Corporate Governance - One-Tel Company Australia - Case Study Example

Corporate Governance (One-Tel Company Australia) Name Institution Name Date Executive Summary Good corporate practices within any company are mainly governed by the company’s corporate governance framework. In order to have a good corporate governance framework, there are various corporate governance standards and guidelines that must be followed during its development. The six corporate governance principles as defined by OECD which a company must consider when developing its corporate governance framework (OECD, 2004). This paper discusses corporate governance standards and guidelines; and also the paper reviews the corporate governance practices of One Tel Company prior to its collapse in 2001. Table of Contents Executive Summary 2 Table of Contents 3 Introduction 4 Standards of Corporate Governance and their Importance 4 Review of One-Tel Corporate Governance 7 Financial Reporting Quality 7 Board Composition and Activity 9 Compensation 10 Recommendations 10 Conclusion 10 References 11 Introduction Corporate Governance is defined as the manner and ways in which finance suppliers to the corporation ensure that they get returns on their investment. Corporate Governance is a collection of relationships between the board of directors, the management, , and stakeholders of the company; it provides structures within which the corporate objectives of the company are attained, monitored and performance determined. In order for corporate governance to be sound and effective, it should be practiced in an environment where authority is exercised with probity. For instance, it is extremely paramount for the company directors, non-executive and executive members to ask questions as well as the board’s chair to guarantee proper information flow within the company up to the directors of the board. This paper discusses importance of corporate governance, and using One Tel’s corporate governance during its collapse, the company’s corporate governance is reviewed. Recommendations based on the review will also be provided. Standards of Corporate Governance and their Importance According to OECD there are six universally accepted principles or standards of corporate governance which are regarded as the basis for corporate governance initiatives globally. The following are the corporate governance standards and guidelines together with their relevance in reviewing company’s practices: Ensuring the basis for an effective corporate governance framework (OECD, 2004): according to this principle, any business organization is required to have a framework of corporate governance that upholds market efficiency and transparency , be in line with the the rule of law by articulating clearly the division of responsibilities between different supervisory, regulatory and enforcement authorities (OECD, 2004). In essence, the framework of corporate governance must be created based on how it will affect the performance of the entire economy, the incentive it will create for participants in the market together with market integrity as well as promotion of efficient and transparent markets (OECD, 2004) The rights of shareholders and key ownership functions (OECD, 2004): this principle dictates that the framework of corporate governance must have the capacity to protect and facilitates exercising the rights of shareholders (Watts 2001). For instance, some of the fundamental rights of shareholders include; secure ownership registration methods, share transfer, right to obtaining material and relevant information with regard to the company on a timely and regular basis, participates as well as voting in the general meetings of shareholders, right to remove and elect members of the board , and sharing company’s profits (OECD, 2004). The equitable transparent of shareholders (OECD, 2004): it is imperative for the framework of corporate governance to make sure that shareholders are treated equally regardless of being foreign or minority shareholders (OECD, 2004). In this regard, shareholders as a whole should be give chance to obtain effective effective redress for violation of their rights (OECD, 2004). For instance, those who belong to a similar series of a class should be equally treated (Brown & Caylor 2009). Accordingly, inside trading together with self-dealing that is abusive must be avoided and abolished from the company. The members of board together with key executives are required to disclose to the board whether they indirectly or directly or on behalf of third parties have anything of interest in any given transaction and/or a matter that has direct impact on the corporation The role of stakeholders in Corporate Governance (OECD, 2004): it is vitally important for the framework of company’s corporate governance to understand and recognized the rights of stakeholders as dictated by law while at the same time necessitating cooperation that is active among stakeholders and corporations particularly in job creation and wealth, as well as encouraging a sustainable and financially sound corporation (Gup 2007). For instance, in the event where interests of stakeholders are legally protected, they will have the chance of obtaining effective redress for their rights’ violation (OECD, 2004). Furthermore, methods that enhance performance for participation of employee must be allowed to be nurtured. Disclosure and Transparency: corporate governance for a given business corporation is mandated to ensure accurate and timely disclosure is made with regard to all matters pertaining the corporation comprising of the company’s financial performance, situation, ownership together with its governance (Farrar 2001). The disclosure should include things such as company objectives, the operating and financial results of the corporation, and ownership of major share and rights to voting (Tregidga & Milne 2006). The information must be prepared and disclosed based on non-financial and financial standards of disclosure, and high quality accounting. Accordingly, auditors must be accountable to shareholders and they also owe a duty to the corporation to exercise due professional care particularly during the auditing process. The responsibility of the board (OECD, 2004): the framework of company’s corporate governance should be one that ensures company’s strategic guidance, effective management monitoring by the board, and accountability of the board to the shareholders and the company (OECD, 2004). The members of the board are required to action based on the available information, in good faith, with care and due diligence, and in the company’s and shareholders’ best interest (OECD, 2004). The board is also required to apply high ethical standards by taking into consideration stakeholders interests. Accordingly, where the board’s decision affects different groups of shareholders differently, it should make sure that all shareholders are treated fairly (Solomon 2007). Review of One-Tel Corporate Governance Given the above corporate governance standards and guidelines; prior to its collapse, One Tel did not holistically abide by the above principles. Its