Corporate Governance - Market Disclosure - Case Study Example

Corporate Governance-Market Disclosure Name: Course: Tutor: Institution: Date: Part 1: Introduction and Market Disclosure Description An organizational governance system is described as the approach and systems through which organizations are managed and directed. In this regard, it includes all the organizational systems, policies and strategies. On the other hand, corporate governance is described as the process and approach through which organisations ensure the representation and inclusion of all the stakeholders in the management process1. As such, the concept of corporate governance, a new and growing trend in management is based on the principles of stakeholder theory adoption in management. In this case, organisations operating under the stakeholders’ theory seek to ensure that the interests and consideration of the interests of all the stakeholders are incorporated in the management process. One of the strategic approaches through which organisations exercise the concept of corporate governance is through market disclosures. Market disclosure is described as the process through which organisations avail all the relevant information about their operations and expected market changes that could influence investors’ decisions on the viability and attractiveness in the market. Under market disclosures, organisations are expected to accurately report on both positive market and organizational changes that could increase their market competitiveness or negative occurrences that could implicate on a reduced organizational profitability margins consequence2. The Australian market regulations on disclosure are guided by the ASX regulatory framework. In this case, the current system is based on the adoption of a continuous disclosure system. Under this management approach, organisations listed on the ASX market disclose the entire price sensitive to the existing and potential investors on a timely and continuous basis. The ASX regulation on a continuous disclosure system has facilitated the adoption and realization of market information, access, equity as well as timely access to investment based information. However, the current regularity framework of the ASX listing rule 3.1 allows for the exemption of information for full market disclosure if such information is part of an incomplete negotiation process, it would be a breach of the Australian law if disclosed, and such information is a trade secret. As such, the regulations require that although such information could be shared with other industry partners such as consultants, partner and financial advisors, none of the partners should trade such confidential information for earnings to merit some investors over others in the market. Other supporting regulations in the Australian market are the use of code of conducts among the finance and accounting professionals. Under the Accounting professional and ethical standard board (APESB) a professional body developed by the CPA Australia, Institute of chartered accounts Australia (ICAA) and the Institute of Public Accounts (IPA) is charged with ensuring ethics and morals in the industry3. In this case, with its statement of purpose geared on developing an ethical and public oriented accounting profession, the organisation developed code of ethics governing its members with respect to disclosures. One of the code of ethics listed by the organisations is the obligation by its members to disclose all organisational, financial information as under the law and in the interest of the public as well desisting from acting and participating in inside dealings, through trading confidential information for favours and financial gains. Part 2: Case Study Demonstrations Example 1: The Babcock & Brown Company The Babcock and Brown Company case on disclosure serves as a recent evaluation and demonstration of the challenges facing the Australian regulations and legal framework on market disclosures. The Case filed in 2012 was based on claims and accusations from 77 different shareholders who had acquired the company shares between the period of February 2008 and March 2012. In this case, the complainants were that the shareholders suffered losses upon acquiring the organizational shares. In this case, the shareholders argued that the organization had failed to accurately disclose all the financial information. In particular, the analysis was based on the assertion that the organization failed to disclose that paid out dividends for the 2005 to 2007 financial years was illegal and paid from the capital rather than from the profits as legally required4. Moreover, it failed to disclose to the shareholders that the dividends for the 2007 financial year were based on loan from assets revaluations. The matter laid into Justice Perram was to evaluate the extent to which the causative market loss concept could be applied to the organisation. In this regard, the case was based on evaluating if the organization had illegally paid out dividends, if the company management was aware of the insolvency nature as of 20009 and if the lack and non-disclosure caused market losses to the shareholders5. On one hand, the court decided that although the organisation had paid its dividends out of its capital base rather than profits, it had other subsidiaries submitting