Shareholder-Centered Nature of Australian Corporate Laws and Plight of Stakeholders - Case Study Example

Shareholder-centered Nature of Australian Corporate Laws and Plight of Stakeholders Name Institution Instructor Course Date Abstract This report is about the corporate governance with specific mention of the corporate law in Australia. The report introduces the subject of the collapse of corporate in Australia. It particular it mentions the collapse of the HIH Insurance and the One.Tel Company and the consequences it had on the stakeholders. The issue of corporate governance is addressed in details in regard to the role of boards of directors in companies. The report continues to illustrate the importance of corporate social responsibility in improving the brand image of companies. Plight of stakeholders such as employees is addressed in relation to the collapses of companies due mismanagement or other factors. Recommendations regarding corporate governance and the importance of addressing the plight of stakeholders in an organization are also given. Table of Contents Abstract……………………………………………………………………….2 Introduction……………………………………………………………….......4 Background Information………………………………………………………4 Corporate Governance…………………………………………………………4 The Collapses of HIH Insurance and One.Tel…………………………………5 Corporate Social Responsibility……………………………………………….8 Company Stakeholders………………………………………………………...9 Conclusion and Recommendations……………………………………………11 References……………………………………………………………………..12 Shareholder-centered Nature of Australian Corporate Laws and Plight of Stakeholders 1. Introduction For many years scholars have shown interest in the effects of shareholding system of corporate governance utilized in the United Kingdom and especially Australia. International corporations have also interested in the application of corporate governance laws. Outsider systems are associated with shareholder-centered corporate governance while insider systems are associated to stakeholder-centered model (Whincop, 2006). The corporate collapses in Australia affect stakeholders such as employees, negatively and to some extent also affect the corporate social responsibilities of the affected companies. 2. Background Information Corporate organizations have always strived to have strong relationships with all their stakeholders who include employees, shareholders, and local communities through engaging in corporate social responsibilities. Any company that does not put these groups in mind may have challenges in implementing its objectives (Lehman, 2007). When corporations collapse due to poor administration or other reasons, the employees are likely to be effected directly. In order to address the plight of stakeholders companies need to embrace effective corporate governance. 2.1 Corporate Governance Corporate governance is the system through which corporate organizations are controlled and directed. This may include the structure and composition of the board of directors, financial reports, auditing, and recognition of the minority shareholders’ rights. Corporate governance is also regarded as a means to address the issues of corporate citizenship, eliminating corruption and participating in social responsibility practices. A weak corporate governance system lacks transparency and shows no interest in protecting the rights of the minority shareholders. This in return discourages foreign investments and capital flows from external stakeholders. A good implementation of corporate governance is mostly associated with positive financial results in a company. Stakeholders are regarded as individuals who can possibly count losses when a company collapses or is faced by some sort of calamity. An appropriate stakeholder management puts into account all the stakeholders’ interest in an organization including the Corporate Social Responsibility. According to corporate governance, law is paramount in the development of financial markets. Many law reforms have been suggested especially due to the corporate collapses in countries such as Unite Kingdom and Australia. These reforms are aimed at rectifying governance weaknesses in corporate legal systems. 2.2 The Collapses of HIH Insurance and One.Tel The global corporate collapses represent a crucial moment in the contemporary corporate governance. The corporate collapse that involved HIH Insurance and One.Tel in Australia raised a lot of ethical questions on corporate governance and financial regulation (Roberts, 2007). HIH is the biggest collapse in the Australian corporate history and was discovered by the HIH Royal Commission which presented its report in April 2003. One.Tel was a corporate involved in telecommunications market and had a vision of being the major telecommunications provider in Australia in the larger European Market. This however did not happen as One (Whincop, 2006). Tel only survived for less than four years after it was listed in the Australian Stock Exchange in 1997. The collapses of the two companies were similar in many ways. Both companies participated in risky practices in markets that were considered to be highly competitive. For HIH, the practices included lack of appropriate surveys in insurance margins, and participating in London reinsurance market. High losses were also experienced in the Californian workers’ compensation market. More losses were also encountered when HIH took