Benefits of Good Corporate Governance in an Organization - Assignment Example

Corporate Governance Name Class Unit 1. What are the benefits of good corporate governance in an organization? An organisation with good corporate governance is able to act as an incentive to the management in pursuing the organisation objectives and interests. An organisation is able to benefit from efficient use of capital (Daily, Dalton & Cannella, 2003). Good corporate governance promotes market confidence and helps in gaining additional capital. Studies have proved that having a good corporate governance helps in accessing capital at a lower cost. Accessing capital at a lower cost has two major benefits. The benefits are; increase in organisation value and enhanced shareholders value. The firm is able to carry out viable projects as the rate of return for the organisation is diminished. Organisations with good corporate governance are able to come up with better strategic decisions which lead to better operational results (Aguilera & Jackson, 2010). Through good corporate governance, the business is able to carry out its duties with the best interest of the shareholders. Corporate social responsibility ensures that the level of confidence necessary for appropriate functioning of the economy is presence. There is promotion of a positive system which benefits the organisation as a whole (Aguilera & Jackson, 2010). An organisation with good corporate governance has a good reputation. Stakeholders are able to see the organisation fiscal policies and controls which might lead to good partnership. People feel more confidence working with an organisation that is transparent. The organisation is also able to avoid fines penalties and lawsuits. There is also reduction of conflicts and cases of fraud due to rules instituted (Black, Jang & Kin, 2006). The modern economy, corporate governance helps an organisation to shape their entrepreneurial leadership. When an organisation has effective corporate governance, they are able to create a competitive advantage. During the financial crisis, firms which had good corporate governance were able to have their stock performing better. The results for good corporate governance are clear and enable the firm to run at equilibrium during economy downturn (Claessens, 2006). Investors pay a higher premium for good corporate governance. It is possible to reduce the organisation cost of debt through use of sound corporate governance. The organisation is capable to improve its stability and the operational efficiency which is very vital for good performance. An organisation that has good corporate governance is able to gain more recognition from the stakeholders (Daily, Dalton & Cannella, 2003). When an organisation is seeking for mergers and acquisitions, their corporate governance plays a vital role. Those seeking mergers and acquisitions looks whether the organisation have a transparency record which is achieved through corporate governance (Black, Jang & Kin, 2006). 2. What are the consequences of bad corporate governance in an organization? Poor corporate governance is a major cause of failure in an organisation. For example, the banking sector can suffer bad debts which erode shareholders funds due to poor corporate governance (Claessens, 2006). This is due to poor regulatory and control frameworks. Organisations fail to grow in a sustainable way when it has poor corporate governance. When there is bad corporate governance, weak management is evident in an organisation. The organisation lacks future planning and no informed decisions are made. There is poor accountability and the final decisions are made without consultations (Black, Jang & Kin, 2006). Another issue is deficient and inadequate accounting in an organisation. The management are not able to get the information about the business performance since the right information is not available. Planning for the possibility of cash shortfalls becomes impossible. This is due to the fact that without corporate governance, it is hard to forecast and implement cash flow plans. Organisations also become prone to costing problems. This leads to instances where products are underpriced (Daily, Dalton & Cannella, 2003). Unsound policies are another consequence of bad corporate governance. Organisations may hold high stock levels due to over production and unrealistic sales targets. This leads to tying up the organisation working capital resulting in cash flow problems (Daily, Dalton & Cannella, 2003). In banking sector, there are ineffective credit card control policies which results in account backlog and problems in liquidity. The organisation becomes unable to expend its market. This leads to reliance on a narrow market base. This gives the small market base to dictate prices making the business to operate at risk (Claessens, 2006). Lack of an appropriate corporate governance leads to over bearing. This involves a situation where the business has large debt that it can pay due to over borrowing. This is a situation which puts the business in a risky situation as it becomes more exposed to changes in performance. The organisation becomes prone to breaching covenants which leads to future uncertainty. It has also been proved that an organisation with poor corporate governance may be overdependence on a single large project (Claessens, 2006). This leads to a lot of resources being put in a single project at expense of other less riskier projects. For example, a new business may overspend their resources on product launch and fail to budget the cost of taking the product to market. Poor corporate governance makes it hard to adapt to change. Corporate governance elicits reactions from the stakeholders. This implies that it have large implications on the organisation reputation. When the organisation’s corporate governance is poor, there is risk getting bad reputation from the stakeholders which discourages investors (Black, Jang & Kin, 2006). 