company. It means that company is allowing the consumers to go for wide variety of products
online rather than specializing in online book retailing industry (Bujaki and McConomy, 2016).
Authors have identified one of the biggest weaknesses of Amazon is its business model of Zero
Margin that highly affect the profit margin of Amazon as well as affecting the current business
strategy and net revenue.
Opportunities
However, Amazon has many weak points that may hinder the opportunities existing in the
current market place but there are many opportunities awaiting the decisions and project
implementation for Amazon. Since the implementation of Online Payment system of Amazon,
customers are remarkably attracted towards Amazon (Short and Keasey, 2010). Authors and
business analyst has suggested that improved privacy and security can be an added opportunity
for Amazon can it may have direct impact over consumer buying behavior. Apart from that,
through increasing the portfolio of offerings where company has high stocks can ultimately
result into extra revenue for them.
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Threats
As per the viewpoint of Gilson, R.J., (2016), one of the biggest threats for an online retailer
company is its market competition with wide variety is entertaining the consumers. Similarly,
there are ample numbers of competitors challenging the business strategy of Amazon as well as
affecting the consumer retention strategy of the company. Competitive pricing strategy towards a
particular product or service can be another form of threat for the company. Apart from that, the
high concern of consumer about theft of identity and leaving their information exposed can be
counted another concerning threat for Amazon.
This analysis concerns about the future strategies of Amazon widely significant for the
development and high potential. On the other hand, this analysis has tried to highlight the key
concerning areas including both profit margin and threats for Amazon.
Agency Theory on Corporate Governance
The agency theory critically analyses about the modern corporation (that hold the share
ownership) that departs with managerial actions required maximum returns for the shareholders.
As opined by Short and Keasey (2010), owners can be referred as the principals whereas
managers as Agent. Therefore, the agency loss can be considered since the owners, residual
claimants fall under the principal (exercising the direct control of corporation). However, this
theory considers the delegation must be minimized since it leads towards abusive content. As
argued by Gilson (2016), the agency theory leads towards unrealistic organizational and human
viewpoint. Furthermore, in order to recognize the broad range of the human motives, agency
theory is applied, which is drawn on the basis conventional theory.
Some authors have argued with the behavior of this theory and suggested that agency theory
focuses on inherent investors. Moreover, agency theory comprises with the assumption about
homogeneous essentiality of the company, which directly or indirectly affects over governance
structure of a firm. In the context of Amazon, it can be interpreted that Amazon has been ruling
on the agency theory that deals with outperform of others. Meaning that Amazon has been
indulged highly on shareholders rather relying on own business platform. This theory is failed in
identifying the consistency, which controls more over managers responsible for producing the
better results. Based on the viewpoint of Jensen (2010), it has been found that manager can
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