Introduction
Every successful organization can attribute its growth to competent management and evaluation of risks in a volatile business environment. JD Sports Fashion PLC is a UK-based sports fashion retailer whose merchandise is sold across hundreds of stores, including its own, particularly in Western countries. After being founded in 1981, it is now a retail giant with over 6 billion pounds in revenue. It has achieved such success through strategic growth, expansion, and acquisitions.
The company’s corporate governance approach is comprehensive and efficient, providing significant value and promoting its strategic growth. This is achieved by following established international protocols in board management, regulations for organizations, and weighted risk evaluation and management. This paper will seek to examine how JD Sports Fashion PLC meets the specifications of the UK Corporate Governance Code and then examine a hypothetical risk evaluation scenario of the company’s expansion to Brazil.
Corporate Governance
Corporate governance refers to a set of governance practices in globalized companies which affect a wide range of company operations, activities, and structures. These can include board structure and elections, stakeholder engagements, power distribution, daily routines, and strategic direction to build sustainable organizations for future needs (Davies, 2006). JD Sports Fashion PLC seems to understand the importance of corporate governance and is committed to meeting the expectations based on internationally recognized codes and universally beneficial practices. Particularly, the UK Corporate Governance Code will be used to evaluate JD Sports Fashion PLC. There are four major categories of board leadership, division of responsibilities, composition, succession, and evaluation, and finally, audit, risk, and internal control (Financial Reporting Council, 2018).
Also, another aspect that should be explored is sustainability and ethics. Although these are separate themes, in the modern economy, it is expected that sustainability and ethics are integrated into corporate governance, and corporate governance fosters sustainable values (Krechovská and Procházková, 2014). Corporate governance practices are incorporated into the company’s executive management and serve as vital elements of its strategic planning and operations. The Board of JD Sports Fashion PLC promotes and applies the main principles of the UK Corporate Governance Code.
Board Leadership
Based on the JD report, the Board generally follows the recommendations set out in the U.K. Code. It sets strategic initiatives for the company and seeks to achieve them through best management and economic practices. It assesses risks and the general economic environment of the company and makes changes or improvements as necessary. Money is provided to fund both strategic acquisitions and capital projects as necessary while maintaining a healthy state of the company. The company takes into consideration the views of the company’s key stakeholders, including independent non-executive directors.
There are also effective means of raising concerns in the workplace and conflict of interests is monitored continuously (JD Sports Fashion PLC, 2020). The Board is effectively promoting the long-term success of the company from a strategic point of view and creating long-term value. However, where the Board struggles is in assessing and monitoring culture. In fact, culture does not seem to be a concern in the report outside inclusivity of hiring practices. It is a significant element of board leadership to oversee culture and ensure that it aligns with the company’s purpose and strategy while reflecting the measures taken to support the workforce.
Division of Responsibilities
The Board meets the recommendations laid out by the U.K. Corporate governance report. It is composed of people at all levels of the Group and consists of a diverse mix of individuals, including by gender, culture, and talent. All recruitment including board members is based on objective criteria. There is a healthy mix of executive and non-executive directors, which are assigned responsibilities during annual meetings and in between scheduled meetings, with mandatory attendance set out for each (JD Sports Fashion PLC, 2020).
Composition, Succession, and Evaluation
The JD Board consists of seven directors including the executive chairman, CFO, and 5 non-executive directors. Succession planning is central to the Board, reviewing its composition on an ongoing basis. For example, those that hold their roles for a number of years, are more likely to be under review for their independence and potential replacement. The Board composition seeks to have a combination of skill, experience, and judgment to satisfy the demand for agile leadership and maintain entrepreneurship within the context of management and risk management. There is a fair and set plan in place for nomination and succession of Board members. The Board conducts both internal and external evaluations every couple of years, facilitating results to provide feedback on their effectiveness and decision-making and adopting measures for improvement (JD Sports Fashion PLC, 2020).
Audit, Risk, and Internal Control
As advised by the UK Corporate Governance Code, JD Sports have an established internal audit committee composed of three independent non-executive directors. The committee has the competence of the sector in which JD operates confirmed by the Board Evaluation processes. The Audit Committee meets four times with an external auditor present as well. Alongside the Audit Committee, the Board implements an internal controls system that seeks to manage risks and oversee fiscal spending. This ranges from capital investment to comprehensive monthly accounts to an annual cash flow budget. The Audit Committee also receives detailed reports from the external auditor which can be compared to and monitored in the context of the Group’s internal system of controls (JD Sports Fashion PLC, 2020).
Sustainability and Ethics
Sustainability and ethics are not included in the UK Corporate Governance report but serve as vital elements of modern company leadership and management. They can be summed up under the popular umbrella term of Corporate Social Responsibility (CSR). CSR in itself is a form of private business self-regulation but inherently refers to the evaluation of whether practices and policies undertaken by a corporation have a positive impact on its surroundings.
