Major Regulatory Influences on Corporate Governance - Essay Example

Running Head: REGULATORY INFLUENCE ON CORPORATE GOVERNANCE IN AUSTRALIA Regulatory Influence on Corporate Governance in Australia Name Course Tutor Date Introduction Corporate governance can be defined as a control system under which organisations are directed. It refers to how authoritative responsibility is carried out within organizations. It relates to the functionality of leadership and management in terms directorship. The roles of directors in relation to stakeholders in an organisation fall under corporate governance. Corporate governance also deals with issues such as constitution of the board of directors. In this aspect, maters of composition in regard to executive and non executive directors are constituted. Executive directorship entails full time responsibility toward an organization while non-executive directors do not have full time commitments corporate governance is also involved in the composition of various committees that run the corporation. The audit committee is responsible for auditing and ensuring that financial statements and other documentation reflect a true and fair view of the corporation. There is also the nomination committee that is responsible for recommending appropriate candidates for selection to directorship positions. The remuneration committee is tasked with coming up with salaries, benefits and other compensation packages for employees in the corporation (Nelson, 2005, p. 200). Apart from these roles, corporate governance also separates and mandates different directors with different roles. For instance, the roles of the board chair may be distinguished from those of the Chief Executive Officer. Other important functions of corporate governance include determining the extent to which control is extended or delegated and manner in which reporting on relevant issues is done. In the recent past, a significant upheaval has seen a substantial change in how corporations are run. The organizational culture of governance is no longer a dominant factor in determining the way corporations are run. The degree and scope of corporate governance has significantly expanded due to the changing dynamics of corporations and their operations (Nelson, 2005, p. 203). There is also the need for directors and leaders to be more involved in the day to day running of corporations. This need for closer scrutiny and monitoring is in a bid to create more growth opportunities given the liberalization of markets world wide. This research paper will discuss major regulatory influences on corporate governance. Corporate governance Inadequate corporate governance strategies or lagging behind in corporate governance may result in collapsing of corporations. Some of the major issues that lead to collapse of corporations are huge executive perks that do not correspond to the efforts put into the corporation. This is, especially rampant in the private sector. Poor corporate governance led to the fall of several corporations in the UK in the 1990s. However, the situation is different in Australia. It is ranked as one of the counties with the most efficient corporate governance strategies in the world. It has always ranked in the top three according to the world economic forum. This is according to stakeholders such as investors and management teams that expressed strong super visionary approaches to decision making. Another evaluation by Governance metrics International ranked Australia an overall fourth in 2008 (Australian Governmet Productivity Commission, 2010). The criteria that was use to arrive at the decision was based on accountability, board disclosures, shareholder perceptions, ownership, executive remuneration, and active internal controls. To achieve effective corporate governance, there are various regulatory and control measure that Australian firms have implemented I their specific portfolios. Collectively, it was noted that similar approaches to corporate governance had contributed to the overall results. Regulatory Influences of Corporate Governance in Australia Regulation of remuneration The remuneration of executives in corporations are based on full disclosures and accountability by executives to shareholders and other relevant stakeholders. It is built on a combination of laws, regulations and guidelines that all are expected to comply with. These laws are formulated by bodies such as the Australian Securities Exchange. Other advisory bodies that contribute to regulatory procedure include the Corporate Governance Council among other institutions. The bodies work hand in hand in coming up with regulatory guidelines. The framework employed is a complex one and it encompasses listed financial services institutions, listed and non listed companies. First, The Australian securities Exchange and Corporate Governance council have their own set requirements. They are based on listing, compliance with accounting and prudential standards. Corporations are expected to comply or comprehensively explain their reasons for any making contrary arrangements. Other institutions that are enjoined in the regulation process include Australian Institute of Corporate Directors, Australian Council of Super investors, Australian Prudential Regulation Authority, Australian Shareholders Association among other stakeholder oriented groups. To further strengthen the framework, the Corporations Act of 2001 supports these institutions. The Corporation Act The corporation act provides a wider and more comprehensive approach to running of corporations in Australia. Apart from regulating remuneration of executives and directors, it further regulates the formation of corporations and clearly enumerates the duties of directors towards safeguarding the interests of stakeholders. The scope of the act is different depending on whether corporations are private or public. Public companies are subjected to robust disclosure and reporting practices compared to private ones. Some of the issues covered in the act relate to registration of corporations, membership, selection of directors, reporting and disclosure, takeovers, fundraising and financial activities. The act provides guidelines on executive remuneration in regard to their responsibilities and roles in the corporation. It also outlines the way board should be structured and constituted. It requires voting and agreement of remuneration by shareholders n cases of termination. The board of directors, as selected by owners should appoint a CEO and then decide on remuneration perks. The act also requires full disclosure of comprehensively audited financial reports. One of the annual reports is the remuneration report which should be in line with agreed standards as mentioned before. Failure to adhere to this, directors seek facing legal action and even imprisonment. Amendments to the act to further ensure corporate responsibility have been implemented since 2001. In 2004, the use of non binding voting was introduced in regard to the remuneration disclosures (Subramaniam, Stewart, & Shulman, 2013, p. 950). The shareholder was also given more voting powers by reducing their threshold, particularly when termination is a subject Corporate Law Economic Reform Program Implementation of this law began in