3. Locate the website for a Western Australian organization with a corporate governance program in place. Analyse the corporate governance program they have in place and explain what tools and resources they use to try and enforce good corporate governance. Bank of Common Wealth in Australia is a financial institution with a sound corporate governance framework in place. The bank board have put great importance in good corporate governance for the bank. According to the bank website, the corporate governance guidelines adopted by the bank is comprehensive to balance performance and conformance. Due to sound corporate governance, the business is able to engage in risk taking activities which are normal in the banking sector. The bank corporate arrangements are set in compliance with the 3rd edition of the ASX Corporate Governance Council. The group performance and governance are responsibilities of the bank board (Commonwealth Bank of Australia, 2014). According to the bank website, the board have a major responsibly in implementing corporate governance and coming up with the committees. The bank has set out a system where delegation of authority is carried out. The corporate governance framework is made up of board of directors, CEO, board committees and executive committee (Commonwealth Bank of Australia, 2014). To enforce good corporate governance, the bank has set out the ethical standards to be followed. According to the bank constitution and corporations’ acts, the bank directors are supposed to disclose any interest that they may have in a material contract. The group have put in place a group securities trading policy. The directors can deal with the group securities for a specified period and are not supposed to be in possession of any price sensitive material which is unpublished. The bank has a remuneration committee which helps in fulfilling the members’ responsibilities. The committee is independent and effective by use of the charter for remuneration committee (Commonwealth Bank of Australia, 2014). To fulfil the statutory and fiduciary responsibilities the bank uses the audit committee. The committee provides both statutory and fiduciary responsibilities for the bank. The committee looks at the internal control environment of the group and analyses tax and accounting risks. The bank audit committee helps in overseeing the bank’s accounting policies, accounting requirements and both internal and external audit (Commonwealth Bank of Australia, 2014). The bank uses internal audit tool called the general Audit Assurance (GAA). The tool is used in internal audit, retail network assurance and Credit Portfolio Assurance. The bank also involves external auditor. PricewaterhouseCoopers (PWC) is the external auditor who was appointed in 2008 financial year. The group is expected to comply with the requirements by US Auditor requirements (Commonwealth Bank of Australia, 2014). Risk management at the bank originates at the board level and cascades to the business. The board have the responsibility to ensure that they oversee risk management through establishing systems, approving policies in risk, credit and operations. The bank has a risk committee which oversees the group’s risk management framework. The bank risk management framework is extensive which helps to manage, access, report and identify risks (Commonwealth Bank of Australia, 2014). The bank engages in continuous disclosure to shareholders and market to ensure that they have information on the group activities in a timely manner. This is done in compliance with the continuous disclosure requirements. The group have outlined their ethical policies which are; integrity, collaboration, excellence, accountability and service. The group have their own code of conduct referred to as Statement of Professional practice. Diversity and workplace behaviour policy are implemented to ensure that there is good corporate governance (Commonwealth Bank of Australia, 2014). 4. Locate and summarize a media article about future corporate governance trends. The board at Bank of Common Wealth in Australia puts emphasis that their practices and procedures can always be improved. The group keeps their corporate governance framework under review due to changing standards and regulations. The bank is expected to create a better future for the shareholders, customers, partners, employees and world in general. The bank must have the core value in order to have a competitive advantage. After the financial crisis, there has been an increase in controls and regulations for banks. The bank will have to increase their efforts in risk management fir the wellbeing of the stakeholders. Future trends will be aimed at ensuring that the bank have the capability to retain and improve stakeholders wellbeing through ensuring that the bank is a free from financial risks. There has been an increase in communication between the board and management. The bank aims at increasing the number of board members to 10 in line with the bank’s constitution (Commonwealth Bank of Australia, 2014). References Aguilera, R., & Jackson, G. (2010). Comparative and International Corporate Governance, Academy of Management Annals, Vol. 4, no. 1, p.485–556. Black, B.S., Jang, H. & Kin, W. (2006). Does Corporate Governance Predict firms market Values? Evidence from Korea. Journal of Law, Economic and Organization, Vol. 22, no.2, p.3-13. Claessens, S. (2006). Corporate Governance and Development, The World Bank Research Observer, Vol. 21, no.1, p. 91-122. Commonwealth Bank of Australia (2014). Corporate Governance Statement 2014, Commonwealth Bank of Australia | Acn 123 123 124, Retrieved 10th December 2014 from, https://www.commbank.com.au/content/dam/commbank/about- us/shareholders/corporate-profile/corporate-governance/2014-corporate-governance- statement.pdf Daily, C. M., Dalton, D. R., & Cannella, A. A., Jr. (2003). Corporate governance: decades of dialogue and data. Academy of Management Review, Vol.28, no.3, p.371-382. Read More