Corporate Governance: Australian Securities And Investment Commission Essay

Question:

Discuss about the case study Corporate Governance for Australian Securities and Investment Commission.

Answer:

Introduction:

In the context of Australia, Public companies are commonly enlisted to the “Australian Stock Exchange (ASX)”. As mentioned by Gibson and Brown (2012), these enlisted companies are the subject of broad and strict directives and they are subjected under the regulations of Australian Securities and Investment Commission (ASIC). However, in most of the recent cases it has been found that the CEOs or other managerial authorities are not satisfying the legal or ethical cravings of the organization. Here, the cases of Enron, HIH, One.Tel Ltd and many other companies can be discussed. In most of the cases, the CEOs have found guilty of ethical behaviour and lack of control of the Board of directors over them has led the companies to corporate failures. In the cases like Harris Scarfe Ltd. it has been found that the CEO was incapable and indecisive to work in favor of the company. On the other hand, in case of Parmalat, fraudulent account handling has criminalized the management. In such a context, these public listed companies need to focus on the corporate governance and compliance to the ASIC norms.

Purpose:

From the above discussion, it can be said that the corporations need to focus on creating a better ethical and responsible environment within the company. Hence, it is needed for them to delineate the authorities between the BOD and the CEO. Moreover, to uphold good corporate governance the corporations need to take some strategic steps.

Discussion:

As discussed by Tricker (2015), a board of directors can be identified as body of nominated or selected members who in cooperation supervise or administer the activities of an organization or a profit making company. On the other hand, a CEO can be identified as the chairperson of the board. As discussed by McCahery et al. (2016), CEO is the highest executive liable for the maneuver and administration of a company.

The prescribed role and responsibilities of the Board of directors:

Foundation of the vision, mission and values of the company:

As discussed by Erkens et al. (2016), the members of the board of directors should determine the company’s vision and mission. As they are the supervisors of the management and operation of the company, they need to set the path for the members of the organization. As opined by Solomon (2014), the board of directors needs to have a better control over the corporate entities in the context of corporate failures. Hence, it is needed for the directors to determine and ingrain the values of the company among the members. The corporations are accountable to the stakeholders, hence, it is the responsibility of the board of directors to review the company goals and determine the company policies (Dean et al. 2014). According to the Legitimacy theory, the companies need to ensure that they are operating within the standards of existing society (Rezaee and Kedia 2012). Hence, the directors need to focus on laying down the values and vision of the company according to the societal norms.

It is important to include non-executive directors to the board. As he/she is not liable to the management, he/she can be more independent regarding their decision and choices. The number of them must be significant. It will make the board more independent from the management.

Recruit, supervise, retain, and evaluate:

As opined by Christensen et al. (2015), “Recruiting, supervising, retaining, evaluating and compensating the CEO or general manager are probably the most important functions of the board of directors”. Within the framework of corporate governance, it is important to hire the right persons for the posts like CEO, CFO, President and many more. As discussed by Solomon (2014), in most of the cases, corporate failure has usually been attributed to behavioral factors such as exuberance, greediness and hubris in economic boom and consequences in taking of excessive risk by companies. Hence, it is important for the Board of Directors to identify the right persons and recruit them.

Setting of strategy and structure of the company:

As discussed by Hamilton and Micklethwait (2016), it is important for the directors to evaluate the opportunities and threats to the business operation and outline the pragmatic strategies. The directors need to prevent insolvent trading. They need to be informed of the financial status of the company. They have a statutory power to restrict insolvent trading and they are personally liable to the debts during insolvency. According to the Australian Accounting Standards (AASB), the directors are also liable to prepare the financial reports (Gibson and Brown 2012).

Delegate to management:

The board needs to allocate the roles; monitor, and evaluate the implementation of the strategies. They need to exercise effective internal control. In performing this task, the board needs to communicate with the senior management.

Accountability to the shareholders:

The board needs to ensure a proper communication and information channel back and forth with the shareholders. They need to take account of the interest of the shareholders. The board must maintain a good will with the shareholders (Anderson 2014).

Other roles:

The board needs to align, compensate and monitor the key executives and the board members in with the company shareholders. They need to ensure transparent and formal board nomination and election procedure. The board needs to look after the disclosure and communication procedure (Dean et al. 2014).

In this context, the distinct roles of each member can be identified as following:

The independent directors:

They will be consulted for the issues placed before the board mainly the financial issues of the corporation.

The CEO:

He will be accountable for the management issues.

The CFO:

He will be in charge of the financial management.

