Commonwealth Bank: Corporate Governance and Ethical Challenges - Case Study Example

Commonwealth Bank: Corporate Governance and Ethical Challenges Name Institution Course Professor Date Introduction Several corporate organizations have failed due to various reasons all over the world. In reaction to these failures is corporate governance. Frauds that have been carried out by directors of companies have resulted in high profile corporate scandals that include companies such as Enron and Worldcom. It is a disturbing issue in a corporate world that despite implementation of corporate governance, there is still failures of corporate entities. Several approaches have been used in analyzing corporate governance such as agency and stakeholders’ approaches. The institutions in banking sector have the possibility of failing just like other corporations in different industries that make up the economy. Commonwealth Bank is one of the major banks in Australia having been established in 1911. It has since to grown to offer many services to its customers. Issues of corporate governance also affect the operations of the bank. This report covers corporate governance and in particular, the issue of corporate governance at Commonwealth Bank. Features, agency and stakeholder approaches to corporate governance, and ethical challenges faced by commonwealth Bank are also evaluated and discussed. Corporate Governance Frameworks Corporate governance has evolved to become significant to all organizations regardless of the size. Organizations that do not have a governance strategy pose significant risks while those that have one perform comparatively better. A governance framework that corporation uses emanates from the law and by regulations put forward by regulatory bodies that are subject to it (Calder, 2008, p. 01). It appears that corporate governance concerns with structure of board, shareholder reporting and executive compensation. However, the inherent assumption is that the management of the business and control of organizations risky assets is the responsibility of the board. In essence, corporate governance can be considered as a combination of both statutory and non-statutory framework which the board of directors uses in exercising the duties they are appointed to perform by the organizations (Calder, 2008, p. 03). This can be undertaken by using various approaches towards corporate governance. Shareholders Approach to Corporate Governance Many organizations have failed in the recent past and the reaction to these failures had been the corporate governance. There are many examples of corporate scandals that date back to many centuries ago. The most recent corporate scandals include Worldcom and Enron. Increased failures of corporations have resulted into intense implementation of corporate governance all over the world. There exist many approaches used in analyzing corporate governance. Agency and stakeholder approaches are reviewed in this essay. The interests of stakeholders are important to any organization. Bryson (2004, p. 22) defined stakeholders as any person (in this case a company or an individual) that can be affected by the decisions or activities of the organization. In addition, stakeholders refer to groups that benefits or endure harm and their rights are either respected or violated by the organizations. Stakeholder theory concern itself with the idea that organizations are required to take into account other stakeholders interest when undertaking strategic decisions (Salami et al, 2014, p. 252). Stakeholder theorists advocates for satisfaction of stakeholders interest. Among the important members of stakeholder are shareholders according to the stakeholder approach to corporate governance. Shareholders posses stake in the business and are affected by operations and achievement of the organization like other stakeholders such as customers, employees and suppliers. Agency Approach to Corporate Governance Agency theory is another approach critical in analyzing corporate governance. In this theory, shareholders are regarded as the most important stakeholder as asserted by (Lan & Heracleous 2010, p. 296). This theory involves itself with the relationship between organizational owners (principals) and the organizational directors (agents). The goals of both the agent and the principal are in conflict according to the main assumption of the agency theory (Feizizadeh 2012, p. 3355). In theory, the basic objective of an organization is wealth maximization of the shareholders. However, in practice, managers tend to prefer pursuing their own personal objectives like aiming at gaining higher bonuses as they possibly can (Solomon 2007, p. 17). It is possible that managers are likely to exhibit behaviors that lead to maximization of their own self-interest. Features of Corporate Governance The characteristics of good corporate governance include transparency and disclosure, shareholders rights, social responsibility, remuneration practices, social responsibility, committee composition, and audit process. In a company, a remuneration committee should exist. This committee should be comprised entirely or mostly of non-executive directors (Malin 2013, p. 230). Audit committee need to be in place with majority of its members being independent directors. The audit process is performed by this committee. The rights of shareholders