over FAI insurance based on inadequate information. Australia had adopted a system that continuously disclosed the public listed companies. Despite the existence of this rule that allowed for continuous disclosure, some investors had access to more information than others concerning HIH and One.Tel corporations. The information was about the financial positions of the two companies. HIH and One.Tel companies had substantial block shareholders. For instance, 50 percent of HIH was under Winterthur Swiss Insurance Company which was considered to have a high credit rating. This company eventually sold all its shareholding to the public in 1998. The shareholders at One.Tel were however more active than those of HIH. One reason that led to the collapse of the Australia’s One.Tel were the main players in the scandal who included James Packer and Lachlan Murdoch who had inherited large fortunes from their families. Both were non-executive directors at One-Tel Company. Board failure was also mentioned by the board of directors to have contributed to the corporate collapses. There is a global trend that has come up allowing stock exchanges to be more active in corporate governance laws. In Australia, the Australia Stock Exchange (ASX) continues to play a main role in corporate governance since 1996, where a rule was introduced requiring all listed companies to disclose some corporate governance practices included in their annual financial reports (Whincop, 2006). Some institutional investors and other stakeholders were opposed to the rule stating that it lacked regulatory mandate. Before the collapses of One.Tel and HIH companies in Australia, the Australian corporate governance was publicly criticized by some financial scholars for being compliance-based other than performance-based. The collapses led to the strengthening of the Australian corporate governance laws where ASX also adopted the ASX Corporate Governance Principles. Under this principle, the U.K style of comply or explain was adopted as a way of enhancing stricter regulations (Roberts, 2007). Most of the ASX corporate governance principles stipulated the direct roles of directors and their effectiveness in the company structure. All the companies listed in the ASX had to comply or explain their application of these principles in their annual financial reports. The statements from HIH annual reports in 2000 showed that the company was interested in adhering to work ethics and code of conduct. This did not however march with the report from the legal proceedings on the collapse of HIH, which led to a deficit of Australian $5.3 billion; found that directors had breached their duties towards the collapse period. The corporate governance was strengthened by the Higgs Report on Review of the Role and Effectiveness of Non-Executive Directors on 2003 (Hill, 2007). The recommendations from this report was that the composition of board of directors and their recruitment ought to be strengthened in order to fit in the UK model of ‘comply or explain’. The collapses of international corporate have led to the need to control conflicts in companies. Australia’s regulatory responses were in strengthening the structure of stakeholders such as external and internal auditors as a way of controlling management-employee conflicts of interest and misconducts. The winter Report was quite influential in Europe as it advocated for the importance of non-executive directors in corporations that had majority shareholder so as to ensure monitoring for the sake of the minority shareholders. Following the collapse of various companies in Australia and in other parts of the world, there was need to adopt reforms for enhancing managerial accountability for the sake of shareholders, employees and other stakeholders. The boards of directors were associated with the scandals whereas shareholders were viewed as innocent victims of circumstances. In the Australian reforms, the objective was to strengthen the shareholders’ rights for participating in corporate governance (Hill, 2007). In this regard the CLERP 9 Act illustrated the need to increase the shareholders’ activism in order to have influence in the companies they choose to invest in. this act also gives shareholders powers to give their views concerning the remuneration of employees and how their plight should be addressed in case of a company collapse. 3. Corporate Social Responsibility Corporate Social Responsibility (CSR) aims to build the relationship between a company and the society in its surrounding environment. This also includes the international and local communities in the natural environment. CSR is generally a voluntary behaviour than a company undertakes as a way of giving back to the community and is more than just being legally compliant (Lehman, 2007). Although laws and regulations are necessary for effective corporate governance, a company may not sustain itself without including the element of corporate responsibility. As the private sector continues to grow in Australia, it is widely acceptable that companies have more responsibilities in addition to making profits that benefit shareholders directly. A company should therefore ensure business activities are undertaken in an ethical manner, and that are socially and environmentally responsible. Companies that have experienced collapses in Australia engage in CSR in order to retain a large percentage of their loyal customers and to avoid some undesirable consumer actions such as boycotts. Engaging in CSR also makes the communities surrounding a company to have positive perception towards working in such a company (Lehman, 2007). Installing the necessary legislation is therefore paramount in adopting voluntary programmes that are in harmony with the agreed codes of conduct and work ethics. In general CSR enables organizations to win the support of the communities where they are business operations are situated. 