Australia in 1997 and has been one of the contributors to the high rankings it was meant to strengthen the corporate law. The law was in response to a report that showed a need for evaluation of regulatory guidelines. The law sought to conceal loopholes in corporate governance that were taking advantage of free markets, shareholders and investors. The law was implemented in 9 stages. Each consequent stage strengthened the regulatory measures, further safeguarding stakeholder interest and preventing eminent losses. Initially, accounting standards setting was reconstructed to include new guidelines. The process included restructuring of general accounting standards in Australia and establishment of a financial reporting council. Due to fraudulent fundraising practices, the process was reviewed, costs reduced and disclosures enhanced the law introduced business judgment rule which was supposed to be a corporate duty of directors in the organisation. When major decisions such as mergers and notification were to take place, the law requires notification of all stakeholders in due time. Accessibility to information is enhanced electronically and can be gotten any time a user feels the need to. Institutions offering financial services and support were more prone to malpractices than other companies. To solve this problem, a reform of the financial market system was necessary. This step led to the formation of Australian Prudential Regulation Authority. Forwarding complaints and suggestion was, made easier through simple documentation. There was also the need to comply with international cross border transactions as per the rules set by The United Nations (Spedding, 2009, p. 504). Generally, the law sought to tighten corporate governance ties and ensure that the system followed was just and equitable. Australian Stock Exchange Listing Regulations The ASX has set rules and regulations that govern the process of listing of public companies. The requirements for a company to be listed in Australia depend on quotation and listing, information on markets, supervision and settlements. Most institutions under this body will also be under the Corporations Act as well. The rules followed in listing are evaluated from time to time to include emerging aspects that develop every now and then. The main aim of this is to ensure that corporate governance safeguards he interests of investors. Though the ASX sets some of these rules, the relevant ministry has to approve them before they become effective. The key areas that are controlled by this body revolve around remuneration of directors, voting exclusions, issuance of shares and full disclosures. Failure to meet regulation set by this body, consequences such as fines, suspension of operations, sanctions and compulsory training for directors. The rules of disclosure state that directors should immediately let ASX know if new information that any reasonable stakeholder would want to know. Entities should not alter director remuneration perks without the consent of shareholders. If directors are seeking to be elected in governance positions, they are expected to resubmit their bids to shareholders. If individual directors were to be allowed to own more than 5% of the company, shareholders must vote to make these decisions (Otchere, 2006, p. 935). Shareholders have a lot of power in shaping corporate governance in Australia through their voting rights. Some of the decisions that require voting rights include, termination payments exceeding 5 % of the total entities, share incentive schemes and equity. If there is a change in control of the entity, senior executives cannot receive termination packages. Regulations by APRA Financial services are controlled by The Australian prudential Regulation Authority. Financial institutions such as banks, building societies, microfinance institutions, insurance and credit unions are controlled by APRA. The reason for closer scrutiny of financial services is the high risk of third parties losing their money and the impact of failure in such institutions. Some companies under this umbrella are also under the ASX and Corporations Act. The body recommended that risk management should be aligned with remunerations. To oversee, a remuneration committee should be formed and mandated to set remuneration polices. APRA applies remuneration polices based on structure of entities. The remuneration structure is the sole responsibility of the directors. However, their powers are limited. They are required to establish and maintain a remuneration policy which should be regularly reviewed and also create a remuneration committee to oversee the processes. The remuneration process and policy involves directors, managers, financial controllers, and executives (Australian Governmet Productivity Commission, 2010). In forming the remuneration committee, it should have non executive directors only. Members should also independent including the chair. Review of remuneration packages should be done at least once in three years annually, recommendations regarding the same should be made to the CEO. APRA guides entities in making remuneration decisions. Adequate remuneration policies should incorporate issues such as risk when performance targets are formed Conclusion From the above rules and regulations, it is now clear why Australia ranks very high in corporate governance. There are various watchdog institutions that are tasked with the responsibility of ensuring that directors put the interest of stakeholders’ firsts. The Australian situation recognizes the powers held by directors and has put adequate measures in place to tame them regulatory measures ensure that directors and executives do not award themselves hefty perks at the expense of stakeholders. The system is also based on a doctrine of disclosure and accountability. All information regarding entities is readily available. It is also easy lo lodge complaints to relevant authorities. Regulation bodies have clear guidelines regarding duties, responsibilities and liabilities of directors. Another aspect that is evident in the Australian regulatory bodies is flexibility. These bodies are not rigid and allow for review of policies regularly. This is essential in ensuring that new standards are incorporated in the regulations. The issue f set standard is also paramount. Set international and local regulations are the guidelines which directors and executive follow in governance. The issue of corporate governance is very sensitive and requires strict rules to safeguard stakeholder interests. References Australian Governmet Productivity Commission, 2010, Overview of the regulatory and corporate governance framework, pp. 125-138. Nelson, J,2005, 'Corporate governance practices, CEO characteristics and firm performance',Journal of Corporate Finance, Vol 11,no 1,pp. 197-228. Otchere, I, 2006, 'Stock exchange self-listing and value effects',Journal of Corporate Finance ,vol 12, no 5, pp. 926-953. Spedding, L,2009, 'Chapter 14 - International dimensions: corporate governance in Australia',Due Diligence Handbook ,pp. 497-517. Subramaniam, N, Stewart, J, & Shulman, A,2013,'Understanding corporate governance in the australian public sector',Accounting, Auditing & Accountability Journal, vol 26, no 6,pp. 946-977. Read More