Governance and Fraud - Principles of Corporate Governance, Performance Benchmark, and Executive Salary - Assignment Example

Governance and Fraud Name Date Course Question 1 Principles of Corporate Governance According to ASX, corporate governance is a framework of rules, relationships, systems and processes within and by which authority is exercised and controlled within corporations. The principles of corporate governance involves the recommended practices for the entities listed on ASX that have the potential of achieving good governance outcomes and meet the reasonable expectations of most investors in most situations. The principles are applicable to all the ASX entities including those that are not operating in Australia. 8 central principles have been outline and they form the basis of corporate governance for the ASX entities (ASX, 2014). Laying solid foundation for management and oversight is one of the central principles of corporate governance. The ASX enlisted entities are required to structure the board to add value. The corporations are required to act ethically and responsibly as part of the corporate governance. Safeguarding integrity in corporate reporting is also part of the corporate governance principle. A listed entity is also required to make timely and balanced disclosure. The respect for rights of the stakeholders is part of the principle for the ASX listed companies. The listed entities are also required to recognize and manage risks. The remuneration of the directors should be fair and responsible. This is for the purposes of attracting and retaining high quality directors. The 8 principles have the ability of impacting positively on the governance as well as the performance of the organization. Link between Corporate governance and performance Corporate governance influences the decision making process of an organization and it therefore has a direct impact on the performance. Corporate performance usually determines the ability of an organization to engage in ethical practices. This has a direct impact on the customers. When high standards of ethics are maintained within an organization, it is likely to perform well as most customers will be retained and new ones attracted (Lama & Anderson, 2012). However, low levels of ethics have negative impacts on the performance of the organization. Corporate governance promotes consistent leadership within an organization. An organization performs well under consistent leadership and hence the importance of corporate governance in promoting good performance. A high level of management turnover has negative impacts on the performance of the organization. Accounting irregularities is one of the main problems that face most organizations. This has translated to poor performance and collapse of some of the organizations. Corporate governance encourages the company to provide accurate accounting reports. IOOF HOLDINGS LIMITED and DJERRIWARRH INVESTMENTS LIMITED are some of the ASX enlisted companies that have not performed well as a result of not fully abiding by the ASX corporate governance principles. Enron Corporation is also one of the organizations that faced major challenges as a result of poor corporate governance principles in terms of financial reporting (Lama & Anderson, 2012). The environmental issues are currently becoming an important aspect for most of the organization. The environmental performance of an organization is greatly influenced by corporate governance. Corporate governance therefore has a direct link with the performance of an organization. Link Between ASX Principles and two Selected Companies IOOF HOLDINGS LIMITED and DJERRIWARRH INVESTMENTS LIMITED are ASX enlisted companies which are required to comply with the governance principles. IN 2010, Djerriwarrh has complied with most of the governance principles. However, it had not complied with some of the principles including the remuneration of the directors as well as the laying solid foundation for management and oversight. This performance of the company improved in various areas although it suffered a loss during the financial year (ASX, 2014). The previous performance of the company was not good enough before it embraced the corporate governance principles. The financial crisis of 2008 affected the performance of the company but the executive payment remained high. This was also the case in the previous years although the introduction of corporate governance has seen the company improve on the issues of executive pay. IOOF Holding had a lot of problems in the past with regards to the issues of corporate governance. This also includes the executive pay as well as ethical issues. In the past, the company was faced with accusations of poor pricing and lack of integrity safe guards. The company has experienced some changes although some of the employees of the company have still raised concerns with the issues of risk management, unit pricing and employee involvement. Measures are being put in place to ensure that the company is fully compliant with the 8 ASX corporate governance principles. The companies could have performed better if they were required to adopt all the ASX principles and recommendations. Question 2 Performance Benchmark and Executive Salary The performance benchmarks have been put in place in the two companies for the purposes of ensuring that the goals and objectives of the company are met. At IOOF Holdings, the Total fixed remuneration has been experiencing an increase with the current figures being at $ 1,207,206. The short term incentives have remained constant in the last two years. Two thirds of the incentives are usually paid in cash while a third is in deferred shares. The performance right of $ 70,000 has currently been proposed by the board. This is an increase from the previous years (ASX, 2014). This is an indication that the company has is putting in place measures to address the issues of executive pay. At Djerriwarrh investments, the company has also put in place measures to address the issues of executive compensation. However, the company does not pay any performance based remuneration to the director. The shareholders of the company are required to approve the long term remuneration for the directors. The amount has however been increasing over the years. In 2010, the annual remuneration of the directors was $ 800,000. The amount has also been experiencing an increase in the last five years. At Djerriwarrh investments, the director will still receive their remuneration regardless of the performamance. The involvement of the shareholders plays an important role in terms of ensuring that the company does not spend too much in the executive compensation. Disclosure of Executive pay At IOOF Holdings, the disclosure of executive is clear and appropriate. In the statement by the company, need to comply with the ASX listing 3.1 and ASX on disclosure of CEO pay has been clearly highlighted (ASX, 2014). This is an