An executive director:

He will be in charge of the risk management committee. Other members will also be there in the board.

A non-executive director:

He will be in charge of the audit committee. Other members should be non executive too.

An executive director:

He will be the charge of the appointment committee. The CEO also can be a part of the committee.

On the other hand, the responsibilities of a CEO can be designated as bellow:

Financial, Tax, Risk and Facilities Management:

To be particular, a CEO needs to lay down the budget of the company for the board’s approval. He needs to manage financial issues in accordance to the company laws and governmental regulations.

Community Relations and HRM:

It is one of the major duties of the CEO to present the company mission and vision in a positive manner to the society. He must be a personality who is capable enough to deliver his jobs and make his employees deliver their tasks. As mentioned by Solomon (2014), the CEO needs to promote the corporate culture that upholds ethical observance, support individual uprightness, and fulfils societal and ecological responsibility.

Board Administration and Support:

It is also important for the CEOs to maintain operations and management of the Board by providing recommendations and informing the members the organizational data and facts. He is also responsible for implementing the strategies developed by the board. He needs to prepare and administer the realization of key corporate policies (McCahery et al. 2012).

The service:

The CEO needs to investigate the design, promotion, delivery and quality products and services of the company. The CEO needs to ensure that the concerned managers are rightly administering the routine business dealings of the company and risk management can be performed when needed (Christensen et al. 2015).

A number of cases can be cited as examples of corporate failures due to the lack of valuing good corporate governance in the investment decision-making models of the companies.

Research and findings:

If a review on the case of the American energy production company Enron can be done, the importance of good governance can be noticed vividly. The collapse of the company was a result violation of number corporate principles.

As mentioned by Soltani (2014), “the existence of off-balance sheet liabilities hidden in Special Purpose Entities (SPE) was used to move financing off-balance sheet and avoid consolidation of the SPE”. Moreover, Enron boosted its reported income from allegedly ‘laissez-faire’ transactions. The SPE also allowed the company to increase its reported cash flow. On the other hand, the key personalities of the company found guilty of ethical degradation. As mentioned by Smith (2015), the Chairman Ken Lay, CEO Jeffrey Skilling and CFO Andrew Fastow were found guilty of fraud. The CEO ware found following the senior executives blindly and avoided any review of the company proceedings. In addition, the company was following poor internal controls that led to accounting malpractices. The auditor Arthur Andersen was also ineffective and criminal and fraudulent proceedings led to the company’s collapse (Lessambo 2014).

On the other hand, in the case of One.Tel Ltd. in Australia, an excessive risk taking, poor costing, credit administration, and dominant management led the company to corporate failure (Anderson 2014). Whereas, in the case of Harris Scarfe Ltd. the issue was with the bad administration and fraudulent account handling and exposure irregularities for more than six years (Smith 2015). In addition, in the case of HIH, the company was led to failure due to deception by directly manipulating the accounting records, failed management, and ignorance of the shareholders rights. As discussed by Hamilton and Micklethwait (2016), the same thing happened in the case of Parmalat in 2003. The company tasted failure due to absence of power and autonomy of the non-executive directors, over dominating management, poor accounting and lack of internal control. As mentioned by Anderson (2014), the company was also a victim of “insider trading and undisclosed related party transactions of senior corporate officers”.

However, if a review on the success stories can be done, it can be noticed that following a good corporate governance practice has helped the companies to obtain a better investment return as well as public acceptance. In the case of “the Coca-Cola Company”, strengthening the board and management accountability, establishing “Corporate Governance Guidelines”, regular reviews of the corporate culture, establishing charters for all the board committees helped the company to develop good corporate governance (McCahery et al. 23016). Establishment of “Codes of Business Conduct”, disseminating the information regarding the method of reporting apprehensions about the organization and its public policy, helped the company to attain a huge rage of investor return, public trust and company eminence.

However, from the above stated discussion it can be said that the companies need to follow some strategies to uplift their good corporate governance practices and increase their rate of investor return.

Recommendations:

The companies need to build a strong and competent BOD:

As opined by Solomon (2014), it is important for the companies to uphold a strategy of electing the board members by the shareowners. Thus, it will ensure the maintenance of the interest of the shareholders and the long-term health and overall success of the business and its financial strength. The board should be comprised of the members, who are competent, decisive and possess strong ethics and integrity, diverse backgrounds and skill sets. As discussed by Rezaee and Kedia (2012), the majority of the directors must be independent. It will ensure unbiased judgment.

