Importance of Corporate Governance - Australia - Coursework Example

Running Head: Corporate Governance Corporate Governance Customer’s Name: Customer’s Course: Tutor’s Name: 19th April, 2014. CORPORATE GOVERNANCE The term corporate governance refers to the concept under which a corporation is run. The term generally refers to the day to day running and practice of a company as regards to a set of principles or guidelines and provisions that govern its activities (ASX Corporate Governance Council, 2014). The guidelines ensure that a company fulfils its set objectives in a manner that adds value of the organization and also benefits all the stakeholders involved. In a nutshell, corporate governs refers to the framework of a corporations system of activities as to the command of its objective while meanwhile observing the rights of each stakeholder at an equitable but sufficient level (Tomasic et al, 2002). The corporate governance concept is simplified to several principles which cover on duties and rights of company stakeholders which include the shareholders, directors, employees and the government among customers and suppliers (ASIC 2014). The key principles include observation of the shareholders rights, integrity, accountability, disclosure and transparency and compliance to the state laws in which the subject corporation is based (ASX Corporate Governance Council, 2014). Importance Corporate governance plays a very important role in the existence and running of a corporation. It plays as a fair ground of operations between different stakeholders each on the basis of the contacts. As a matter of fact, the importance of the whole concept can be summarised on the grounds of Agency theory which refers to the different conflicts brought about by the incidence of a stakeholder being an agent of another (ASX Corporate Governance Council, 2014). This is importantly depicted and goes hand in hand with the principles of the corporate governance concept. The agency theory reflects on the various conflicts brought about by one stakeholder been an agent of another. Majorly, it can be clearly observed that directors are just but mere agents of the shareholders. Therefore, the directors are obliged by the principle of corporate governance to act in the best interest of the shareholders which simply lies on maximising their wealth. For example, directors often tend to act in their own interest towards short-term profits to depict a good image while the shareholders are interested in long-term profits. The corporate governance concept therefore guides on fiduciary and general duties of the directors which are guided towards shareholders’ interests. The principles of accountability, disclosure and transparency points out an importance of the concept directly as regards to the conflicts in the agency between the directors and the financiers, the suppliers, potential investors and the government (ASX Corporate Governance Council, 2014). Major conflicts are bound to arise if director lack to transparent as regards to the financiers especially as regards their account records in respect to the balance sheets and income statements which may lead to a wrong decision which would not have been the case if complete disclosures were made. This happens to be the same case to the relations with the suppliers, investors and the government as regards to equality and compliance. Key laws governing Corporate Governance in Australia Due to the demanding need for corporate governance as brought about by factors on accountability, transparency and disclosure, the Australian constitution has incorporated various key laws that govern and enhance corporate governance. In the corporations Act 2001 section 5H, corporate governance has been observed in the context of a company registration where the details of the shareholders and the directors are required as well as the liability whether unlimited or is as regards to their shares and more so the voting rights attached on them while section 120 of the Act is on members, directors and company secretary of a company as regards who the law acknowledges as one (Tomasic et al, 2002). In the same Act, section 12 relates to associates and consequently the extents, restrictions and powers attached to the shares acquired in a subject corporation (Tomasic et al, 2002). It extends on issues of take-over bids alongside mergers and acquisitions and the kind of securities involved. The law mainly focuses on the voting powers to which running of affairs of a subject corporation is based on. Section 179 on matters relating to duties of directors, other officers and employees is also a key law on governing corporate governance alongside part 2D.3 of the Act on appointment, remuneration and cessation of appointment of directors. Governance of corporate governance by the law has been covered under various sections in the corporations Act 2001 and evident in most aspects of the Act as from the formation, registration, appointments, mergers and associates, reporting, meetings and documents of a company to its dissolution (Tomasic et al, 2002). Corporate Governance and the Law Corporate governance has been ultimately linked to the law particularly to the corporations act. The major fact observed is the relationship between a corporation