Corporate Governance in Australia: the Centrebet Company and the CI Company - Case Study Example

Corporate Governance Report Summary: Recent corporate scandals have resulted in an enhanced thrust and focus on corporate governance. Some of the significant aspects that Companies are now required to take into account is increased disclosure and transparency within the organization, as well as independent review and audit of financial statements. The ASX Guidelines in Australia set out guidelines whereby organizational risks can be managed to minimize corporate fraud. The financial statements of the Centrebet Company and the CI Company are examined from the perspective of corporate governance. The CI Report appears to be lacking in its levels of disclosure and non executive directors are also being paid remuneration on par with executive directors which is likely to pose a conflict of interest and impede internal controls within the organization. Analysis According to the Australian Guidelines, corporate governance is the system by which companies are directed and managed, and this influences the process whereby organizational objectives are set and achieved, risk monitored and assessed and performance optimized (ASX 2003, pg 3). Failures of corporate governance in companies such as Enron and Adelphia have produced a negative impact on investor confidence and made them question the integrity of information that is provided in the financial statements of a corporate entity (Rezaee, 2004). The development of corporate governance codes has as its primary objective, the restoration and increase of investor confidence through increased accountability and transparency in corporations (Mallin, 2007:21). Effective corporate governance enhances investor confidence, enhances competitiveness and ultimately contributes to economic growth. Corporate governance has become increasingly important in determining cost of capital and can help in making Australian companies competitive in a global market. The recommendations provided by the ASX Corporate Governance council emphasize some basic areas that corporations must focus upon. The first is the clear establishment of the roles of the management and the Board as set out under Principles 1 and 2 of the Guidance, through (a) increased disclosure, especially of potential risks and director remuneration (b) maintaining an appropriate balance between achieving a desirable level of Board independence and maintaining sufficient experience and competence on the Board and providing an explanation if an optimal number of non executive directors are not included on the Board. The next important consideration is the need to ensure financial integrity, as set out under Principles 3 to 5, by introducing integrity in financial reporting through the use of separately constituted audit committees and the presentation of a true picture of the financial status of a Company. The major purpose of financial reporting is acknowledged to be the satisfaction of the information needs of users, because traditional financial statements have a backward focus which is not very useful to investors in making decisions about the company’s future (Beattie, 2005:85-114). As a result, this is one of the focal aspects of corporate governance, also set out in the Australian guidelines. Another important consideration is the appropriate management of uncertainty and risk through effective management and internal control, and by getting CEOs and CFOs to sign off on risk management systems, as per principles 6 to 8. The term “risk management” first emerged in the United States in the 1950s, emerging out of the insurance buying function, with managers seeking strategies to manage corporate risks rather than attempt to finance them after the loss had occurred (Young and Tippens, 2001:6). The directors and officers of large, public sector enterprises have access to billions of dollars of capital provided by investors, as a result, they should be held fully accountable for what they do with that capital.(LeBlanc, 2007). Annual Reports of CI Resources Limited and Centrebet Company: The Centrebet Company has included a corporate governance statement at page 12 of its annual report, wherein it spells out the various measures by which it has sought to comply with the ASX recommendations as identified above. The expanded charter of Directors includes a Director’s Code of Conduct, which clearly states that Directors must act in good faith, exercise independent judgment and not make improper use of information gained by virtue of their position as Director; they must also not allow personal interests to conflict with the interests of the Company and must engage in ethical decision making. Both independent and non executive directors are independent of management, although non executive directors are allowed to hold a substantial shareholding in the company of more than 5%. The weighted average number of ordinary shares held by shareholders in 2007 is 86,609,081 (Annual report, p 47), while the total number of shares held by the executive directors amounts to 49,885, which is only 0.05% of the total number of shares. But taking into account the shares also held by the Directors indirectly or beneficially through related entities, their share amounts to 32.63 million shares or 37.4% while other shareholders hold 54.67 million shares or 62.6%.(Annual Report, page 60). These disclosures in the Annual Report are in line with the stated policy of the Company to ensure compliance with the ASX guidelines. “Disclosure has long been recognized as the dominant philosophy of most modern systems. It is a sine qua non (essential aspect) of corporate accountability.”(Solomon, 2007:144). Where there is inadequate disclosure, there is a greater likelihood that financial mismanagement can occur. As per the Centrebet company requirements, at least two independent directors are required to be on the audit, risk and compliance Committee, and their functions would include a review of the adequacy of financial and internal control systems, especially in relation to risk management. They are also required to assess the adequacy of audit services and provide their recommendations and findings directly to the Board of Directors. But in view of the fact that there are seven directors totally, this means that a majority of the Directors are not independent, non executive Directors as recommended under ASX guidelines, therefore the cause of corporate governance may not be adequately served in this Company. The company report on corporate governance outlines how Company policy is geared towards ensuring enhanced disclosure in compliance with the ASX guidance, but this is restricted to annual reports and quarterly statements and does not include disclosures on environmental issues, marketing or technical risks, which can also pose huge losses for investors. In the case of the Centrebet company the Board of Directors consists of seven members, of which there is one