should be protected by the board of directors. Furthermore, all relevant information about a company should be release to all stakeholders by the board of directors. No important information should be hidden by them. Overview of Commonwealth Bank Commonwealth Bank was established in 1911 in form of a state bank and gains a lot of influence as a banker to the federal government. The Commonwealth Bank Act of 1911 created the bank’s operations to carry out savings and other general banking business. The bank began carrying out its mandated activities in 1912 (Cain & Hopkins 2014, p. 495). Commonwealth Bank has since expanded its operations to countries such as United Kingdom, Fiji, United States of America and New Zealand as well as in some Asian Countries. The bank is listed on Australian Securities Exchange (ASX) and is one of the largest banks in the country. On 17 April 1991, Commonwealth Bank became a public company (Commonwealth Bank 2015). This was possible through the Commonwealth Banks Restructuring Act of 1990 that enables the bank to be partly owned by the government. The bank was fully privatized in stages between 1991 and 1996. This enables the bank to grow rapidly with numerous changes undertaken including introduction of technology and structure of the bank. Commonwealth Bank now has large customer base with numerous services offered by the bank to its clients. Commonwealth Bank Corporate Governance Development of improved corporate governance structures was needed in 1990s as countries in the Asia-Pacific region were faced by financial downturn. The proposed changes include full disclosure and transparency, more protection to minority shareholders and independent directors to be appointed (Malin 2013, p. 242). Many countries including Australia have since strengthened their corporate governance codes which recommend full disclosures, transparency, accountability and appointment of independent directors among others. In the banking sector, there have been numerous changes to the banking codes in Australia. The code sets standards to be used in undertaking good banking practice. In essence, Australian banks have been carrying out implementation of various governance measures in order to comply with the requirements of the regulators. This also has the benefit of improving the operational and market efficiency of the banks for purposes of protecting shareholders and other stakeholders’ interests (Gup 2007, p. 219). A special significance to the economy is played by the banking institutions and bad management of these institutions has detrimental effects to the economy. Commonwealth Bank knows this fact and has put in place its corporate governance framework to guide it in making good decisions. Committee Composition From time to time, Commonwealth Bank issues a statement on the corporate governance which outlines the banks corporate governance framework. It contains features of corporate governance such as committee composition, audit process, and transparency and disclosure. The board is comprised of directors that are accountable to shareholders of the bank. There shall be a maximum of 13 directors and minimum of 9 directors on the board according to the constitution of the bank (Commonwealth Bank 2014, p. 02). There are various committees that include audit, risk, remuneration and board performance and renewal. These committees assist the board in performing its responsibilities. Each committee chairman provides board with a report after every committee meeting. In particular, remuneration committee provides assistance to the board in fulfillment of its responsibilities to the bank regulators and shareholders on matters relating to remuneration in the bank. In general, remuneration committee is tasked with the responsibility of recommending to the board the approval of remuneration for senior executive appointments, Chief Executive Officer, and that of finance, internal control and risk personnel. Audit Process Corporate governance is important to any corporation because of the objectives it is intended to fulfill. Making management accountable to the board of directors (they are bestowed with responsibility of guarding shareholders interests) is among the corporate governance objectives (Gup 2007, p. 220). Auditing of the organizational activities is crucial to the effective management of the resources of a company. The auditing process should be thorough in order to uncover any misappropriation of shareholders wealth by the management. At Commonwealth Bank, there is an audit committee that helps the board of directors in executing its fiduciary and statutory functions. The banks audit committee offer objective, independent and unbiased review that concerns external reporting of financial information. Moreover, the responsibility of the committee entails overseeing accounting policies, external auditors’ appointment, internal and external audit, and professional accounting requirements (Commonwealth Bank 2014, p. 07). Group Audit and Assurance (GAA) is the internal audit of the Commonwealth Bank responsible for development of annual audit plan and execution of the approved plan by the audit committee. Other functions of the GAA are maintenance of both regular dialogue with the external auditors and effective relationships with the industry regulators (Commonwealth Bank 2014, p. 07). The leader of GAA reports