Corporate Governance in the Sportswear Industry

1. Corporate Governance in the Sportswear Industry Alex, YEUNG, wai hon Fu Jen Catholic University, Taipei, Taiwan Nov 1, 2005,. Tokyo, Japan

2. Introduction • In the past decade, corporate catastrophe with maltreatment of corporate governance being the primary cause have included a list of prominent companies like Enron, WorldCom, Inc. and Barings (Zandstra, 2002; Boyd, 2003; Drummond, 2002). • The sportswear industry which is essentially a highly globalized industry is inevitably affected as the demand for sound corporate governance practices has gathered considerable momentum.

3. Introduction • This paper serves to explore the current development in the philosophies and practices of corporate governance in the global arena with an emphasis to explain the rationale behind such emergence as a kind of a shareholder activism, • followed by an attempt to scrutinize different approaches adopted by the World's prominent sportswear companies in response to such challenge in the context of globalization.

4. Corporate Governance (I) • Vinten (1998) suggests that the corporate governance issue could be dated back to the nineteenth century when limited liability corporations started to emerge and good corporate governance play a crucial role in sustaining businesses. • (Parker, Peters and Turetsky, 2002; Zandstra, 2002; Vinten, 1998, 2000, 2002)

5. Corporate Governance (II) • Pass (2004) defined corporate governance as the “duties and responsibilities of a company's board of directors in managing the company and their relationships with the shareholders of the company and the stakeholder groups • He presumed that it is the structure for the policies and procedures which govern the Board of Directors in a business corporation, including non-executive directors and others who advise the Board.

6. Corporate Governance (III) • The OECD Principles of Corporate Governance (OECD, 2004; p.11) suggests “Corporate Governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. • Corporate Governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined”.

7. Corporate Governance (IV) • Accordingly, “Corporate Governance is a set of relationships between a company’s management, its board, its shareholders and other stakeholders”. • Corporate governance also provides the structure through which the objectives of the company are set and the means of attaining those objectives and how performances are being determined.

8. Corporate Governance (V) • Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring.

9. Corporate Governance Scandals • In recent years, a number of high profile corporate scandals have occurred witnessed that poor corporate governance, including greed; lying; breaches of trust; conflicts of interest; lack of transparency; insider dealings; and fraud by directors and others. • Moreover, these corporate scandals are not restricted to any one country, or any particular business sector.

10. Corporate Governance Scandals in the USA (I) • The collapsed energy company, Enron and the collapsed telecommunications group, WorldCom led to the US Sarbanes-Oxley Act of 2002, which affects not only US corporations but also European and other businesses listed in the USA (Levine, 2005). • The former Chief Executive of WorldCom, Bernie Ebbers, was found guilty of manipulating the company’s accounts in late 2000 in order to conceal mounting network expenses and to satisfy stock earnings expectations. As a result, WorldCom collapsed!

11. Corporate Governance Scandals in the USA (II) • It was argued that the fraud could have been avoided, if Andersen, the global CPAs firm used to have sound reputation that was smashed in the Enron scandal, had been auditing with conscientiously care.

12. Corporate Governance Scandals in the in UK (I) • Equitable Life, the old established UK mutual Life Assurance Society, is suing currently in the High Court, London, 15 former executives and non-executive directors for negligence and breach of duty, alleging that they should have taken legal advice before deciding to award differential terminal bonuses in 1996-1998. • The controversial policy of differential terminal bonuses (DTBP) was introduced at Equitable Life in 1993. Equitable Life is seeking damages of up to £1.7 billion from the directors.

13. Corporate Governance Scandals in the in UK (II) • The trial will highlight the role of directors, non-executives, and raise questions about the extent to which non-executive directors can rely on executive management, and how extensive their role has to be to avoid draconian litigation risks. • However, the claims against them do not suggest that they were dishonest: rather, negligent and failing in their duty.

14. Corporate Governance Scandals in the in UK (III) • In addition, Equitable Life is suing its former auditors, Ernst & Young, a damage of £2.05 billion for negligence and breach of duty, alleging that the 1997-1999 accounts were deficient because they did not include proper provisions for “guaranteed annuity rate” (GAR) policies. • Equitable Life is demanding £2.05 billion damages from Ernst & Young. Both the auditors and the directors deny the charges (Phelps, 2005).