independent director, one non executive director and one independent Chairman. Hence the distribution of independent directors is one out of 7, which is 14.28%, and this is also replicated in the case of non executive directors, i.e, 14.28%. The Chairman and Managing Director are not the same person – the Chairman is Graham Kelley, while the Managing Director is Con Kafataris. The Chairman’s report points out that 2007 is the Company’s first year of trading on the Australian Securities Exchange and the Company has done well in terms of improvement in its financial position. In particular, wagering revenue has increased 17%, while revenue from gaming products has grown by 85%. The Chairman attributes increase in financial gains to the restructuring of capital and debt reduction. The Company is improving its incorporation of technology into its daily operations and the Chairman is optimistic about the Company’s future prospects due to the migration of the Company’s betting to the more versatile OpenBet system. The Company is also in a strong position to consider a business acquisition. The separation of these two offices is an excellent move favoring corporate governance, because a failure to do so could produce an unwelcome result, as was the case of the corporate scandals that erupted in the case of the Mirror Group Newspapers in the U.K, for which culpability was primarily attributed to Robert Maxwell. The actual failures may have been in corporate governance; because Maxwell was allowed to be both Executive Chairman as well as Chief Executive, and no changes were made in terms of financial controls (Drennan, 2004). Hence, the Centrebet Report on the whole, appears to be complying with the requirements for increased disclosure. In the case of CI Resources Limited, the Company has eight directors, of which three are non executive Directors and two are Company Secretaries. Hence the representation of non executive directors works out to 3 out of 6, or 50%.(Annual Report, p 10-11). These non executive directors hold 24,333 indirect ordinary shares and are also paid remuneration, determined within an aggregate directors’ fee pool limit where the maximum currently stands at $200,000. The Board of Directors is the largest shareholder in the Company, holding 38.77% of the shares while the balance of shares is distributed among institutional shareholders and investors from the public. The Company’s corporate governance report is set out at page 18 of the annual Report. It reveals that the Company does not have a sustained disclosure and audit policy in place as compared to the Centrebet Company. While the proportion of non executive Directors is higher than the Centrebet Company, their function in ensuring corporate governance may be hampered by a conflict of interest. The reason is that these on executive Directors are paid remuneration, although they have not received payment against their shares. However, since they receive remuneration, the independence that they are required to have may be compromised. There is no independent and continuous review of the audit process which us being carried out, which may further cloak any irregularities in payments made to Directors or any evidence of the Directors profiting at the Company’s expense. From the position of corporate governance, the Centrebet Company non executive directors do not receive remuneration and are in a better position to ensure independence in their view, thereby enhancing the process of internal control so vital for effective corporate governance. It must be noted that while the risk assessment process at Centrebet may also leave something to be desired, i.e, it does not adequately cover other risks that may be posed to the Company other than financial risks, the risk management process at the CI Company appears minimal and therefore inadequate from the perspective of ensuring corporate governance. The positions of Chairman and Managing Director have been separated at Centrebet, which would undoubtedly enhance corporate governance. The Directors of both Companies have provided a comprehensive statement, identifying the future opportunities existing for their respective Companies and the projected direction those Companies would take in the coming year, which enables investors to make some assessment of potential risks. But it is the Centrebet company that has a much better policy on risk management and higher levels of disclosure in its Annual Report, which is likely to improve corporate governance, while CI suffers from the serious risk of conflict of interest on the part of its directors which could impede corporate governance. The Chairman of the Company is Clive Brown and his report highlights the gains which have accrued to the company from the Phosphate division, especially because of the favorable long term outlook for the rock phosphate and fertilizer markets. With rising prices of oil, there is a greater demand for agricultural crops that can be used as feedstock in bio fuels, and thus, there is a corresponding rise in demand for phosphate fertilizers that may also arise. The Chairman has also mentioned that the Company is trying to improve communications by setting up its website. His Report also mentions the Company’s investment in Xi Feng International Pte Ltd, another phosphate producing facility, which has now started turning a profit, as well as the proposal to enter into a Memorandum of Understanding on the Hunan Two Project in China. References: * Annual Report of the Centrebet Company. * Annual Report of CI Resources * ASX Corporate governance Council, 2003. “Principles of good corporate governance and Best Practice Recommendations”, http://asx.ice4.interactiveinvestor.com.au/ASX0301/Principles%20of%20Good%20Corporate%20Governance/EN/body.aspx?z=1&p=1&v=1&uid=, * ASX Guidance, 2004. “What do the report from the IRG and the ASX Corporate governance council’s response mean for companies?” (Issued 31st March, 2004), http://www.asx.com.au/about/pdf/IRG_report_web_tool.pdf, * Beattie, B, 2005. “Moving the financial accounting research front forward: the UK contribution”, The British Accounting Review, 37(1), P 85-114 * Drennan, Lynn T, 2004. “Ethics, Governance and Risk Management: Lessons from Mirror Group Newspapers and Barings Bank”, Journal of Business Ethics, 52, pp 257-266 * LeBlanc, Richard, 2007. “External disclosure of leading governance assessment practices: what shareholders should be asking and companies should be disclosing”, International Journal of Disclosure and Governance, 4(3): P167-181 * Mallin, Christine A, 2007. “Corporate Governance”.(Second Edition). Oxford. * Rezaee, Z, 2004. “Corporate governance role in financial reporting”. Research in Accounting Regulation, 17, pp 107-149 * Solomon, Jill, 2007. Corporate Governance and Accountability. Second Edition. By John Wiley and Sons. * Young, P.C and Tippens, S.C.,2001. “Managing business risk: an organization wide approach to risk management”, American Management Association Read More