Australian Corporate Governance - Case Study Example

Student Name: Tutor: Title: Australian Corporate Governance Institution: Due Date: Table of Contents Table of Contents 2 1.0 Introduction 3 2.0 Importance of corporate governance in Australia 3 3.0 Australian corporate governance framework 4 4.0 Australia’s present corporate governance framework 6 4.1 The Corporations Act 6 4.2 ASX listing rules 7 4.3 Advisory guidelines 8 4.4 The ASX corporate governing council principles and recommendations 9 4.4.1 Principle 1: Lay solid foundations for management and oversight 10 4.4.2 Principle 2: Structuring of the board in order to add value 10 4.4.3 Priciple3: Promotion of responsible and ethical decision making 10 4.4.4 Principle 4: Safeguarding of integrity in financial reporting 11 4.4.5 Principle 5: Making balanced and timely disclosure 11 4.4.6 Principle 6: Respecting of shareholder’s rights 11 4.4.7 Principle 7: Recognition and management of risk 12 4.4.8 Principle 8: Fair and responsible remuneration 12 5.0 Conclusion 13 6.0 Bibliography 14 1.0 Introduction Corporate governance refers to the rules, laws, or processes through which businesses are regulated and controlled. It is the framework of relationships, rules, processes and systems within and by which authority is controlled and exercised in organizations. It encompasses the mechanisms through which corporations, and those in regulation, are held account. Corporate governance influences the manner in which organizational objectives are set and accomplished, how risk is assessed and monitored, and how performance is optimized. Efficient corporate governance structures encourage organizations to create value, via innovation, entrepreneurialism, development and exploration, and offer control and accountability commensurate with involved risks. 2.0 Importance of corporate governance in Australia Demonstrably excellent practices of corporate governance are increasingly significant in the determination of cost of capital in an international market. Australian organizations are required to be equipped with to compete internationally and to promote and maintain investor confidence both in the country and overseas. In an examination of Australian corporate governance, the nation begins from a point of strength and has continued to review corporate governance practices to make sure that they continue to reflect to international and local developments and position the country at the front position. Good corporate governance is fundamental for the prosperity and progress of any company. Excellent corporate governance is a balance of power amid shareholders, managers, directors and boards. It makes sure that standards of transparency are in line with global requirements, there is equal treatment of shareholders, and that auditors and boards are independent. Good corporate governance practices are fundamental for good business and assists organizations to attain greater transparency and fairness and also prevents fraud It safeguards shareholder’s rights and protect long term strategic objectives of Australian companies (Lipman & Lipman, 2006). Corporate governance motivates managers and directors to act in the interests of corporation through incentive pay, through their individual reputational and shareholdings concern, and through the risk of takeover. The remuneration of executive directors and operation of boards are crucial in the protection and maintenance of the interests of diverse shareholder groups. Several companies spend large amounts of money to develop their brand image since it is very important for their long term success. Reputation and goodwill may be improved via corporate social responsibility, marketing and improved relationships with stakeholders. According to Davies, (2006), corporate governance also develops goodwill of an organization over a period of tine. With the assistance of excellent corporate governance, organizations are able to develop strong customer relationships which results to development of brand loyalty and companies with good practices of corporate governance enjoy superior market reputation. 3.0 Australian corporate governance framework Corporate governance includes rules and framework of processes and relationships established to ensure that company directors and managers act in the interests of the organization and eventually, shareholders. Reflecting changes in organizations and market anticipations, the corporate governance framework of Australia has significantly evolved over time. In order to accommodate diversity and balance objectives, the Australian regulatory and corporate governance comprises of a blend of soft law, under the principles and recommendations of the ASX corporate governance council, black letter law via the Corporations Act 2001 and ASX listing rules and non regulatory principles promulgate by the industry organizations (Bagaric & Plessis, 2005). The regulatory and corporate governance framework influences how boards make choices of linking pay to performance, the way boards operate, disclosure of executive and director pay and how efficiently boards participate with the shareholders of a company. Clark and Rama (2006) note that