indication that the company is committed to providing accurate information with regards to the salaries of the CEO. All the benefits as well as allowances that the CEO will receive have been clearly highlighted in the statement. The performance benchmark for the remuneration is also clear in the statement. This is a further indication that the company intends to comply with ASX corporate governance principle of disclosure. This is also important in ensuring that any conflicts with regards to the remuneration of the CEO are addressed. At Djerriwarrh, the disclosure of the CEO remuneration is not clear and appropriate. A lot of information has not been provided and hence making it inappropriate. The constitution of the company has been cited in this section for addressing the lack of adequate information (ASX, 2014). However, this is not satisfactory as full disclosure is required under ASX principles. In the statement, the company has highlighted that it does not have an equity-based remuneration scheme. The statement has also stated that it is not appropriate for the company to follow the recommendation of establishing a separate remuneration committee. The outsourcing of the administrative functions is a reason that has been provided by the company. However, the disclosure is not clear and appropriate at the company. Remuneration and Performance Linking the performance of the company and the remuneration of the CEO has attracted a lot of discussions from different stakeholders (Kathyayini, et al, 2012). The main reason is that some of the CEOs earn more money while the company continues posting poor performance. This link is important as the CEOs are usually hired for the purposes of ensuring that the company is successful. At IOOF Holdings, the remuneration of the CEO is clearly linked to their performance. A performance rights amount has also been set up by the board. The performance of the CEO determines whether they will receive the amount or not. The shareholders as well as the board members have a role to play in terms of approving the amount that has been set aside for the remuneration of the CEO (ASX, 2014). The link between performance and remuneration is aimed at promoting transparency and efficiency at the company. At Djerriwarrh, the remuneration of the employees is not linked to their performance. A fixed amount is usually decided at the beginning of the year for the remuneration of the CEO. This means that the CEO will still be paid the amount regardless of their performance. However, the company has clearly stated that this is derived from the constitution of the company. The company has also stated that it does not have employees and it outsources the administrative functions. This therefore makes it difficult for the company to link the performance of the CEO to the remuneration. Question 3 Comparisons between ASX corporate governance principles and NFP The first NFP principle of good governance is roles and responsibilities where the duties of the directors have to be clearly outlines. This is similar to the first principle of ASCX which requires the roles and responsibilities to be clearly defined in order to lay a solid foundation. According to the second NFP principle, the composition must have the right group of people. This is similar to the second ASX principle which deals with the structure of the board. The third NFP principle is purpose and strategy where the board has to play an important role in setting it (NFP, 2013). This has not been clearly outlined in ASX principles although it is almost similar to the first ASX principle. Risk recognition and management is the fourth NFP governance principle and this is also similar to seventh ASX principle which requires an organization to come up with a framework to manage risks. Organizational performance is the fifth principle and the board is required to determine the appropriate performance indicators and categories. The ASX principle does not address the issues of organizational performance in relation to the indicators. The sixth NFP governance principle is about the board effectiveness and an organization is required to put in place measures which ensure that the board is effective. This principle has not been addressed effectively in the ASX governance principles. However it is almost similar to the first and second principles which deal with the board. The seventh NFP governance principle is about integrity and accountability by the board and organization during the flow of information and decision making. This principle is similar to the third, fourth and fifth ASX governance principles which emphasizes on ethics, transparency and accuracy during reporting and disclosure of information. The eighth NFP governance principle is about organizational building and the board is required to take an active role. This has however not been highlighted in the ASX corporate governance principles. The ninth corporate governance principle of NFP deals with the issues of culture and ethics. The board is required to set an ethical tone during the decision making process and other activities. This is similar to the third ASX corporate governance principle. The final NFP governance principle is about engagement of the stakeholders in the decision making process. This is similar to the sixth ASX principle which requires the rights of the stakeholders to be respected and maintained. The two corporate governance principles have a lot of similarities. However the ASX principle tends to put more emphasis on the business and financial aspects within a business. Little emphasis on the financial issues as well as the business aspects characterizes the NFP corporate governance principles (Chapple, et al, 2014). The corporate governance principles are aimed at enhancing the performance of the organizations. In the NFP corporate governance principles, little emphasis has been placed on the executive pay. This can be attributed to the nature of the organizations. List of References ASX, 2014, Corporate governance Principles and Recommendations, ASX Corporate governance council. ASX, 2014, IOOF Holdings limited Annual Report, Retrieved on 13th August 2015 from, . ASX, 2014, Djerriwarrh investments Limited Statutory Annual Report, Annual shareholder review, Notice of Meeting and Proxy Form, Retrieved on 13th August 2015 from, . NFP, 2013, Good Governance Principles and guidance for Not-for-Profit Organizations, Australian Institute of Company Directors. Lama, T & Anderson, W, 2012, Company characteristics and compliance with ASX Corporate governance Principles, Pacific Accounting Review, Vol. 27 Iss: 3, pp. 373-392. Kathyayini, K, et al, 2012, Corporate governance and environment reporting: An Australian Study, The international Journal of business in society, Vol. 12 Iss: 2, PP. 143-163. Chapple, L, et al, 2014, Corporate governance and securities class actions, Australian Journal of Management, Vol. 39, No 4, pp 525-547. Read More