Corporate Governance at Commonwealth Bank and Its Significance in Contemporary Business - Case Study Example

COMMONWEALTH BANK Student’s name Code & Course Professor’s name University City Date Commonwealth Bank Corporate governance has created divergent principles governing the operations of organizations, notably in the banking industry. Simply put, corporate governance refers to the system by which an organization is directed and controlled where its outlines the specific distribution of responsibilities between managers and shareholders. In the wider spectrum, it integrates the relationships between stakeholders, bother external (customers) and internal (employees). The definition of corporate governance is twofold: the design of organizations that enforce management that internalizes the stakeholder’s welfare. The various subjects of corporate governance, this paper confronts, presents specific attributes that contribute to its significance in contemporary business. Literature Review The agency Approach The agency theory places the stakeholders as important players in any corporate governance structure (Lan and Heracleous, 2010). The agency theory is defined as the premise that surrounds the relationship between the directors or managers and the organizations. The agent’s interest might conflict with the organization’s goal. A well-developed market for corporate control is non-existent that may lead to asymmetric information, incomplete contracts, and moral hazards, to name a few. A number of governance approaches have been created including, but not limited to the prudent market competition, financial institutions, debt and an effective board of directors. The creation of an effective board of directors is paramount to any organization and a feasible option for corporate governance mechanism. Managers or agents may not always function to the shareholder’s interests when controlling a company; rather they may be “satisfiers”, as opposed to being “maximisers” (Bonazzi and Islam, 2007). Simply put they tend to act safe, and they seek preferred levels of growth since they are more concerned with their individual interests. Consequently, the shareholder tends to task decision-making duties to the agents within their expectation that the agent will perform in their interest. The principles can be certain that the agents will make calculated decisions, in the case when appropriate incentives are offered, and well placed under scrutiny. Corporate governance, therefore, is paramount to the organization given the multiple functions engaged at different levels. Stakeholder Approach The stakeholder approach to corporate governance suggests a change from the conventional role of board of directors as protectors of the stakeholder’s interest. As a top level governance body the directors are tasked with settling of standards and values within the organization through their decisions pertaining incentives, strategy and internal control systems. In this respect, a body that significantly seeks to commit to CSR strategies and seek to address the stakeholder’s needs may be attuned to its new operation roles. The stakeholder’s theory suggests that companies need to attune their strategy in line with the stakeholder’s interest – individuals that are affected by the firm’s operation. The stakeholders are valuable; therefore the company has the sole responsibility of committing to their demands. Secondly, addressing the stakeholder’s needs is conceptualized as important in augmenting the company’s profitability (instrumental approach). The main goal of CSR is to develop an increased value for the stakeholders in fulfilling their responsibilities towards them. Evidently the stakeholder’s approach presents the governance process that controls the managers and other organizational participants in the ensuring that they function towards the owner’s interest. Analysis Located in Australia, the Commonwealth Bank is a multinational bank whose business spans across New Zealand, Fiji, Asia, and United States of America and in the United Kingdom (Commonwealth Bank, 2015). The bank was founded in 1911 by the Australian government and in effect it has realized a significant growth over time thanks to its robust corporate governance framework (Commonwealth Bank Limited, 2015). It provides a variety of financial services including but not limited to retail, business and institutional banking, funds management, insurance and investment services. It is listed as one of the largest Australian Bank with respect to the Australian Securities Exchange (Common Wealth Bank, 2015). As a multinational business operating center, its signature strength lies in its corporate governance framework; how these features positions the Bank to engage with stakeholders on local and international levels. Tentatively, given its global operations, ethical challenges are eminent. These attributed ethical challenges are stimulated by its present governance arrangements, witnessed by its executive