corporate governance isn’t merely a product of government control. Organizations have the innate incentives to design governance processes to illustrate their bona fides to investors, so as to attract capital. Executives also have the incentives to deliver excellent performance to sustain their professional reputes, but rules may reinforce such enticements and lessen the risk of loss of confidence within a market emerging from poor conduct of a few. There isn’t a single of enduring best practice approach for corporate governance. Diverse models and combination of models can enhance trust and alignment, whilst market expectations and company structures change over time. In fact, the diversity of organizations makes flexible corporate governance arrangements greatly desirable. Additionally, regulations established to enhance accountability and alignment, if they are exceptionally prescriptive, have the latent to impede the capability of managers to manage (Clarke, & Rama, 2006). 4.0 Australia’s present corporate governance framework Australia’s regulatory framework for corporate governance and remuneration has over time brought increased disclosure, accountability of managers and engagement of shareholders. The corporate governance framework is based upon a blend of regulations or black letter law, explain or comply guidelines (soft laws) which are issued by ASX corporate governance council, and advisory principles. The black letter regulatory framework for Australian companies is centered on Corporations Act 2001 and ASX listing rules and together, they form the basis of regulatory obligations placed on organizations with regard to matters like board structure, shareholder voting, corporate governance and disclosure. 4.1 The Corporations Act The Corporations Act 2001 is the primary legislation regulating organizations. The Corporations Act applies, although to differing levels, to public and private organizations and some partnerships as well as managed investment schemes. Public organizations are subject to highly strict reporting and disclosure requirements than private organizations. With respect to remuneration of executives, Corporations Act contains provisions relating to the responsibilities, structure and roles of boards voting on remuneration, termination payments and disclosure in cases of listed companies. Under this Act, the board of directors has the responsibility of selecting the chief executive officer and making decisions on the structure of the remuneration package of the managing director. The board also has a major role in establishing payments for other senior executives (Commonwealth of Australia, 2001). The Corporation Act 2001 requires organizations to prepare their yearly financial report, entailing remuneration report, in accord to the pertinent accounting standards, entailing valuing of share based payments. Sanctions for violations of provisions of the Corporations Act involve fines, and at times, imprisonment. The Act also requires companies to produce an annual remuneration report as a portion of their yearly report. It stipulates the information that requires to be offered in the annual report. Shareholders have an advisory or non binding voting on the annual report at the yearly general meetings. They also possess a binding vote on the termination payments above a particular threshold, and on remuneration that involve the issuance of equity to the directors, and election of directors (Stellios & Fleming, 2002). 4.2 ASX listing rules ASX listing rules are concern with requirements for quotation and listing, trading and settlement, market information and universal supervisory issues. The rules apply to all trusts and companies listed on the Australian stock exchange. Majority of these entities are also subject to requirements of the Corporation Act with exceptions of some listed companies and trusts outside Australia. The ASX listing rules are designed to safeguard investors and reputation of market, whilst taking into consideration the interests of the listed entities. Major listing rules influencing executive remuneration linked to the consistent disclosure, issuance of shares to related parties, reporting on remuneration of non- executive director and reporting against recommendations of the ASX corporate governance council and some voting exclusions. Listed trusts and companies enter into a uniting contractual relationship with ASX to conform to its listing rules. Additionally, these rules are enforceable under Corporations Act against listed entities alongside their associates. A violation of ASX listing rules may lead to a wide range of sanctions against the organization, such as censure or mandatory director education for minor violations and suspension of fines of up to one million dollars for serious breaches (Australian Stock Exchange, 2005) 4.3 Advisory guidelines Advisory guidelines re offered by organizations like the Australia council of super investors, Australian institute of company directors, Australian shareholder’s association, and investment and financial services association. These corporations cover a wide range of major stakeholders, entailing both retail investors (individuals) and institutional investors (organizations like mutual funds and superannuation funds). Stapledon and Ramsey (2000) note that whilst the guidelines of these organizations are directed at boards, they also offer their members reference point when engaging with organizations and voting on the corporate governance issues. Additionally, individual institutional investors together with proxy advisors who give advice to institutions on the way to vote their shares, such as CGI Glass Lewis and Risk Metrics, usually follow their individual guidelines when making decisions or recommendations on the manner of voting. Therefore, advisory guidelines usually affect practices of remuneration via the risk of a negative vote on organization’s remuneration reports or board elections. 