This includes sustainable practices to preserve natural resources and net carbon emissions to the best extent possible. It can refer to ethical practices, such as using fair-wage labor and ensuring that materials are both sustainably and ethically sourced (especially relevant for the fashion and apparel industry). CSR can be broad but ultimately focuses on the ability of the corporation management to integrate social and environmental concerns into business operations and interactions with stakeholders (UNIDO, n.d.).
As part of JD’s risk assessment and mitigation, a number of environmental concerns are touched on regarding the use of materials, methods, and technologies in the production of its goods. The company takes the issue of climate sustainability seriously, seeking to adhere to global scientific recommendations and comply with regulations in the UK. It engages in mitigating activities to ensure that the Group’s efforts on the issue continue to progress as it reduces its carbon footprint to minimal in operational activities. In terms of social responsibility, the Group evaluates its labor standards and ensures that human rights are met, and all operations associated ranging from manufacturing to training to retail are conducted in safe and inclusive environments.
Additionally, JD invested in the development of a human capital management system that enhanced transparent and stable communication with staff in the era of the pandemic. The company also engages in a number of foundations and charities across the UK as part of giving back to its community. Finally, the company follows ethical guidance in terms of compliance for data safety according to regulation and beyond, supporting the capability of customer, employee, and supplier data to remain confidential. The Group also takes effort across the organization to provide anti-corruption measures and stands for fair competition (JD Sports Fashion PLC, 2020).
Recommendations
JD Sports is a company that has met and often exceeded many of the elements of the UK Corporate Governance Code. The Board and the way the company operates seek to embrace an approach that is ethical, transparent, responsible, and maintains a system of checks and balances along with audits and evaluations. However, some recommendations will be offered to further enhance the Board’s ability for effective corporate governance.
One of the notable elements missing was the role of the Board in promoting workplace culture. Despite corporate culture often being a set of unwritten rules and intangible assets, the Board can offer oversight and promote a positive culture. First, a culture should be defined, alongside the blueprint for the company’s purpose, mission, and values, there should be well-defined cultural attributes that are aligned to the other elements and the general strategy. The culture should be intentionally designed in the context of the company’s strategic orientation in the market (Dettmann & Klemash, 2019).
For example, Apple’s orientation is seamless quality with technological innovation, so it maintains a culture of perfectionism and achieves optimal results prior to releasing a product or service. As a company identifies its orientation and how culture, vision, and values meet, it can translate this to daily decisions and behaviors in the company including how the staff is managed, leadership styles, hiring and training practices, and communication with customers. Culture is an underlying concept that ultimately has long-lasting effects on the company’s future and ability to navigate crises, remain agile, and stand as a cohesive organization.
Corporate governance in itself is a consistent balance between conformity and compliance (to codes, legislation, and regulation) and performance (via strategy formulation and policy-making). JD Sports seems to lean heavily towards the compliance factor, with its report almost checking off every element of the UK Corporate Governance Code and local regulation. The corporate governance section is even broken down into similar sections covering each area. While this is necessary to an extent, it will not allow the business to grow successfully in the long term. Compliance should be following legal regulations, but other codes are general recommendations. There will always be new regulations, particularly operating across multiple markets, so attempting to meet all of them is unhealthy for corporate governance.
There is some discussion in the JD Sports report about the role of the Board in strategic decision-making and monitoring organizational performance, but it remains minor. The board should elaborate on its position on performing the major functions in comparison to those performed by management. Balancing the conformance aspects with performance-oriented activities for the board can aid in deriving greater strategic long-term benefits for the company (Mahanti, 2021). Good corporate governance stems from monitoring and analysis on a regular basis and applying the recommendations of the Code to policy in a manner that promotes awareness and debate on how to best implement it.
Risk Management
JD Sports Fashion is doing well financially over the last several years, seeing growth in virtually every financial and performance indicator metric. However, the large majority of the company’s sales stem from the UK, Europe, and the United States, with only 5% originating from other geographic markets such as the markets of South Korea, Thailand, Singapore, and Australia (JD Sports Fashion PLC, 2020). Despite COVID, the company has seen a 30% increase in global revenue as well as the opening of additional stores across regions. The company sells on multiple channels alongside its own stores, which has allowed remaining flexible and competitive despite the economic downturn and in vital markets. JD’s premium multi-brand offering is appealing to consumers across the globe as the company maintains high standards for authenticity, technology, and digital strategy.