15. Corporate Governance Scandalsin Italy (I) • The Italian Parmalat Company grew rapidly after branched out to some 200 subsidiaries in 30 countries including Brazil, China and the United States of America. • The Parmalat founder, and former Chairman and Chief Executive, Signor Calisto Tanzi, sat on the Parmalat Board with other members of his family, Stefano Tanzi (his son), and Giovanni Tanzi (his brother).

16. Corporate Governance Scandalsin Italy (II) • His niece, Paola Viscounti, had also been a Board member. Non-core businesses, such as the Parma football team, and travel operations, were part of the empire of the Tanzi family. • Calisto Tanzi is reported to have admitted fallaciously invented huge cash reserves and revenues. • In December 2003, the Parmalat Empire collapsed (Porcheron, 2004).

17. Corporate Governance Scandalsin Italy (III) • Numerous international banks are alleged to have been aware of Parmalat’s precarious finances, prior to its collapse, but to have continued to finance the company in return for large fees. • Parmalat’s former auditors have also been accused of fraud, malpractice and negligence, for allegedly helping Parmalat’s former management to deceive investors about the true status of the company’s financial situation. The plea bargains relate to charges of deceiving the market, obstructing regulators, and fraudulent auditing.

18. Corporate Governance Scandalsin France (I) • George Soros, the Hungarian-born investor, appealed in the Paris Appeal Court in February 2005 against his earlier conviction in the lower court of insider dealing. • He was fined €2.2 million for using privileged information in 1988 liable to affect the price of Société Générale’s shares (O'Donoghue, 2002).

19. Corporate Governance Scandalsin France (II) • Mr. Soros had his Quantum Fund pay US$50 million for shares in the bank, and in three other French companies. Société Générale’s shares rose considerably and the takeover failed. • Mr. Soros sold his shares at a profit which the court deemed to be insider dealing, dismissing Soros’ claim that the information was in the public domain.

20. Corporate Governance Reforms • All above scandals confirmed that major corporate failures occurred either because of best practices were absent, or if available, being abandoned (Cutting and Kouzmin, 2000; Zandstra, 2002; Boyd, 2003; Rezaee, Olibe and Minmier, 2003; Doost and Fishman, 2004). • This activates the motive in searching for more effective corporate governance reforms in this era of globalization (Vinten, 1998, Taylor, 2000; Walker and Fox, 2002).

21. Sarbanes-Oxley Act, 2002in the USA(I) • Enacted in 15 July 2005, section 404 of the US Sarbanes-Oxley Act is probably as the most complicated provision to meet (Ramos, 2005). • This section of the governance legislation covers internal controls against fraud, and requires companies to document, test and report on the effectiveness of their internal controls. Also, section 404 requires auditors to give separate opinions on the state of the controls.

22. Sarbanes-Oxley Act, 2002in the USA(II) • With the advent also of the new International Financial Reporting Standards, some US-listed companies, including US-listed European Union companies, are struggling with the requirements. • Section 302 is another key provision of the Sarbanes-Oxley Act, compels Chief Executives to swear to the accuracy of their company’s accounts, possibly a direct response in the United States of America to the Enron and WorldCom scandals.

23. Sarbanes-Oxley Act, 2002in the USA(III) • Moreover, section 406 of the Sarbanes-Oxley Act requires a “Code of Ethics” for senior Financial Officers. The Act defines the term “Code of Ethics” as such standards as are reasonably necessary to promote:- • honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; • full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by the issuer; and • compliance with applicable governmental rules and regulations.

24. The UK Combined Code on Corporate Governance, 2003 (I) • The 2003 UK Combined Code on Corporate Governance, based on a review by Derek Higgs applies to UK-listed companies, • replaces the earlier Combined Code issued by • the Hampel Committee on Corporate Governance in June 1998, • the Greenbury recommendations in 1995, and • the earlier Cadbury recommendations in 1992 (Pass, 2004).

25. The UK Combined Code on Corporate Governance, 2003 (II) • The Derek Higgs Combined Code • a review of the role and effectiveness of non-executive directors, • a review of audit committees by a group led by Sir Robert Smith (Smith, 2003), and • a guidance for directors on internal control produced by the Turnbull Committee (Institute of Chartered Accountants in England and Wales, 1999).

