Investigation of Corporate Governance Characteristics - Essay Example

Topic: Investigation of corporate governance characteristic Introduction Corporate governance at country and individual level has been a topic of hot discussion off late. Efforts in both public and private sectors have been taken to investigate the important features of corporate governance. Scandals the like of Satyam in India and Enron in America have raised a question on the credibility of auditing firms. A number of countries have added their own legal processes by taking the lead from other countries. All countries and companies do not follow the same set of framed rules; they differ from country to country and company to company. It is significant to find out whether companies are adhering to or not to such formulated rules and practices in their day-to-day corporate governance practices. There has been a tendency not to follow the stipulated guidelines (Berglöf & Claessens 2004). Part I The two Australian companies listed on the Australian Security Exchange (ASX), namely Aditya Birla Minerals and Adelaide Resources can be a good example to check their corporate governance characteristics, their strategies, policies, and practices. Both the companies are into mining and exploration activities. Aditya Birla Minerals (ABM) is running its operations at the Nifty copper operation in the Pilbara region, northern Western Australia, and the Mt Gordon copper operation in northwest Queensland, Australia. Adelaide Resources is into mineral exploration for Gold, Copper, and Uranium deposits. Both the companies have disclosed their governance strategies, policies, and practices in their annual financial reports available on their company websites. As per the Aditya Birla Minerals’ corporate governance statement given in the final annual report 2007-08, the company board has developed policies and practices relevant with the ASX recommendations as well as changes incorporated according to specific conditions. The board of directors of ABM provides strategic direction and effective governance over the company’s affairs. The board also monitors the implementation of its policies, practices, and strategies. It checks compliance with regulations. Hindalco being its block shareholder, the appointment, evaluation, remuneration, succession, and removal of the chief executive officer is decided on the nomination of Hindalco. Selection and appointment of directors is made by the board in the best interests of the company stakeholders. There are six members in the board, out of which three have to be independent non-executive directors, as per the charter of the board. A director can hold either of the positions of the chairman and the chief operating officer, not both. Mr. Debu. Bhattacharya is the Chairman of Birla Minerals and Mr. Sanjay Loyalka is the CEO and MD of the company. There are two non-executive directors and six independent non-executive directors. So in percentage it comes to 25% of non-executive directors and 75% of independent directors. In the annual report 2007-08, there is no such specific summary of the statement of the chairman or the CEO, which has been a practice but the chairman report provides a deep business insight of the company, market, and industry on the whole. Mr. S. Loyalka had consolidated shareholding of 10,000 on 1 April 2007, which saw movement but there was no balance left on 31 March 2008. Dr. S. Bhargava had 40,000 shares on 31 March 2008. Hinalco being the block holder company, it owns 51% shares of Birla Minerals. There is no detail provided on shares held by institutional investors. The company has given detail of its organic growth strategies at the operations sites Nifty, Mt. Gordon, and Exploration relevant with its vision of incessant and aggressive growth. Adelaide Resources also likewise Aditya Birla Minerals holds the board of directors responsible for all corporate governance related functions like setting strategic direction, management goals, and monitoring their realization. It follows the code of conduct of the Australian Institute of Company Directors. The board has not assigned specific duties to its functionaries, i.e. the board members and the management -- so that the available resources could be used flexibly for the best interests of the company. The board follows a ‘continuous disclosure policy’ to be compliant with corporate governance standards. Likewise the ABM, Adelaide Resources follows the stipulated conditions set up by the ASX and the Australian Securities and Investments Commission (ASIC), as per the Corporations Act 2001. Adelaide Resources seems to be more committed to the governance standards than ABM, as ABM has shown commitment to only the ASX recommendations while Adelaide Resources has shown allegiance to the disclosure requirements of both ASX and ASIC. In its annual report for the year 2008, the company, i.e. Adelaide Resources has given details of the departed recommendations – notification and explanation of departing. Adelaide