Corporate Governance Practices at Woodside Petroleum Limited - Case Study Example

Running Header Financial Accounting Financial Accounting Course Name Professor’s Name Institutional Affiliation City and State Where Institution is Located Date Introduction Corporate governance has been defined as the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. Corporate Governance encompasses the mechanisms by which companies, and those in control, are held to account (ASX 2014). ASX provides eight good corporate governance principles that organizations should apply. This paper looks at the above principles in critically evaluating the depth of application of good corporate governance by Woodside Petroleum Limited as well as mineral resources limited as well as how the application of these principles have impacted on the companies’ performance. Corporate governance practices at Woodside Petroleum Limited (WPL) The following table compares the application of corporate governance principles in Woodside Petroleum Limited (WPL) and Mineral Resources Limited (MIN). Principle 1: Lay solid foundations for management and oversight WPL MIN Has the company disclosed the respective roles and responsibilities of its board and management? Yes but for management not clearly disclosed. Yes. Cleary explained Has the report disclosed those matters expressly reserved to the board and those delegated to management? Yes but for management not clearly disclosed. Yes. Cleary explained Does the entity undertake appropriate checks before appointing a person or putting forward to security holders a candidate for election as director (Christopher and Larcker, 2015)? The areas of competence and skills as well as acceptable criteria for nomination has been clearly laid down yes Are security holders provided with all material information in the entity’s possession relevant to a decision on whether or not to elect or re-elect a director? Yes Yes Does the entity has a written agreement with each director and senior executive setting out the terms of their appointment? Yes Yes Is the company secretary accountable directly to the board on all matters to do with proper functioning of the board? Yes Yes Has the entity put in place a diversity policy The board has a diversity policy both for the board and the employees with 30% of the board being female in 2016. The equal employment opportunity and diversity policy with a target of 20% employees being female. In 2016, 17% of employees were female. Does the entity have a process for periodically evaluating the performance of the board, its committees and individual directors and has the evaluation been undertaken in the reporting period Yes. Pg. 216 discloses how the 2016 took place in accordance with the policy. Yes. The process has been clearly explained. Principle WPL MIN Principle 2: Structure the board to add value Board consists of ten independent non-executive directors and the CEO. With diversity and skills to achieve corporate goals. Does the entity has a nomination committee? Yes. Consists of all non-executive directors with a charter and number of meetings attended disclosed. Yes. Consists of three independent directors. Does the entity has a board matrix? Yes. The matrix details the mix of skills and diversity of the current board. Yes Does the entity disclose the names of independent directors Yes. All directors except CEO are independent in accordance with the company’s independence policy. Yes. Three of the four directors are considered independent Does the entity disclose the length of service of each director? Yes yes Conflict of interest The company has a conflict of interest policy but currently no director is considered to have conflict of interest. Currently no director is considered to have conflict of interest in line with the company’s policy. Is the chairman an independent director (Armstrong and Ittner, 2012)? Yes and he is not the CEO The Chairman is an independent director and is not the CEO. Does the entity has an induction, training and development program for directors? Yes Yes Principle WPL MIN Principle 3: Does the entity act ethically and responsibly? Yes. The company has put in place code of conduct, ant bribery and corruption policy and whistle blower policy, the securities ownership and dealing and policies on payment to political parties all aimed at promoting ethical and responsible behaviour MIN has a clearly laid down code of conduct that guides its operations. Principle 4: Safeguarding integrity in financial reporting -The entity has put in place an audit committee. It also issues CEO and CFO reports while conducting an independent external audit by a competent audit firm. -The company has audit committee composed of three independent members. It conducts an independent external audit while CFO and CEO issue statements certifying financial statements. Principle 5:Making timely and balanced disclosure The entity has put in place measures to ensure timely and balanced disclosure by employing various methods of communication to its various shareholders. The entity has a continuous disclosure policy that allows for timely and balanced disclosure. Principle 6: Respect the rights of shareholders The entity recognizes the shareholders as the owners of the company and hence respects their rights to appropriate information and facilities that allow them exercise their rights effectively. The entity provides adequate information about itself in its website where shareholders as well investors can access various types of information Principle 7: Recognition and management of risk The company has put in place a risk management policy to ensure consistent recognition and management of risks and has also put a risk management committee in place as well as an internal audit function. The company’s risk management policy enables various stakeholders to identify and manage risk. These include the risk management committee, nominations committee, audit committee as well as its code of conduct Principal 8 : Remunerate fairly and responsibly -The company has put in place remuneration committee aimed at ensuring fair and responsible remuneration of both directors and executives. The company has a fair remuneration policy as well as a remuneration committee From the above analysis, it is clear that both the companies have adequately applied the principles of corporate governance as recommended by ASX (2014).However, from the presentation, MIN has a deeper and more clear application since all issues have been clearly explained and addressed. However, the company fails in ensuring the diversity of its board and hence WPL can be said to have strictly adhered to corporate governance principles. Do the companies’ current practices reflect good corporate governance? From the above analysis, the companies’ current practices do reflect good corporate governance. Good corporate governance should entail establishment of a management structure and mechanism within an entity aimed at creating relations