and the government. Consequently, the government through the corporation act has a control over corporations and their governance. A corporation is considered a different legal entity separate to that of the owners. On the contrary, the government has gone ahead to lift the veil of incorporation so as monitor corporations operations (Tomasic et al, 2002). This is especially so to govern issues of monopoly an as well issues regarding the rights of shareholders, directors and other stakeholders as per their duties. The law is also keen to observe issues as regards conflict of interest especially between company stakeholders and mostly that between the directors and the shareholders of a company. Consequently, the law has been direct on the appointment of directors and the rights of the minority. This is directly followed by duties of the directors as fiduciary duties and the general duties so as to act in the best interest of the company (Tomasic et al, 2002). On the other hand, the rights of the directors have been pointed out by the law especially on the basis of their removal from office with a majority in an ordinary resolution (Tomasic et al, 2002). Take overs, mergers and acquisition issues are another platform where corporate governance is observed by the law. In this case, issues as regards lifting the veil of incorporation can be viewed. The veil of incorporation refers to that distinct legal personality that a company gains after incorporation such that it can sue or be sued, own property and enter into contracts in its name. In events of take overs and acquisitions, the government lifts the veil to find out the individual shareholders involved on basis of anti-monopoly monitoring among other issues (Tomasic et al, 2002). Key bodies that enforce corporate governance Apart from the corporations Act 2001 in the Australian constitution, there are several bodies in addition that enforce corporate governance. The major one of them being the Australian Securities Exchange (ASX) whose primary objective was to facilitate exchange of securities but now certainly has an oversight council over corporate governance referred to as the ASX Corporate governance council (ASX Corporate Governance Council, 2014). The oversight council governs corporate governance via its principle of management oversight, ethical conduct, integrity, disclosure and fairness to all stakeholders and more so to observe shareholders’ rights. The Australian Securities and Investments Commission is another key body enforcing corporate governance formed as a regulator of security and financial market (Australian Securities and Investments Commission Act, 2001). It therefore observes fairness, transparency and disclosure in the field. The body formed under its acts mainly performs its duties as under the corporations Act 2001 the law under which corporate governance concept is based upon. There are several other bodies that govern corporate governors in Australia. Australian institute of company directors, Australian shareholders’ association, Institute of chartered Accountants Australia among others are also in the quorum of bodies that govern corporate governance while most happens to be members of the key bodies such as ASX (ASX Corporate Governance Council, 2014). BENEFITS OF GOOD CORPORATE GOVERNANCE Article: financial planning, investment and self-managed super fund article: corporate governance. By John Robertson 2009 http://www.atcbiz.com.au/financial_planning_investment_smsf_articles.php?new=bbz7cx212n&num=&np=YES According to Robertson 2009, corporate governance is directly related to the performance of a company which can be viewed mainly in a finance perspective. Good corporate finance is linked to good returns while the opposite is also true. Returns are directly related to risks that high risks leads to high returns. However, there are some unnecessary risks that do not directly relate to returns and instead harm returns levels. In this case, good corporate governance is linked to reduce such risks earning the same level of returns at lower risks levels. Investors are interested in securities with low risks but with high returns. Consequently, reducing risks through good corporate governance leads to investors’ interest consequently leading to increased value of the firm (Robertson, 2009). According to Robertson 2009, Investors should consequently pay more for companies with good governance structures in place. This case also applies to events of mergers, acquisitions and take overs. The value in exchange of the securities involved should be at a considerable level proportion to the structure of corporate governance of the associate as this would refer to the expected level of returns (Robertson, 2009). In a nutshell, good corporate governance is a composite of a company’s goodwill. Article: Good Governance: Boosting profits and reducing volatility through better governance by Australian institute for corporate responsibility (AICR) http://www.ourcommunity.com.au/business/view_article.jsp?articleId=3577 Return on assets has been used to gauge a corporation’s performance (AICR, 2014). According to Australian Institute for corporate responsibility (AICR) 2008, good corporate governance will yield high returns on assets and therefore high