Moreover, it is also important to educate the directors and make them familiar with the business, respective roles and the boards’ expectations. A regular review of the board mandates and assessment of the directors’ performance is also needed. As opined by Balkaran (2013), the corporations must “develop an engaged Board where directors ask questions and challenge management and don't just "rubber-stamp" management's recommendations”.

Distinct roles of the management and executives:

Clearly written mandates for each executive and typical committee (audit, compensation and others) need to be maintained. As described by Kandukuri et al. (2015), “role descriptions for the board members, the CEO and executives” should be preserved.

Integrity and ethical dealing:

It can be identified as one of the major principles of good corporate governance. As opined by Denis (2016), the corporations need to implement a “conflict of interest policy” and a “code of business conduct”. A structured procedure to report and treat disobedience, and a “Whistleblower policy” should also be maintained. Moreover, the management needs to ensure that the directors would abstain from voting over the issues in which they have an interest.

Evaluation:

The board has to ensure that the fees will attract the suitable candidates but it will not limit the director's autonomy or fulfillment of his job roles. Establishing a performance target for the executives including the CEO and evaluating it and tie compensation to performance is also needed.

Risk management:

The corporations must look into the issues of risks potential to be faced. These can be financial, reputational, industry-related, operational, environmental or legal. As discussed by Tricker (2015), “lack of independence” leads to “risk taking behavior”. The board need to establish strategic leadership for the organization’s risk tolerance. A clear framework for managing risks needed to be found and evaluated regularly. Moreover, as opined by Solomon (2014), the BOD “should challenge management's assumptions and the adequacy of the company's risk management processes and procedures”.

Conclusion:

Hence, it can be concluded that to ensure a better performance, the corporations need to focus on their management and operation pattern. The shareholders can be identified as the foundations of a public listed corporation. Hence, as discussed by various theories, it is important to follow a good corporate governance to earn their trust and uphold their interest. In the recent decades, a number of companies have faced disastrous corporate failures by disregarding the principles of corporate governance. Hence, the public listed corporations must concentrate to this and take the appropriate actions.

References:

Anderson, H., 2014. Pressing the right buttons: Australian case studies in the protection of employee entitlements against corporate insolvency.International Labour Review, 153(1), pp.117-142.

Balkaran, L., 2013. Auditing the Corporate Governance Effort in an Organization. EDPACS, 48(4), pp.12-18.

Christensen, J., Kent, P., Routledge, J. and Stewart, J., 2015. Do corporate governance recommendations improve the performance and accountability of small listed companies?. Accounting & Finance, 55(1), pp.133-164.

Dean, G., Clarke, F. and Egan, M., 2014. Corporate capers, accounting and governance reform. Governance Directions, 66(9), p.541.

Denis, D.K., 2016. Corporate Governance and the Goal of the Firm: In Defense of Shareholder Wealth Maximization. Forthcoming in the Financial Review.

Erkens, D.H., Hung, M. and Matos, P., 2012. Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide.Journal of Corporate Finance, 18(2), pp.389-411.

Gibson, B. and Brown, D., 2012. ASIC'S expectations of directors. UNSWLJ,35, p.254.

Hamilton, S. and Micklethwait, A., 2016. Greed and corporate failure: The lessons from recent disasters. Springer.

Kandukuri, R.L., Memdani, L. and Babu, P.R., 2015. Effect of Corporate Governance on Firm Performance–A Study of Selected Indian Listed Companies. Overlaps of Private Sector with Public Sector around the Globe (Research in Finance, Volume 31) Emerald Group Publishing Limited, 31, pp.47-64.

Lessambo, F.I., 2014. Corporate Governance, Accounting and Auditing Scandals. In The International Corporate Governance System (pp. 244-263). Palgrave Macmillan UK.

McCahery, J.A., Sautner, Z. and Starks, L.T., 2016. Behind the scenes: The corporate governance preferences of institutional investors. The Journal of Finance.

Rezaee, Z. and Kedia, B.L., 2012. Role of corporate governance participants in preventing and detecting financial statement fraud. Journal of Forensic & Investigative Accounting, 4(2), pp.176-205.

Smith, H., 2015. Australia's Company Law Watchdog: ASIC and Corporate Regulation.

Solomon, J., 2014. Corporate Governance and Accountability. 4th Edition, Wiley, USA.

Soltani, B., 2014. The anatomy of corporate fraud: A comparative analysis of high profile American and European corporate scandals. Journal of Business Ethics, 120(2), pp.251-274.

Tricker, B., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.

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