26. The UK Combined Code on Corporate Governance, 2003 (III) • This UK approach of principles of corporate governance, rather than legislation, is tied into the London Stock Exchange Listing Rules and is intended to be more flexible, • applied with common sense and due regard to companies’ individual circumstances, and with an annual report explaining the application of the principles.

27. The UK Combined Code on Corporate Governance, 2003 (IV) • The London Stock Exchange Listing Rules require listed companies to make a disclosure statement in two parts in relation to the Combined Code:- • the company has to report on how it applies the Principles, and • confirm that it complies with the Code’s provisions.

28. The UK Combined Code on Corporate Governance, 2003 (V) • The revised Code does not include the previous Code on remuneration, as ‘The Directors’ Remuneration Report Regulations 2002’ are now in force. • These Regulations require the directors of a company to prepare a remuneration report that is “clear, transparent and understandable to shareholders”. • A formal assessment of how the revised Combined Code is being implemented will be carried out in the second half of 2005 by the Financial Reporting Council (FRC).

29. The OECD Principles Of Corporate Governance, 2004 (I) • The OECD Principles of Corporate Governance for publicly-traded companies, were first endorsed by OECD Ministers in 1999, and have since become an international benchmark in corporate governance initiatives in both OECD and non-OECD countries. • OECD Principles of Corporate Governance are not intended to substitute for government or private sector initiatives to develop more detailed ‘best practices’ in corporate governance (OECD, 2004).

30. The OECD Principles Of Corporate Governance, 2004 (II) • These developments include the work of the • World Council for Corporate Governance; • European Union directives and company law reform studies; and • reforms in individual countries.

31. Private Corporate Governance Initiatives • The FTSE ISS Corporate Governance Index Series, launched in phases from December 2004 as a joint project between • the FTSE Group, London, and • the US Institutional Shareholder Services (ISS), • the new Corporate Governance Index (CGI) Series has among its aims “to raise the profile of companies achieving high standards of corporate governance” (FTSE Research, 2005), so that best corporate governance performers can optimize their access to capital.

32. Private Corporate Governance Initiatives • The financial performance of companies can be tracked against “themes in corporate governance practice”, including compensation systems for executives and non-executive directors; the structure and independence of the Board; and the independence and integrity of the audit process. • The rewards for those companies selected to be listed on the new Corporate Governance Indexes include an incentive for corporate governance.

33. The Sportswear Industry (I) • The sportswear industry which is essentially a highly globalized industry is inevitably affected as the demand for sound corporate governance practices has gathered considerable momentum. • In the 1970s, sporting sportswear began to evolve from a product line aimed at niche and unique markets into a mainstream fashion product.

34. The Sportswear Industry (II) • The clear divisions between performance and fashion, function and style, formal and informal that once existed have become increasingly blurred (Clean Clothes Campaign, 2004). • In the 1980s, the acceptability of casual dress on more occasions paved the way for sportswear to move into the mainstream clothing market. • The trend was accompanied by a real increase in sports participation.

35. The Sportswear Industry (III) • Nike in particular has played an important role in transforming sport shoes and apparel into a fashion statement. Nike was not only the first to have its shoes produced in Asia; it was also the first in the marketing and advertising of sporting shoes. • Today, practically all brand-name corporations have a business plan similar to that of Nike’s strategy of focusing on the branding and marketing of sportswear.

36. The Sportswear Industry (IV) • In 2002, the total worth of the sporting apparel and footwear market is estimated at US$58,479 million at the wholesale level. • Of which the sportswear apparel sector US$41,467(71%) forms a much larger part than the sporting footwear sector US$17,012 (29%) (Clean Clothes Campaign, 2004).

37. The Sportswear Industry (V) • Of the international sporting apparel market which worth nearly US$41.5 billion, the US sporting goods market accounts for 41% of total sales as the World’s largest, followed by the European Union, which accounts for some 38% of total sporting apparel turnover (Clean Clothes Campaign, 2004). • Nike, Adidas and Reebok dominate market by some 14%.

38. The Sportswear Industry (VI) • Meanwhile, Fila, Puma and Umbro each comprise of approximately 1% of market share, while Mizuno represents approximately 0.5%. • The other brands such as Lotto, Kappa, and New Balance— represent less than 0.5% of market share. • The top-20 brands manage to account for some 36% of the global wholesale market.