committee. Evidently, these codes of practices are fundamental for any bank, subject to their recommendation by the Australia Service Exchange (ASX). As such, this paper seeks to discuss key issues that dictate the code of practice in the bank’s operations. Remuneration practices. Commonwealth Bank has emerged as a competitive company in the banking industry. This is achieved through efficient services to its clients due to remunerations practices given to its employees in creating a competitive platform. Remuneration practices pertain the engagements between the employers, human resource and the clients (Hewitt, 2009). In this respect, remuneration is based on two fundamental attributes that govern the entire process in ensuring that competitive workers are awarded accordingly. These attributes include key learning for managing remunerations practices and the employee’s engagement during an economic downfall (Hewitt, 2009). In effect, this process is attuned to a fair and transparent process where the human resource manager award workers that showcase resilience and outperform other employees in assigned tasks. Hewitt (2009) contents professional ethics as a key factor in any remuneration process. Remuneration practices compel unmotivated workers to increases their efforts when undertaking tasks; thereby creating a proffered competitive environment. Consequently, this competitive environment enhances employee performance in the Bank, thus increasing quality dispensation for the clients. A fairly done remuneration has contributed to the bank’s emergence as a multinational operating company and among the top four companies in Australia (Common Wealth Bank, 2015). Committee composition The Governance Committee is appointed by the Board of Director of the First Commonwealth Financial Corporation, otherwise known as, the Corporation (BPRC, 2011). The committee plays a significant role in identifying qualified individuals that can act as a board member and directors, to name a few. The committee comprises of not less than four members who function as directors of the Corporation (BPRC, 2011). The committee members are appointed on the basis of their professional skills; that follows an open and fair process. As its signature strength, it has enabled the company to dominate the banking sector effectively. The committee chairs various functions, which oversees the creation of preferred operational results, hence Shareholder rights The shareholders are entitled to efficient service delivery and a guarantee for shareholder’s rights. The company’s shareholders enjoys rights such as attending company general meetings, sharing the company’s profits, access to the company’s annual accounts and overseeing an efficient operation of the bank (Company Solutions, 2015). Hence, the bank upholds these rights and conforms to shareholder’s suggestions whenever applicable. Such fair treatment, create a welcoming platform for prospects, given the security of their investments. These attributes necessitate the bank’s conformance to its code of ethics, given the need to serve the shareholders. Board diversity Board diversity in Commonwealth Bank is vital. The Bank increased the proportion of women leadership by 35% by the end December 2014 (Workplace Gender Equity Agency, 2012). Diversifying the board helps in creating work flexibility and ensures maximum output (Workplace Gender Equity Agency, 2012). The integration of a diverse gender has enabled it to garner skilled and professional employees, irrespective of the gender. In effect, a competitive environment is thus created; that increases the workforce’s performance. Social responsibility The Bank plays an instrumental role in promoting social responsibility in Australia. It is mandated with the responsibility of making the community a central part of its business (Greenberg, 2007). The bank strives in fostering a working relationship with its employees and the larger community. The company’s stakeholders are always keen to impart the society in a positive way. This is facilitated its participation in the society and its subsequent protection. This is witnessed through its undying support for the need around the globe. AS part of the social commitment, it offers scholarship, in partnership with Centre for Social Impact for various candidatures. Tentatively, it works in support to Red Cross where it has opened a call center and branches with an aim of raising money for the needy (Common Wealth Bank, 2015). Additionally, Common Wealth Bank proudly sponsors Clean Up Australia initiative, in which it volunteers to clean up Australia (Common Wealth Bank, 2015). Audit process The Enterprise and Projects Internal Audit Team handles the bank’s auditing process, in which, financial transactions are audited to ensure the accuracy of disclosed financial statements (Commonwealth Bank, 2015). The auditors consult the workers to ensure the provision of accurate of information and the bank’s entire transactions is captured. The process is carried out by