corporate practices were not in line with practices good corporate governance which led to the company’s final demise. This review is based One Tel’s corporate governance three aspects including the composition of board and activity, financial reporting quality, and compensation of the executive (Monem 2010). Financial Reporting Quality The financial reporting quality demands that all company’s financial and accounting reports should represent faithfully the true economic situation of the company. For instance, the financial information should be complete, free from error and neutral. Similarly, quality of higher earnings should also truly show the ideals of the company’s basic earnings process. Given this view, the financial statements of One Tel never represented the true financial position of the company and were full of errors. During the investigations, Jodee Rich exposed that he did not see the company’s trial balance, spreadsheets showing the monthly board reports, ageing creditors and debtors reports, reports to be billed together with unrepresented cheque listing (Monem, 2010). He expected other managers to bring to his attention these matters. Accordingly, some company executives were not included in the company ledgers, trial balances, journals and/or in any primary or secondary accounting records. In the same manner, lot discrepancies were found in many company records and documents including the trial balance, collection of accounts receivable, the outstanding balance of accounts receivables, and data description. The company did not have real-time or close to real-time information regarding its total debtors, risk profile debtors, and ageing (Monem, 2010). The company’s quality reporting was very low and this is attributed to accrual components that were higher in earnings as compared the competitors who were equal in size with One Tel. Accruals can easily be manipulated by the management, and high accruals proportion in earning is a clear show that the company has poor quality earnings. , One-Tel showed positive earnings in the financial year 1998 and 1999 due to positive accruals that were large. The two major company changes that the company made to its accounting policy changes within a period of two years. The company’s 1998 annual report stated that in contrast to the telecommunication industry, One Tel’s conservative accounting practices did not create intangibles in its balance sheet (Monem, 2010). Contrastingly, One Tel in 1999, changed its deferred expenditure policy. This encouraged capitalization of the previously expensed costs for amortization over period not exceeding three years. The company management analysis and discussion in all annual reports emphasized on earnings before interest, taxes, description and amortization rather than earnings reported under GAAP. Generally, One Tel Company had financial reporting systems were of poor quality (Monem, 2010). Board Composition and Activity According to the annual report of 1998, One Tel’s board comprised of four members including Jodee Rich and Brad Keeling; the joint managing directors, and Rodney Adler and John Greaves were the two non-executive directors (Monem, 2010). All members of the board were subjected to election every year except Jodee Rich. This was to ensure that Jodee Rich maintained his position as the company’s CEO. For instance, Brad Keeling and Jodee Rich held their position as company chief executive officers until 2001 when they resigned. Also, John Greaves also held his position until his resignation in 2001. By 31st June, 1999, the board of One Tel was made up of of eight members, where five were non-executive directors (Monem, 2010). One Tel’s Audit Committee for two financial years 1997-98 and 1998-99, the Corporate Governance Committee of 1999-2000, the Finance and Audit Committee of 1999-2000, and the Remuneration Committee of 1999-2000, were all compromised of two same non-executive directors; Rodney Adler and John Greaves who closely associated with the CEOs (Monem, 2010). In essence, the audit committee is required to make sure that company complies with the accounting standards, One tel breached the accounting standards in the financial statement of 1998-99 showed that audit committee was ineffective (Monem 2010). The board chair of the company never presided over the meetings of the board . Full corporate disclosure of company’s corporate affairs is essential to ensure effective functioning of the board. Non-executive directors efforts to monitor and control the management of the company were hampered One Tel inability to fully disclose its corporate affairs. Compensation Remuneration executives are required to be responsible and fair in a show of good corporate governance practices. Three executive directors of One Tel and the chair of the boards in 1998-99 had a total of A$2.3 million remuneration (Monem, 2010). The company reported a A$6.97 million profit. The financial year 1999-2000 the company’s reported a total of A$15.5 million remuneration to the five executive directors including A$6.9 million performance bonus was paid to the two CEOs (Monem, 2010). During this financial year the company reported a A$291.1 million loss and the company’s shares prices were steeply decreasing. In essence, there was no clear connection between the CEOs compensation and the company. In essence, One Tel did have weaker corporate governance structures which allowed CEOs to get high compensation resulting into poor performance (Monem, 2010). Recommendations The company should have developed its Corporate Governance framework based on OECD principles (Brown & Caylor 2009). This would have ensured that good relationships between the management, directors of the board, together with the stakeholders of the company; while at the same time providing structures within which the corporate objectives of the company would have attained, monitored and performance determined. Conclusion Corporate Governance is the backbone of good corporate practices within any given company. The above discussion provides an excellent description of good corporate governance standards and guidelines. For instance, OECD six corporate governance principles have been discussed; Ensuring the basis for an effective corporate governance framework; The rights of shareholders and key ownership functions; The equitable transparent of shareholders; The role of stakeholders in Corporate Governance; Disclosure and Transparency; and The responsibility of the board. One Tel Corporate practices prior to the company’s collapse in 2001 have also been reviewed. For instance, the company’s corporate practices necessitated unethical practices that allowed executives to fleece the company. References Brown, L & Caylor, M., 2009, “Corporate governance and firm operating performance”, Review of Quantitative Finance and Accounting, vol. 32, no. 2, pp. 129-44. Farrar, J 2001, Corporate governance in Australia and New Zealand, Oxford: Oxford University Press OECD, 2004, Organization For Economic Co-operation and Development: OECD Principles of Corporate Governance 2004. 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