Brazil is one of the most promising emerging economies. The country itself is the largest by the population at 211 million, with a growing proportion of young people aged 15 to 33 being at 17%. Brazil has major urban centers such as Sao Paulo, Rio de Janeiro, and the capital of Brasilia, and the country’s per capita spending has grown to $11,100, by far the largest in South and Latin America (Trading Economics, 2021). If JD Sports Fashion seeks to enter a new market in a completely different region than its traditional sales, Brazil is the optimal choice. Brazil is the only country in the region listed in the top 10 global markets for clothing and accessories. The apparel retail industry in Brazil is seeing increased demand, with 4% above pre-pandemic levels (Lewis, 2021). With higher than average the region per capita spending, Brazil’s urban centers are fashion capitals of South America and there is demand for quality and premium level of apparel that JD offers.
Register of Potential Risks
Entering new markets always holds potential levels of risk for large organizations. Despite Brazil being a leading foreign investment destination and rich business environment, there are significant risks and challenges which may be particularly difficult for Western companies to navigate. There are political and economic risks. Like many South and Latin American countries, Brazil has faced political turmoil in recent decades, impacting social and economic stability.
Another element often associated with politics is bribery and corruption. While illegal both in the UK and Brazil, corruption is widespread in the official and unofficial structures of Brazil’s regulatory agencies and taxation at both federal and local levels. Meanwhile, Brazil’s economy is heavily natural resource and energy-dependent, which are notoriously volatile markets and can cause recessions.
COVID-19 represents a risk, as Brazil similarly experienced lockdowns and declining consumer spending in 2020 but has seen economic growth. However, President Bolsonaro and his administration notoriously poorly addressed the pandemic, and he continues to publicly deny safety and prevention measures which create a possibility for repeat infection waves. Intellectual property risks are a key concern, without adequate protection, companies will be quickly mimicked by domestic competitors and lose their place in the market (Department of International Trade, 2017).
Finally, there are cultural risks, ranging from the way that business is conducted in the country to products that are presented to the market, Brazil is notoriously challenging for foreign brands to navigate in the complex business environment (Townsend, 2014). The two primary risks that are most relevant to JD Sports Fashion PLC in the context of expansion to Brazil are intellectual property protection and cultural differences.
Risk #1: Intellectual Property Protection
Although Brazil’s public stance supports intellectual property protection via domestic law and international conventions, the reality-based on multiple cases across various industries indicates that foreign intellectual property is not strongly protected and can be infringed on by both the government and Brazilian national entities. Intellectual property is defined as a “set of rights inherent to intellectual production in the industrial, scientific, literary and artistic fields” (Frenzl, 2016).
Legally, it is usually split between copyright and industrial property rights. With the rise in prevalence of fashion as a rapidly growing sector, fashion law has also been in development. In the fashion and apparel sector where the JD Group operates, the exclusivity of design is an element that ultimately creates value for the fashion articles. However, through piracy or unfair competition practices, counterfeit copies emerge mimicking or borrowing elements from the original designs.
It causes popular brands significant financial damage as well as damage to reputation due to lower quality of production or misuse of the brand name. In Brazil, annual losses for the industry exceed R$ 1.8 billion due to copied designs (Frenzl, 2016). The primary risk is that, unlike in the U.S., U.K., or EU where such practices do exist at lower volumes, it is significantly more difficult to pursue legal action for intellectual property theft or copyright than to gain any compensation from these counterfeit retailers.
Fashion law is only being developed in Brazil and the country’s legal code does not explicitly provide protection for fashion artifacts. There are laws No. 9,610 of 1998, which regulates copyright, and No. 9,279 of 1996, which regulates industrial property rights and obligations. These can be used but there is no consensus in Brazil as to which laws and institutions can protect fashion designs. Brazil is one of the few countries which fosters vertical integration in the industry, having the entire textile supply chain ranging from manufacturing all types of fibers to producing clothing via all known methods, and eventually reaching consumers via retail or e-commerce. However, the thriving industry also grows based on informalities and unethical practices which violate intellectual property (Favaretto, 2020).
JD Sports Fashion which holds its value based on the unique sports fashion design of apparel, as well as the technology of either producing the clothing or retailing it, should significantly consider the risks of intellectual property protection. The issue can be potentially mitigated by proactive patents and the involvement of legal teams in ensuring that intellectual property such as original designs and technology are kept confidential to the best extent possible.
Risk #2: Cultural Differences
Brazil is a highly diverse country with a rich history. The socio-cultural perspective is heavily influenced by the country’s history, religion (Catholicism), and values (family and personal relationships). Many of these elements permeate the business world and influence business partnerships and operations. One of the primary aspects is a personal touch, including business negotiations with local partners or vendors, as well as in the way businesses approach consumers.