4.4 The ASX corporate governing council principles and recommendations The effectiveness of mechanisms of corporate governance have been recently been questioned by numerous commentators in the light of foreign experience of corporate malfeasance especially the corporate fall down of key listed Australian corporations, and the perceptible excessive remuneration packages and a termination payouts of senior executives, particularly when corporations are making losses. It has seemed that in spite of the increased consciousness of the principal-agent conflicts together with interest alignment, shareholders are still not safeguarded from governance failures (Merrett, 2002). The ASX corporate governance council was formed in August 2002 to develop and deliver the industry- wide, and supported corporate governance framework which could offer a practical direction for listed companies along with their investors, the broader market and the Australian community. The council was composed of representative from 21 groups of stakeholders, entailing key investors, professionals and firms and conveyed a set of principles and excellent practice commendations in March 2003. The guidance offered by the principles and recommendations of the ASX corporate governance council with the corporate support of listed entities, has resulted to an increased standard of Australian corporate governance practice without agency costs of black letter law which is widespread in other markets. The ASX principles and recommendations are as listed below: 4.4.1 Principle 1: Lay solid foundations for management and oversight Companies re required to establish and disclose the respective responsibilities and roles of management and board and establish functions preserved to the board and the ones delegated to the senior executives and disclose these functions. This principle also requires companies to disclose their procedures of assessing the performance of senior executives 4.4.2 Principle 2: Structuring of the board in order to add value Organizations are required have a board of an effective size, committee and composition to sufficiently discharge its duties and responsibilities. The board must establish a nomination committee with majority of board being independent directors and chairperson being an autonomous director. The principle requires t he roles of chief executive officer and chairperson not to be exercised by the same individual and companies to disclose the procedure for assessing the performance of the board along with its committee and individual directors(ASX Corporate Governance Council, 2003). 4.4.3 Priciple3: Promotion of responsible and ethical decision making According to ASX Corporate Governance Council , (2003), companies are required to establish a code of conduct and reveal the code or an abstract of the code as to : the practices essential to the maintenance of confidence in the organization’s integrity, the practices essential to take into consideration their legal responsibilities and the logical anticipations of their stakeholders and the accountability and responsibility of individuals for report and scrutinizing reports of immoral practices. Organizations must establish a policy regarding diversity and review the policy and an abstract of this policy. The policy must include the obligations for the board to set up quantifiable objectives for accomplishing gender diversity for the board to asses yearly both the goals and progress in accomplishing them. Organizations are also required to disclose in every yearly report the fraction of women staff in the entire company, females in the senior executive positions and females on the board 4.4.4 Principle 4: Safeguarding of integrity in financial reporting Organizations are supposed to have a structure to autonomously verify and protect the veracity of their financial reporting and the board must establish an audit committee and the committee must be structure so that it comprises solely of non executive directors, comprises of a majority of autonomous directors, has at least 3 members and is presided over by an independent chair, who isn’t chair of the board. The audit committee must have an official charter 4.4.5 Principle 5: Making balanced and timely disclosure Organizations must promote balanced and timed disclosures of every material matters regarding the companies. Organizations must set up written policies intended to ensure conformity with ASX listing rule disclosure obligations and to ensure liability at a senior management level for this conformity and disclose these policies or an abstract of these policies 4.4.6 Principle 6: Respecting of shareholder’s rights Companies re required to respect shareholder’s rights and enhance the efficient exercise of these rights. Organizations are supposed to establish a communication policy for the promotion of effective communication with he shareholders and encourage their engagement at general meeting and reveal of their policy. 