professionally qualified auditors who deliver their services based on professional ethical behaviour. An effective audit process is instrumental for the bank, in that the disclosures of its financial statements are accurately depicted. It would further prevent unethical business standards as witnessed in Enron’s case. Ethical Issues Despite the bank’s robust ethical compliance, it may be subject to various ethical issues that may affect its performance. The creation of a robust code of ethics serves to protect the shareholder’s and management’s interests. The banking industry is dependent on complex transactions and customer vulnerability as a result of imperfect information. While functioning under principles of productivity and profitability, the bank is subject to obey ethical principles in the profession. Incidentally, the bank may at times offer unwarranted and incorrect information to the clients, thereby misleading the customers (ABC News, 2012). More so, most customers lack the knowledge of understanding the banking transactions, which is a requirement of the ethical disclosure. Following the release of new rules by the Australian Securities and Investment Commissions, it was realized that the Common Wealth Bank mislead its customers on credit card limit increases. Consequently, the bank withdrew the message after raising its concerns, where the bank contacted its customers to correct the mistake (ABC News, 2012). Ethical misconduct within the bank is abound and can be attributed to intangibility, inseparability and heterogeneity dimensions that are inherent in provisioning of service delivery (Gupta & Sujo, 2013). Evidently, inseparability limits the customer’s ability to evaluate the quality of the services offered by the bank (Gupta & Sujo, 2013). On the other hand, heterogeneity reflects on the complexity of the bank’s transactions and standardization in controlling quality. Thirdly, inseparability showcases the human elements that are integrated in the bank’s delivery of service (Ni, Jiang, Srinivasan, 2012). All this aspects are contributory features that significantly present the consumer’s vulnerability in relying on the bank’s ethical conducts and the service delivery. Service are intangible and are offered simultaneously with consumption, in which, human are involved. Service delivery between individuals at the banks differs considerably. Hence, it is significantly difficult for the bank to control the service delivery by its employees. Due to such factors, it is a challenge to avoid errors that may implicate the bank’s ethical conduct. Conflict of interests: The service provider within the bank may be closely related to a customer; hence, he/she may experience conflict of interest. For instance, the insurance personnel may advise the customer to split the investment amount into smaller amount, and augment the policies to avoid misguided tax authorities and PAN number requirements. Equity: This is simply fair treatment to clients. The customers should be subjected to equal treatment that lacks favouritism and financial position. Conclusion Commonwealth Bank has specific attributes that guide its cooperative governance. As a multinational company, it extensively addresses various ethical challenges that are related to service delivery. It considers specific attributes to help it solve various ethical problems. These attributes as discussed improves the firm’s competence in the industry. It is evident, therefore that an effective approach to corporate governance increases a firm’s level of success. Contrariwise, the stakeholders are an important aspect of a firm. Hence the managers should prioritize the stakeholder’s needs. Reference List ABC News. (2012) Commonwealth Bank misled customers: ASI. Accessed from: . [13th March 2015]. Board of Performance and Renewal Committee Chatter (BPRC). 2011. Accessed from: . [13th March 2015]. Bonazzi, L., and Islam, S. (2007) Agency theory and corporate Governance. Journal of Modeling in Management 2, (1) 7-23. Company Law Club. (2015) Company Law Solutions. Accessed from: . [13th March 2015]. Commonwealth Bank Limited. 2015. Accessed from . [13th March 2015]. Greenberg, D. (2007) Making Corporative Social Responsibility an Everyday Part of the Business of Business: Offering Realistic Options for Regulatory Reform. Accessed from . [13th March 2015]. Gupta, k., Thomas, S. (2013) Legal and ethical issues in the everchanging marketing environment, International conference on managing change in business economy, Udaipur. Hewitt Associates. Remuneration Practice of High Performing Companies. (2009). Accessed from . Jian N., Jiang, B & Srinivasan, K. (2012) Implications of social preferences in a service market with heterogeneous uninformed consumers. Lan, L. L., & Heracleous, L. (2010) Rethinking agency theory: The view from law. Academy of management review 35, (2) 294-314. [13th March 2015]. Workplace Gender Equity Agency. Commonwealth Bank Case Study. (2012). Retrieved from . [13th March 2015]. Read More