profits. As such, the subsidiaries remitted profits were enough to cover the organizational dividends. Thus, the court noted that failure to disclose this had no direct impact on the shareholders losses. In addition, the court established that although the 2007 dividends were paid out of assets’ revaluations, it had not direct impact on the shareholders In this regard, the court stated that in order to guarantee compensation for the inflated share prices in the market, it was the duty and the responsibility of each of the 77 shareholders to disclose and demonstrate the 'extent to which the use of asset revaluations led to their share purchase losses. Finally, the court upheld the decision that the management should or might have been aware of the insolvency status but failed to disclose. Thus, it admitted that the respective shareholders were rightfully due for compensation for losses incurred out of such non-disclosure. However, the court did not admit collective causative market loss on all the shareholders and argued that each would have to prove the extent to which the non-disclosure led to their losses. A summary of the case illustrates that non-disclosure in the Australian make and its causation market loss aspect is still unrecognized in the Australian Disclosure laws. As such, although it is illegal for the organisations not to disclose all the financial and price sensitive information, it is difficult to evaluate and compensate the losses incurred by industry investors out of such omission incidences. Moreover, the law recognizes the effects and actions of individual investors and class action and lawsuits are yet to be formally considered and court decisions formulated on the basis of the entire class needs. Therefore, the case illustrated that although organisations in the Australian market could be charged with criminal charge for violating the continuous disclosure regulations, they are under no legal obligation to compensate the shareholders and investors for losses incurred for such non-disclosure actions. Example 2: Leighton Holdings Non-Disclosure Inquiry The organization is a renowned mining industry brand in both the Australian and Asian markets such as India. However, in the recent past, the organisation has faced legal challenges on the account that it is faced with non-disclosure based on both the acts of omission and commission. This assertion emerged on a lawsuit filed by a former senior technical manager in the organizations Mr. Henry, who filed for a wrongful dismissal case. The whistle blower asserted that the organization had failed to disclose important information to the public as well as the Australian Stock exchange on project blow ups as well as the financial statements. In the evidence presented in court, Mr, Henry presented a copy of the organizational project meeting white board analysis held in Perth February 2014 showing that a $205 Million project blow out from $ 2.89 to $2.69 on the Chevron Gorgon Jetty Project. The whistle blower argued that the information was never revealed to both the Australian Stock exchange and the public in the fear that it would cause a stock and a share price decline in the market6. In Addition, other allegations laid against the organization include the commission error of inaccurately disclosing the Grogon project. In this case, it was asserted that the organization relied on the unverifiable and overrated expected returns of $2.6 Billion on the project to influence the hare value and prices rise in the market, although the management was aware that the figures were falsified. Based on these and other allegations on the organization, the Australian watchdog, the Australian Securities and Investments Commission (ASIC). The commission, charged with initiating investigations on organizations that fail to accurately report to their shareholders initiated an investigation of the organization for failures to disclose project blow outs worth $ 40 Billion to the shareholders7. The commission will seek to establish the veracity and reliability of the whistle blower allegations among others in the market to decide the legal cause of action in the organization. The above analysis on the challenges facing the market disclosure regulations, illustrates that despite the development of numerous market disclosure regulations in the market, there are existing challenges in the implementation. In this case, the analysis establishes that in order to ensure that the national level policies and regulations are pursued, it is imperative for the respective organizations’ to develop a relevant organizational culture. Moreover, this is evidence that in order to support the law enactment process, other internal organizational management systems should be developed and effected in the long run period. Part 3: Existing Gaps and Recommendations Existing Regulation gaps Based on an evaluation of the above case studies, this analysis develops a series of conclusions with respect to the use and adoption of market disclosure regulations in the Australian market as a form of supporting corporate governance principles and systems in the market. One of the conclusions is that the law has limitations in its consideration of the civil implications of organisations non-disclosures actions. In this case, the analysis establishes that although the ASX and