Even at the highest levels of business, communication in Portuguese is expected. In order to succeed, foreign brands must demonstrate long-term commitment and build fundamentally strong local relationships. The country is diverse and fragmented into widely differing cultural and consumer groups. This presents an opportunity as well as risk, as positioning for the business has to differ based on different regions. The critical aspect for companies to understand is that demand for Western brands is not enough in itself, a local touch or flavor is always required (Reitermann, 2018).
Despite global popularity or success in Western markets, many companies can easily fail in these rapidly developing economies, solely because they fail to understand the cultural differences. The gaps can be evident ranging from marketing gaffs to labeling and packaging of products, to working with local partners in a way that is respectful to them. It is a whole field of management regarding how to manage global workplaces and operations in a culturally competent approach. Those companies that seek to adopt or push the Western way of doing business with local partners, employees, or consumers will meet unexpected barriers (Rahman, 2014). There are often misconceptions because Brazil is a developing country and has a large portion of the population living in poverty. While that may be true, urban centers in Brazil are developed and can be highly sophisticated.
The country is also very digitized, and technology plays a forward role in its transitioning to a modern economy. Brazilians also strongly value locally produced or local collaboration products, connecting culturally to the experience. Foreign brands that have seen success in Brazil are those with a well-developed plan and thought-out approach, not attempting to enter the market on hype alone, but having a relevant useful product in a specific niche or category (Townsend, 2014).
Brazil’s culture and fashion system operate under a system that seeks to express the differences between the ‘Old World’ Europe and the ‘New World’ Americas. Brazilian fashion highlights the differences between tradition and modernity. The industry in Brazil is founded upon young brands that are risqué and experiment culturally with clothing and apparel. Brazilian fashion is not based on the couture tradition but derives inspiration from local culture and tradition, with a particular influence from street fashion as “street style” clothing is favored (Paulicelli & Clark, 2009). These industry-specific differences should be considered by the JD Group as well, which orients much of its collection towards the preferred styles of Europe and the UK. Fashion has always been tied to culture to some extent, and despite the Westernization of culture around the world, as mentioned earlier, Brazilians prefer local influences for brands to succeed in sales.
Risk Identification and Assessment
The internal control mechanisms currently practiced by the Group are comprehensive. While they should remain in place, it can be argued that they will not be able to effectively identify and address the risks discussed above. The current standards are heavily financially based, and focused on quantitative evaluation. The risks identified below are more qualitative-oriented, with general business and financial impacts seen in the long-term of operations.
First, it is recommended that a separate dedicated risk assessment be added for intellectual property protection, as this is a relevant concept in all of the Group’s global operations and the exceeding use of technology in design, retail experience, and supply chain efficiency. It would evaluate the budget and effectiveness of intellectual property protection efforts for the company and its impacts in the long term. As for cultural risks, and the issue of monitoring the Brazil venture, it may be relevant to create geographic region-specific tasks groups that would oversee operations. As the JD Group expands around the world, it is no longer as effective to view all operations under one lens. A geographic-targeted assessment based on regions could provide insight into the performance indicators of any new ventures.
Conclusion
Overall, this report has determined that JD Sports is a healthy and thriving sports-fashion retail company. From a corporate governance perspective, it meets all the criteria set out by the UK Code of Governance and goes beyond by meeting expectations of sustainability and ethics in its operations. While recommendations were provided, these were small and incremental for simple further improvements to corporate governance and general management of the company. A hypothetical scenario was then explored, creating a risk evaluation and management plan for JD Sports’ expansion to Brazil through the opening of retail stores in the region.
It was identified that even though Brazil is a highly prospective location, it remains a challenging business environment to navigate due to the socio-economic structures and the nature of doing business in the country. Western brands have not seen expected success in Brazil because of local customs and interpretations. The report provided a wide risk registry but focused on two primary risks that could be highly potent for JD Sports which are intellectual property protection and cultural differences. JD Sports can see success entering this market, but it will require long-term planning and specific development of product and strategy.
As could be seen in this report, the various elements of corporate governance evaluated in Section A, hold viable real-world applications in Section B. The paper specifically discussed the effectiveness of risk assessment and internal control mechanisms. Numerous other elements are involved that directly fall under Board responsibility when undertaking such fundamentally large strategic business endeavors for the company.
Corporate governance consists of the voice of multiple stakeholders are various levels of the company which contribute to the success of operations and planning. The effectiveness of corporate governance directly reflects on the internal health of the company, and in turn, its economic performance and strategic decision-making. Corporate governance sets a system of rules and practices which establish the foundation and values in which a company operates. Good corporate governance is necessary for business success, but at the same time, it is not sufficient. Enterprise governance consists of two dimensions, conformity (to rules, structures, and roles) and performance. Companies must consistently find ways to balance the two concepts for optimal success.
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