performance. This is evidenced by a research study done on several Australian organizations on the past financial performance which is linked to their returns on assets. The article by AICR, 2008 goes further to indicate how the volatility of returns per share can be reduced through good corporate governance. In portfolio theory, portfolios are classified according to the level of their risk but the theory goes ahead to point out the risks associated with the portfolio managers. This is the same case observed in hedge funds. It is therefore evident that corporate governance has a hidden financial value that replicates to the returns. Generally, through the principles of corporate governance under transparency, accountability, disclosure, ethical conduct and compliance to the law, good corporate governance leads to increased goodwill and returns which in turn leads to increasing value of the firm (AICR, 2008). CONSEQUENCES OF BAD CORPORATE GOVERNANCE Article: Sonray director jailed following $46 million collapse Thursday 17 April 2014 http://www.asic.gov.au/asic/asic.nsf/byHeadline/14-085MR%20Sonray%20director%20jailed%20following%2046%20million%20dollar%20collapse?opendocument According to ASIC 2014, bad corporate governance could lead to fatal performance of a company and the worst would be the actual collapsing of the subject company. Directors among other officers have the obligation to perform their duties in the best interest of the shareholders (ASIC, 2014). Often, an agency problem arises between the directors who in this case are the agents and the shareholders as the principles. It is under the fiduciary and general duties of the directors to take care in their decisions as regards the company’s activities and is held responsible if negative events occur due to negligence. In the fiduciary duties of the directors, it is expected that they should disclose all information as well as their own interests in the company to the shareholders. Failure of such formality would lead to legal litigation as observed in the ASIC 2014 bad governance article. According to ASIC 2014, acting in the best interest of company and observing the shareholder rights stands as a crucial concept under directors duties. It is evident that this would actually lead to criminal legal litigation. Article: Wealth Within Ltd pays $20,400 in penalties over misleading advertising by http://www.asic.gov.au/asic/asic.nsf/byHeadline/14-075MR%20Wealth%20Within%20Ltd%20pays%20%2420%2C400%20in%20penalties%20over%20misleading%20advertising?opendocument on Friday 11 April 2014 The agency theory is a major concept when discussing corporate governance. This is evident through the principles of corporate governance which seek to observe fairness and observation of each stakeholder rights. For example, accountability, ethical conduct, transparency and disclosure principles seek to prevent probable conflicts between the shareholders. In ASIC 2014, directors are held responsible and the company is charged a fine over misleading advertising. In this case, the agency conflict exists where the probable investors and members of the public are the principles while the directors are the agents. It is required by corporate governance principles that transparency and disclosure should be observed as regards the company’s information. Under the corporations Act 2001 of the Australian constitution under public documents, it is clear that directors and any other officers responsible in including misleading information in public documents will be held criminally liable for any damages sustained by members of the public. Criminal legal liability and damaged goodwill are therefore evident to be consequences of bad corporate governance as in ASIC, 2014. Misleading information would lead investors making decisions that would have otherwise not been taken if there were complete transparency and disclosure (ASIC, 2014). Website for Western corporation with a corporate governance system in place Western Australia Sports Federation (WASF) 2011 http://www.wasportsfed.asn.au/about-wasf/governance/ Western Australia Sports federation is a sports and recreational based organized located in Western Australia incorporated on the advocacy and activism of sports and recreation (WASF, 2011). The company operates on core principles of integrity, collaboration, leadership and respect among other ethics. Consequently, the organization has put in place corporate govern as evidenced in its website and considers the system essential towards success of every institution and is devoted to corporate governance maintenance and advancement. As an overall oversight of corporate governance, Western Australia sports federation (WASF) has an internal constitution as rules to govern its acts (WASF, 2011). Element of corporate governance can be viewed in every aspect of the constitution as from the beginning where it starts by the name introduction exhibiting the organization as a separate legal entity by incorporation and by a registered name. The constitution goes ahead on definitions as a matter of integrity and transparency. The objects clause follows as the next matter in the constitution thereby informing every stakeholder where the powers of the organization are limited to giving a criterion for judgments whether