39. The Sportswear Industry (VII) • The global sporting footwear market worth nearly US$17 billion in wholesale value. • The US sporting sport shoe market is the World’s largest, representing 47% (or US$7.8 billion) of the World’s total sales, followed by the European Union at 31% (US$5 billion). • In 2002, Nike (34%), Adidas (16%) and Reebok (10%), together account for 60% of the branded sporting footwear market (Clean Clothes Campaign, 2004).

40. The Sportswear Industry (VIII) • In the US, 70% of this market is controlled by Nike, Reebok and Adidas. Asics, Fila, Kappa, Lotto, Mizuno, New Balance Puma, and Umbro each comprise somewhere from 1% ~ 8% of the total global sporting footwear market. • Together, however, they comprise some 24% of the World market. Together with Nike, Reebok, and Adidas; these companies comprise 84% of the branded sporting footwear market.

41. Research Methodology (I) • Considered the objective of this study is to explore the current development in the philosophies and practices of corporate governance in the global arena with an emphasis to explain the rationale behind such emergence as a kind of a shareholder activism, • followed by an attempt to scrutinize different approaches adopted by major sportswear companies in response to such challenge in the context of globalization.

42. Research Methodology (II) • It is the approaches, rather than the mechanism, of corporate governance reforms adopted by the World's prominent sportswear companies are of prime interest to this study. • Accordingly, this makes a predominantly qualitative approach appropriate, and the analytical approach is by qualitative case study technique was applied.

43. Research Methodology (III) • The uniqueness of qualitative approaches is its effectiveness in uncovering connotation via analysis of non-numerical data that come from multiple sources of information (O’Connor, 2002). • And, the qualitative case study technique is fit for the purpose of this research because it can provide an “exploration of a ‘bounded system’ or a case (or multiple cases) over time through detailed, in-depth data collection involving multiple sources of information rich in context” (Creswell, 1998).

44. Research Methodology (IV) • Nike, Adidas and Reebok were selected as samples for this study because of their dominance and active involvements in the global sportswear market, and hence their representativeness to the status quo of corporate governance in the global sportswear industry. • Secondary data are frequently used for both qualitative and quantitative analysis, including, but not limited to industry statistics, industry performance indicators, company reports and other documentary evidence.

45. Research Methodology (V) • The strength of secondary data is its low cost, accessibility and a broad exposure covering many events and settings. Nevertheless, the weaknesses of this type of data, its retrievability, biased selectivity, accessibility and reporting bias (Yin, 1994). • However, by retrieving the latest versions of corporate governance policies and guidelines of Nike, Adidas and Reebok from their official website can completely avoided the problem of retrievability, biased selectivity, accessibility and reporting bias, hence, assured the sufficiency, reliability and validity of the data for analysis.

46. Findings and Discussions --- Nike (I) • Nike, Inc. is “engaged in the design, development and worldwide marketing of footwear, apparel, equipment and accessory products. • The Company sells its products to retail accounts and through a mix of independent distributors, licensees and subsidiaries in over 160 countries around the World. Its athletic footwear products are designed primarily for specific athletic use, although some of its products are worn for casual or leisure purposes.

47. Findings and Discussions --- Nike (II) • The Company creates designs for men, women and children. Running, basketball, children's, cross-training and women's shoes are the Company's top-selling product categories. • It also markets shoes designed for outdoor activities, tennis, golf, soccer, baseball, football, bicycling, volleyball, wrestling, aquatic activities, hiking and other athletic and recreational uses.

48. Findings and Discussions --- Nike (III) • Its apparel and accessories are designed to complement its athletic footwear products, feature the same trademarks and are sold through the same marketing and distribution channels”. • Nike was listed on the New York Stock Exchange since Oct 17, 1990 (NYSE, 2005).

49. Findings and Discussions --- Nike (IV) • In response to the challenge of more effective Corporate Governance in the context of globalization, the Board of Directors of Nike, Inc. has adopted its own Corporate Governance Guidelines (Nike, 2005) in April, 2003 • with the intention to assist itself in the exercise of its responsibilities and reflect it’s commitment to monitor the effectiveness of policy and decision making both at the Board and senior management level, with a view to enhancing long-term shareholder value.

50. Findings and Discussions --- Nike (V) • Nike specified that these Guidelines will be reviewed annually by the Nominating and Corporate Governance Committee and the Board, and are subject to modification from time to time by the Board. • And, waivers of these Guidelines may be made only by the Nominating and Corporate Governance Committee or the Board.