4. Company Stakeholders Stakeholders in a company play a major role in giving it legitimacy a responsible business enterprise. Even in a situation where an organization strongly believes to be acting responsibly, it is likely to encounter some reputational damage if stakeholders fail to perceive it as responsible. In relation to this many of the companies that have faced corporate collapses in Australia publish annual reports that include their involvement in corporate responsibility. Sustainability reporting is also used as a communication method that strengthens the stakeholders trust and also enhances the relationship between company directors and shareholders. Shareholders in a company have the rights to participate in the voting of company directors and to earn their income in form of dividends. In family-owned businesses, shareholders are actively involved in the running of the business. In Australia the interests of other stakeholders in a company are protected by law (Hill, 2005). Some companies have legal contracts with consumers, and suppliers. The rights of employees are also protected legally and companies should accept responsibility of their employees even in the verge of collapse. It is the role of the board of directors to consider all the stakeholders in a company as they are potential beneficiaries of all the business operations. When stakeholders’ concerns are addressed their relationship with the company is strengthened and an organization maximizes wealth creation. The UK Companies Act of 2006 addresses all the interests of shareholders in a company and the duties of directors. Stakeholders affect the performance of a company even if they have divergent interests. The Act stipulates that directors should consider the interests of stakeholders whenever they make decisions touching on company operations. Stakeholder engagement is an important tool in corporate accountability. Boards of directors are often responsible for maximizing shareholders’ value although various shareholders may hold different views about how their share value can be increased (Kraakman, 2004). The board also has the responsibility of putting in place appropriate and effective risk management measures in order to cushion stakeholders in case of a company collapse. The management of both financial and non-financial risks falls under the company directors. 4. Conclusion and Recommendations Research studies have reported that companies with good financial performance treat their employees, customers, communities, and other stakeholders well. The positive treatment of employees and community members also benefits shareholders in the long run. Businesses reduce the risks of financial collapse by engaging stakeholders (Hill, 2005). This is especially important in the companies with prominent brands and hence vulnerable to brand reputational risk. Incorporating and understanding the interests of employees, consumers, and other stakeholders, assists companies in the management of environmental and social responsibilities. It also reduces the chances of brand collapse by improving cost savings. The collapse of many companies in Australia was caused by corporate governance failures. Corporate governance should monitor the accountability of the boards of directors. In most instances shareholders protest against high pay of boards of directors that fail to comply with company’s corporate governance regulations. When stakeholders are engaged, the overall accountability in a company is enhanced (Kraakman, 2004). If stakeholders in HIH and One.Tel companies were fully involved, through stakeholders’ engagement, the eventual collapse could have been predicted well before it happened and this could have saved the companies numerous resources. Employees and corporate responsibility issues are crucial in business operations and stakeholders should be engaged in the running of a company for accountability purposes. Relating to the societies and other external stakeholders enables a company to understand the society’s expectations and may be financially beneficial in increasing staff morale or improving the company’s reputation in the society. References Hill, J. 2005. “ Regulatory responses to global corporate scandals.” Wisconsin International Law Journal. Vol. 23, Issue 367, pp.58- 62. Hill, J. 2007. “ Evolving Rules of the Game in Corporate Governance Reform”. GovNet eJournal. Vol. 1. Issue 2, pp.112-139. Kraakman, R. 2004. The Anatomy of Corporate Law. New York: Routledge. Lehman, C. 2007. Envisioning a New Accountability. London: Elsevier. Roberts, J. 2007. “Regulating the relations between stakeholders.” Australian Journal of Corporate Law. Vol.12, Issue 5, pp.56-63. Whincop, M. 2002. “The Institutional Politics of Corporate Law in Australia.” Company and securities law Journal. Vol. 20, Issue 8, pp. 25-32. Read More