acts of directors are in accordance to the objects or not (WASF, 2011). Powers and membership follows suit as the next article in the WASF’s constitution. This expands on the extent of operations and the rights as well as obligation of each member. The constitution is clear on who is considered as a member and further expounds on the grounds under which membership can be terminated. As an adherence to corporate governance, the organization’s constitution has gone ahead to outlay channels and procedures of dispute solving (WASF, 2011). In addition, the constitution contains a clause on the federation’s funds which goes along with corporate governance principle of transparency and accountability. The hierarchy of governs is then displayed and powers of each officer outlined therefore one can scrutinize an act to find out whether the subject officer was acting with the powers as expressly or impliedly laid by the constitution. Meetings and elections procedures and rules are then discussed after which appoints of other officers such as auditors are discussed. Documents and special seal are thereby discussed along with rights of alteration and issuance and finally parameters of dissolutions are demonstrated (WASF, 2011). Apart from the constitution, the organization has established a board governance charter that enforces and maintains good corporate governance in the organization. In additions, the organization has a set of five key principles on corporate governance (WASF, 2011). The principles are proper outlining of roles, meetings, governance controls, enhancement of governance and members devotion to good corporate governance. A risk management framework is another key tool in the enforcement of corporate governance principles designed with a plan on risk management endorsement. Significant efforts to enforce good corporate governance can be seen in the organization through its various tools and resources summarized through the constitution, board governance charter, governance principles and the risk management framework (WASF, 2011). FUTURE CORPORATE GOVERNANCE TRENDS http://www.governanceinstitute.com.au/news-media/media-releases/2014/02/clear,-consistent-soc-governance-frameworks-will-enhance-taxpayer-returns/ Article: Clear, consistent SOC governance frameworks will enhance taxpayer returns Friday, 28 February 2014 The need of accountability, transparency, disclosure, respect of rights and ethical conduct has been observed in need by every entity. The concept of corporate governance can be said to compliment in a major way the agency theory. The principles of corporate governance move keenly towards preventing and solving disputes or conflicts between an agent and his principle (Governance Institute, 2014). Notably, it has been observed that tax payers’ fund has often been subjected to claims of misuse and embezzlement. Consequently, it has been observed that there exists an agent-principle relation between the state and the tax payers and therefore the need for a corporate governance scrutiny (Governance Institute, 2014). Tax payers’ funds should be used in the best interest of the tax payers and transparency, disclosure and accountability should be the main ethics observed I state owned corporations (Governance Institute, 2014). It is evident that the virtue of corporate of good corporate governance could be in future instilled in State owned corporations and running. REFERENCES ASX Corporate Governance Council, 2014. Corporate governance principles and recommendations, 3rd Edition retrieved from http://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf on 17 April, 2014. Australian Securities and investments commission, 2014 retrieved from www.asic.gov.au on 17th April 2014. Clear, consistent SOC governance frameworks will enhance taxpayer returns. Friday, 28 February 2014, retrieved from http://www.governanceinstitute.com.au/news-media/media-releases/2014/02/clear,-consistent-soc-governance-frameworks-will-enhance-taxpayer-returns/ on April 18, 2014. Financial planning, investment and self-managed super fund article: corporate governance. By John Robertson, 2009 retrieved from http://www.atcbiz.com.au/financial_planning_investment_smsf_articles.php?new=bbz7cx212n&num=&np=YES on 17 April, 2014. Good Governance: Boosting profits and reducing volatility through better governance by Australian institute for corporate responsibility (AICR, 2008) retrieved from http://www.ourcommunity.com.au/business/view_article.jsp?articleId=3577 on 18 April, 2014. Sonray director jailed following $46 million collapse, ASIC, 2014 retrieved on 17 April, 2014 from http://www.asic.gov.au/asic/asic.nsf/byHeadline/14-085MR%20Sonray%20director%20jailed%20following%2046%20million%20dollar%20collapse?opendocument Tomasic R, Bottomley S and McQueen R, 2002. Corporations Law in Australia. Federation Press, Annandale NSW Wealth Within Ltd pays $20,400 in penalties over misleading advertising, ASIC 2014 retrieved from http://www.asic.gov.au/asic/asic.nsf/byHeadline/14-075MR%20Wealth%20Within%20Ltd%20pays%20%2420%2C400%20in%20penalties%20over%20misleading%20advertising?opendocument on 11 April, 2014. Western Australia Sports Federation (WASF) 2011, retrieved from http://www.wasportsfed.asn.au/about-wasf/governance/ on April 18, 2014. Read More