Resources has in total five board members, out of which two members are non-executive independents. So it comes to a ratio of 40: 60. The annual report carries a copy of the Adelaide Resources’ corporate governance statement, its disclosures policy and other important information. Mr. Paul J Dowd is the non-executive chairman of Adelaide Resources with Mr. Christopher G Drown as the managing director. Mr. Dawd is the chairman as well as the key management personnel like all other directors. He has no shares on his name registered likewise Mr. Dryver, the non-executive director. Other directors namely Mr. Drown, Mr. Horan, and Mr. Yates had a balance of total shares as on 30th of June 2008 amounting to 8,375,668 fully paid ordinary shares. Major shareholders of the company are Troy Resources NL – 11,819,236, Keith Robert Yates -4,927,278, and National Nominees Limited -1,750,000. Percentage-wise, Troy Resources is on the top of the list with 14.21% shares, Keith Robert Yates at second position with 5.93% shares, National Nominees Limited on the third position with 2.10% shares. Here we find a structural difference between the company organizations, Aditya Birla with its block shareholder Hindalco possessing 51% shares of the company while there is not a single block-holder in Adelaide Resources. There are major 20 shareholdings having 36.85% shares while other holdings have a cover of 63.15%. Both the companies vouch for their corporate governance practices and principles but as we find that Adelaide Resources has no independent non-executive director on its board in comparison to Birla having six independent non-executive members. Independent directors play a very crucial role in safeguarding the interests of ordinary shareholders in a company. It seems that Adelaide Resources has a bit different notion on the recommendations of the ASX; It has preferred flexible approach to the management of company functions and on its name departed from some of the best corporate practices regarding the functions of the board and some functions have been transferred to the management. Absence of independent non-executive directors on the company board is conspicuous as it is a significant parameter of the board mechanism to measure governance. Part II There is sufficient literature on measuring the role of corporate governance. The Corporate Governance Problem at company and country level is weak enforcement of corporate governance mechanisms. To comprehend the enforcement, it can be understood with a conceptual model of a firm and how it is financed from outside. Shleifer and Vishny have defined corporate governance in their 1997 review: “Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment” [1997, p. 737], as cited by (Berglöf & Claessens 2004). Difficulty comes in measuring the role of corporate governance as rules and regulations are not followed and implemented earnestly. The Nobel Laureate Douglass North [1991] has rightly observed that “how effectively agreements are enforced is the single most important determinant of economic performance” as cited by (Berglöf & Claessens 2004). Board activity is one of the important corporate governance mechanisms relatively important and provides scope for policy intervention. Sufficient literature is not available particularly on the role of board among a list of corporate governance mechanisms. It is a known fact that owners can indulge in hiring and firing activity. As such it is not a dependable mechanism although it can play an effective role in strategizing long term policy initiatives if freedom, training, disclosure of voting and collective voting is practiced by board members, turning the tables in favor of shareholders (Ogbechie et al. 2009). Studies indicate, for example, a CEO being fired because of bad performance in a country with different corporate governance ruling ((Kaplan 199X and Gibbons 2003). Board characteristics and participation can be instrumental in strategic decision making. The role of government, the regulators, and corporations is instrumental in the functioning of various mechanisms (Okike 2007). The government backing is must for the right functioning of private mechanisms. As substantiated by Durnev and Kim [2003] and Klapper and Love [2003] individual firms can not fill up the vacuum created due to lack of local governing practices even if their own corporate governance standards are higher. In the rapidly changing environment of globalization, the dynamics of the business across the globe have undergone change. The corporations need to implement necessary changes to not only survive but compete with their rival with confidence and effectively meet the challenges of the constantly evolving business environment. The highly competitive nature of emerging new models of global business has increased the risks and responsibilities of the corporations; as a result they are laying greater emphasis to corporate governance. References: 1 Adelaide Resources Annual Report. (2008). Available from: Read More