other financial regulations in the Australian market provide for a loophole through which the organisations fail to properly account and compensate the shareholders and other investors in the market for market disclosure failures and regulation violations8. In addition, this analysis asserts that the market is faced with the risk of increased confidential information misuse by the respective stakeholders involved and entrusted with such information. In this regard, it argues that the Australian market regulations and restrictions on inside dealings are limited to the use of such information with external stakeholders who are not authorized to access the information. However, there is an existing gap on the modalities and systems through which to regulate and control the internal stakeholders’ privy to such information access to the information base9. In this regard, the misuse of such information to develop organizational policies that eventually mislead the stakeholders in the market remains unchecked. Recommendations The above analysis evidences that although the Australian market continuous principles on market disclosures have yielded fruits, improvements on the existing regulations need to be effected to allow for increased market disclosure efficiency in the future. This section provides an analysis of the recommendations offered to mitigate and overcome the industry market disclosure challenges identified above. Code of Conduct Evaluation Although the industry has the professional and ethical organizational and body for the accounting practices, it is apparent that the principle and ethics of the body are yet to being incorporated in the organizational practices in the market. For instance, the Leighton Holdings case study illustrates that a majority of the organization continues to practice unethical accounting and financial management practices in the market10. Therefore, in order to mitigate this challenge, this analysis recommends that the organisations should roll out a whistle blowing program through which it should provide structures through which employees in organizations, whether or not such employees are in the accounting profession should report any suspected unethical behaviours into their organization. This would have provided an alternative approach through which the organizational, technical manager could have raised the alarm on the ongoing unethical accounting and disclosure practices in the organization11. The system should be based on the need to develop a confident and secure platform through which organizational employees can confidentially report and whistle blow on unethical disclosure practices. Such a strategic approach would ensure that the respective organizations in the Australian market develop a positive culture on ethical business practices that would support the implementation and adherence to the existing disclosure policies. With the inclusion of a positive organizational disclosure culture, the Australian market disclosure principles of information access equity and all price sensitive information disclosure to investors equally would be achieved. Class Action and Causative Loss Incorporation An additional disclosure challenge identified is the failure to admit the causative loss aspect in litigations for share and stock price inflations in the Australian market as illustrated in the B&B case study in the analysis. In this context, this analyse recommends that the disclosure legal framework should introduce a clause offering specific guidelines and process through which a class action in causative loss could be handled the procedure and nature through which such could be remedied12. In this case, rather than shouldering the burden of proof on the complainants to proof the extent of loss as in a criminal case, it should be based on the establishment by a court of law on the fact that a disclosure violation occurred that has the potential for causing losses to the investors. As such, this will ensure that the industry organizations adopt the prudent disclosure practice due to the potential civil financial and criminal case implications for any failures. References Allens, ‘Focus: Babcock & Brown – a market disclosure claim decided, 2015. C, Mallin,. ‘Corporate Governance. Oxford: Oxford University Press, 2013, p.37 J, Fu,. ‘Corporate Disclosure and Corporate Governance in China. Alphen aan den Rijn, The Netherlands: Kluwer Law International, 2010, pp. 37-38 J, Stittle, and W, Bob, ‘Financial Accounting’. Los Angeles: SAGE Publications, 2008, p15 J, Wiggins, B, Richard, and N, McKenzie, ‘Another Leighton probe into alleged failure to disclose’, The Sydney Morning Herald. M, Jennings, ‘Incorporating Ethics and Professionalism into Accounting Education and Research: A Discussion of the Voids and Advocacy for Training in Seminal Works in Business Ethics,’ Issues in Accounting Education vol 19, no.1, 2004, p.17 P, Mäntysaari, ‘The Law of Corporate Finance: General Principles and Eu Law. Heidelberg: Springer, 2010, p.535 P. Latimer, and M, Philipp, ‘Promoting Information in the Marketplace for Financial Services: Financial Market Regulation and International Standards. , 2014, p.59 W, Albrecht, C, Ned, and C, Albrecht, ‘The Ethics Development Model Applied To Declining Ethics In Accounting’ Australian Accounting Review vol 16, no. .1 2006, p.35 Read More