directly to the Audit Committee in order to ensure that there is some level of requisite independence as well as objectivity in execution of its role. However, the head of GAA also maintains a management reporting line to the banks Chief Financial Officer. Transparency and Disclosures Transparency enhances the relationship between a company and its stakeholders especially the shareholders. Commonwealth Bank regularly discloses information about events that have material effect on the bank’s assets. This is a requirement of the Corporations Act and ASX listing rules (Du, McConvill, & Bagaric 2014, p. 89). Continuous disclosure policy have been put in place by the bank in ensuring that all the material matters that have potential of being disclosed are reported to the Chief Executive Officer (CEO). This is possible through various reporting lines that have been established. Engagement with Other Stakeholders A good governance structure should have mechanisms for engaging with its stakeholders. Stakeholders are very important to any business organization and engaging them periodically is crucial to successful business partnership. The interest of stakeholders should be safeguarded by the company and transparent disclosure of information need to be regularly done as one way of engaging them. Commonwealth Bank has various mechanisms that it is using in engaging with other stakeholders. Staff engagement surveys, customer feedback systems and regular meetings are used by the bank (Commonwealth Bank 2015). Stakeholders need to make decisions that are well informed about their investment in a company. Commonwealth Bank realizes this and provides its stakeholders with quality information in form of annual reports, quarterly trading updates, shareholders newsletters, and interim and final results (Commonwealth Bank 2014, p. 10). In addition, all price sensitive information is released to the Australian Securities Exchange (ASX) on time and shareholder panel at the banks website. Ethical Challenges Ethics in business is an issue that has been debated for many years and it is continually revisited at the backdrop of many corporate scandals. Every company is faced with ethical dilemmas in dealing with an issue that affects the operations of the business. This situation is exacerbated further by the fact that competition has become stiff and any mistakes are capitalized on by the competitors. Conflict of interest is an example of ethical challenges faced by the Commonwealth Bank. A director can have a material personal interest in a certain matter and can opt to pursue its personal interest in lieu of the company’s interest. Commonwealth Bank is aware that this situation can occur among others and have put in place some ethical policies. Codes of conduct and policies pertaining to accountability, integrity, excellence and collaboration have been established (Commonwealth Bank 2014, p. 10). These policies and standards are regularly communicated to the stakeholders in ensuring that no conflict of interest arises that may have ethical challenges for the company. Conclusion There have been several corporations’ scandals that precipitated the need to have corporate governance frameworks. In a nutshell, corporate governance entails the way in which companies are managed and regulated (Du, McConvill, & Bagaric 2014, p. 84). Due to the fact that corporations are controlling a large part of the world’s wealth, they should have good corporate governance structures. Features of corporate governance such as committee composition, audit process, transparency and disclosure and remuneration practices are important to an institution such as Commonwealth Bank. Indeed, Commonwealth Bank is among the largest banks in Australia having been established in 1911. It has grown over time and privatization process started in 1991. It continually engages with its stakeholders in a bid to offer quality and effective services to its clients. References Bryson, J. M 2004. What to do when stakeholders matter: stakeholder identification and analysis techniques’, Public management review, 6(1): 21-53. Cain, P. J & Hopkins, A. G. 2014. British imperialism: 1688-2000, 2nd edn, London: Routledge. Calder, A. 2008. Corporate governance: A practical guide to the legal frameworks and international codes of practice, London: Kogan Page. Commonwealth Bank. 2014. Corporate Governance Statement, Commonwealth Bank of Australia. [Online]. Available from: . Accessed on [10 March 2015] Commonwealth Bank 2015, History. Commonwealth Bank of Australia. Available from: . Accessed on [12 March 2015] Du, P. J. J 2014, Principles of contemporary corporate governance, Port Melbourne: Cambridge University Press. Feizizadeh, A. 2012. Corporate governance: frameworks, Indian Journal of Science and Technology, 5(9): 3353-3361. Gup, B. E 2007, Corporate governance in banking: A global perspective, Cheltenham, UK: Edward Elgar,. Lan, L. L., & Heracleous, L. 2010. Rethinking agency theory: The view from law, Academy of management review, 35(2): 294-314. Mallin, C. A. 2013. Corporate governance. , Oxford: Oxford University Press. Salami, O. L., Johl, S. K & Ibrahim, M. Y. 2014. Holistic Approach to Corporate Governance: A Conceptual Framework, Global Business & Management Research, 6(03): 251-255. Solomon, J. 2007. Corporate governance and accountability, 2nd edn, Chichester: Wiley. Read More