4.4.7 Principle 7: Recognition and management of risk Companies are required to design a sound scheme of risk oversight and internal control and management. In accordance to this principle, management is supposed to establish and execute the hazard of management as well as internal control scheme so as to manage the organization’s material business hazards and report to the board whether the risks are being effectively managed. It is the obligation of the board to reveal whether it has obtained assurance from the chief financial officer and chief executive officer that the affirmation offered in accord with section 295A of Corporations Act is instituted on a sound scheme of internal control and risk management and that the scheme is effectively operating in every material respect in connection to risks of financial reporting (ASX Corporate Governance Council, 2003). 4.4.8 Principle 8: Fair and responsible remuneration Companies must make sure that the composition and level of remuneration is reasonable and adequate and that there is a clear relationship between remuneration and performance. An organization board is required to design a remuneration committee and the committee must be structured so that it comprises of a majority of autonomous directors, has at least 3 members and is presided over by an autonomous chair. Organizations are also required to clearly differentiate the configuration of remuneration of non executive directors from that of senior executives and executive directors (ASX Corporate Governance Council, 2003). According to the ASX Corporate Governance Council, (2003), the above principles are not prescriptions, but they are designed to generate a quality, integrity and efficiency outcome. Nevertheless, all organizations listed on Australian stock exchange, as well as potential listing organizations are encouraged to utilize these principles to re-examine their practices of corporate governance. Organizations might opt out of implementing the recommendations through clearly articulating the reason as to why they aren’t adopting the specific recommendation. Reflecting upon the diversity of listed organizations, a foundation stone of the ASX principles and commendations is flexibility, balanced with accountability. Organizations aren’t required to abide by the recommendations of the ASX corporate governance council. Nevertheless, under the ASX listing rule s, they are required to disclose whether they have conformed to the recommendations and if they have not complied, offer a public explanation. 5.0 Conclusion Australian corporate governance encompasses rules and framework of processes and relationships that that makes sure that company directors and managers act in the interest of the company and its shareholders. The Australian corporate governance framework is composed of the black letter law through the ASX listing rules and Corporations Act 2001, soft law, under the principles and recommendations of the ASX corporate governance council and non- regulatory guidelines, which are promulgated by industry organizations. The Australian corporate governance framework influences the manner in which boards operate, how boards make choices to link remuneration to performance, disclosure of executive and director pay and how efficiently boards connect with shareholders of the company. 6.0 Bibliography Clarke, T., & Rama, M, 2006, Fundamentals of corporate governance, SAGE, London. ASX Corporate Governanace Council (2003). Principles of good corporate governance and best practice recommedations, Australian stock exchange, Sydney. Stapledon, G, & Ramsey I, 2000, Proxy voting in Australia’s largest companies, centre for corporate law and securities exchange, Sydney. Lipman, D., & Lipman, L., 2006, Corporate government best practices: Strategies for public, private and not-for-profit organizations, John Wiley & Sons, Inc., New Jersey. Davies, A, 2006, Best practice in corporate governance; Building reputation and sustainable success, Grower Publishing Company, England. Bagaric, M, & Plessis, J, 2005, Principles of contemporary corporate governance, Cambridge University Press, Oxford. Australian Stock Exchange, 2005, ASX Listing Rules, The Exchange, Australia. Stellios, G, & Fleming G, 2002, CEO remuneration, managerial agency and boards of directors in Australia, Accounting Research Journal 15(2), 126-145. Merrett, D, 2002, Corporate governance, incentives and the internationalization of Australian business, Paper to the business history conference, Delaware, 2002. Commonwealth of Australia, 2001, Corporations Act, Commonwealth of Australia. Attorney-General's Department COMLAW, Australia. Read More