between the board of directors, the management, employees as well as the shareholders with an aim of serving the best interest of the shareholders while taking into account the interests of the various stakeholders (Kumar and Zattoni, 2017). In this regard, the practices ought to ensure accountability, responsibility, equitable treatment, transparency, creation of long-term value as well as ethics. It involves observing all the eight principles recommended by ASX (2014) as outlined in the table above. From the above analysis, it is clear that each of the two companies have endeavored to observe each of the principles which have in no doubt led to good corporate governance. Whether the adoption of ASX CGC principles and recommendations have made an impact on the companies’ performance The adoption of ASX CGC principles and recommendations has resulted in improved performance by the company. It should be noted that the company is managed by the board of directors and the management on behalf of the company. Thus, the application of the principles does increase accountability thus ensuring that the shareholders best interest are taken into consideration in managing the companies. The principles make roles and responsibilities clear, they result in more equitable treatment of various stakeholders, they enhance transparency while ensuring ethics are observed and creating long-term value for the shareholders. Furthermore, the principles make it easier to identify and manage risk. The overall effect of the application of the principles thus is a better managed company which positively impacts the companies’ performance. The following table provides a summary of the companies’ remuneration of the past five years (2012-2016) Year WPL MIN Long-term remuneration Short-term remuneration Long-term remuneration Short-term remuneration 2012 $3,518,782 $15,684,718 $266,861 $4,665,602 2013 $9,514,857 $13,272,857 $497,055 $6,516,090 2014 $5,322,275 $17,005,356 $1,376,628 $8,663,335 2015 $7,647,759 $12,921,808 $142,847 $5,908,656 2016 $9,689,865 $12,934,398 $3,301,909 $6,639,522 As can be seen from the table, both long-term and short term remuneration for both the companies vary from year to year depending on the prevailing circumstances. It is however worth noting that because of Woodside Petroleum’s management being larger, the company’s remuneration has generally been bigger over the years. Executive performance benchmarks Both MIN and WPL generally adopt similar executive benchmarks over the five years period. For instance, WPL remuneration policy has two components including the fixed component and the incentives component which has a shot term award (STA) component and a Long term award (LTA) component. The fixed remuneration is based on roles, level of knowledge, skills and experience. On the other hand, the STA component links remuneration to short term performance with 2/3 of it being paid in cash while the remaining 1/3 is paid in terms of differed equity. On the other hand, the LTA component is linked to long-term performance (Jared, 2001). In both cases, performance is based on individual performance and company scorecard based on such KPIs as health and safety and environment. The overall effect is having a remuneration package composed of 30% fixed remuneration, 30% STA and 40% LTA. A similar policy is adopted by MIN where remuneration is mainly composed of cash salaries and benefits with long-term and short-term incentives being based on both financial and operational performance. Comparison of the diversity of the boards Both the companies have a great deal of diversity in their board of directors in terms of skills knowledge and experience. However, the differences arise in board size and gender diversity. The mineral Resources Limited’s Board (MIN) has been composed of four members during the entire period of review while that of Woodside Petroleum Limited (WPL) has been composed of nine members until in 2016 when it was expanded to ten members. MIN board of director is entirely composed of men and this is where it fails in corporate governance (Crombie, 2015). On the other hand, WPL board has had a 22.2 % female representation and 77.8% male representation until 2016 when the female representation rose to 30% which is a sign of good corporate governance. ii) From the summary in 2(i) above, the performance benchmarks for remuneration are clear and appropriate for both the companies. This is because they have been designed in such a way that an executive knows what they are likely to get in terms of remuneration if they achieve a certain level of performance on top on their normal fixed remuneration. The benchmarks are appropriate since they act as incentives for one to work harder thereby earning more while the company also gains in terms of short term and long-term value. iii) Link between diversity of boards (including gender diversity) and companies’ performance The table below compares how the two companies performed financially over the five years period. Comparison of financial performance WPL MIN Year Profit EPS Female in the board profit EPS Female in the board 2012 $973,000,000 104 Cents 22.2% $243,324,000 132.29 cents 0% 2013 $113,000,000 32 cents 22.2% $180,387,000 97.48 cents 0% 2014 $2,516,000,000 293 cents 22.2% $230,693,000 124.10 cents 0% 2015 $1,814,000,000 213 cents 22.2% $7,777,000 6.5 cents 0% 2016 $3,044,000,000 366 cents 30% ($27,068,000) (13.31) cents 0% From the above analysis, it is clear that WPL performed better over the five years period as far as returns to the shareholders is concerned and also earned profit throughout the period as opposed to MIN which had a loss in 2016. In terms of board’s diversity, WPL board is more diversified. Since the board is bigger than that of MIN, it brings in more knowledge and skills as well as talents and hence it can be said to be more diversified in this respect. Furthermore, the board has had gender diversity throughout the period with female representation ranging from 22.2% to 30% over the period with the rest of the board being male (Zhichuan and Dylan, 2015). On the other hand, MIN makes no attempt to make its board gender diverse since it has had no female throughout the period and is entirely composed of men. Coincidentally, WPL which has a better diversified board has performed better throughout the period and has had greater earnings for its shareholders. On the other hand, MIN performance is not as good as that of WPL. In this respect therefore, it can be concluded that there is a link between a company’s performance and the diversity of its board (including gender diversity). It is thus concluded that with all factors being equal, the more diversified a company’s board is, the better will be its performance. 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Zhichuan, L&, Dylan, M2015, Corporate Governance and Executive Compensation for Corporate Social Responsibility, Journal of Business Ethics, vol. 136, no. 1, pp. 199- 213. Read More