Introduction: A discussion on corporate regulation and governance is of great importance in today’s economic world. A number of high profile collapses such as HIH, One Tel, Harris Scarfe, Ansett, focuses ones attention on governance issues. Nevertheless, corporate governance is not a static thing and even if basic structures remain the same, policies and procedures surrounding those structures should constantly be reviewed to ensure that the structure is working properly. Globalisation yields challenges not only for industry, but for the corporate regulators as well.
Today, we are faced with the issue of large Australian companies wishing to expand their international presence, without giving up their Australian domicile. The global presence by these companies is important to Australia’s economy, but the modifications and exemptions granted to facilitate dual listed companies has to be carefully ensured and reconciled with the continuing obligations applicable mainstream corporate Australia. There are a range of regulatory authorities and business groups which play key roles in promoting good corporate governance in Australia-ASIC, APRA, and FRC.
The corporate sector in Australia is regulated mainly by agencies like – the Australian Competition and Consumer Commission (ACCC), the Australian Securities and Investments Commission (ASIC), the Australian Prudential Regulation authority (APRA). Others are the Australian security Exchange (ASX), The Australian Accounting Standard Board (AASB), etc. The role of these regulators has been increasing mainly because of the growth and dynamism of financial institutions, the high proportion of Australian citizens active in these markets, governments promotion of the superannuation industry, and the risks for investors, depositors and creditors.
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A Mix of mandatory and voluntary requirements governs corporate governance in Australia. The ASX’s Corporate Governance Code, are voluntary guidelines emphasized by an ‘if not, why not’ disclosure requirement. The member either adopts the principles recommended or explains of non compliance of any of the code. What is corporate governance? Corporate governance is a dynamic force which continues to evolve. In March 2003, the ASX Corporate Governance Council released its first Principles of Good Corporate Governance and Best Practice Recommendations (ASX Principles). These original ASX Principles provide a framework for good corporate governance and included 10 core principles and 32 specific recommendations. BL915-Assignment 1 Corporate Governance The corporate governance model of Australia follows the Anglo-American model which emphasis on the outsider system of independent directors, widely disposed ownership, major institutional holders, separation or independence between the board and management and a short-term business horizon.
Corporate Collapse and Corporate Governance:
Governance has come into focus since the collapse of Enron and WorldCom in the US and HIH, Ansett, OneTel and Harris Scarfe in Australia and Swissair and the German media empire, Kirch in Europe. In Australia, Andersen’s alleged involvement in verifying false accounts is a subject of the HIH case. These cases, have seriously damaged investor confidence and have raised the questions of competence of the companies and regulators. ASX-Principles of Good Corporate Governance and Best Practice Recommendations – The Australian Securities Exchange (ASX) is the primary stock exchange in Australia.
It is a public company, and its own shares are traded on the ASX. While it regulates other listed companies listed on the ASX, it is regulated by the Australian Securities and Investments Commission (ASIC). The Australian response towards corporate collapse include the Ramsay Report on the Independence of Australian company directors, the ASX Listing Rule Amendments on Enhanced Disclosure and Corporate Governance; and the establishment of the ASX’s Corporate Governance Council and the release by the Council of its Principles of Good Corporate Governance and Best Practices Recommendations in March 2003.
That council produced corporate governance guidelines with 10 core principles:
1. Formalise and disclose the roles and responsibility of board and management.
2. Structure the board to add value, with a majority of independent directors.
3. Promote ethical and responsible decision-making, including codes of conduct for directors and key executives.
4. Integrity in financial reporting, with an audit committee of non-executive directors, and requiring the CEO and CFO to certify the accounts in writing to the board.
5. Timely and balanced disclosures.
6. Respect the rights of shareholders.
7. Recognise and manage risk
8. Evaluate the performance of the board, its committees and individual directors.
9. Disclose company remuneration policies for directors and key executives, and the link with corporate performance.
BL915-Assignment 1 Corporate Governance
10. Recognise legimate interests of stakeholders, including employees and customers. On 2 August 2007 the ASX Corporate Governance Council announced changes to its Principles of Good Governance and Best Practice Recommendations. These will now be known as the Corporate Governance Principles and Recommendations.
The best practice recommendations are not mandatory to be followed by all companies but are guidelines designed to produce an efficient outcome. If a company considers that a recommendation is inappropriate to this particular circumstance, it has the flexibility not to adopt it but it has to explain the reason behind it. Under ASX listing Rule 4. 10 , companies are required to provide a statement in their annual report disclosing the extent to which they have followed these best practice recommendations in the reporting period.
Where companies have not followed all the recommendations, they must identify the recommendations that have not been followed and give reasons for that. The ASX listing rules do, however, have mandatory rules that are related to corporate governance. For instance, rules which require shareholder consent whenever the corporation enters into particular transactions. However, the ASX has not taken responsibility to endorse mandatory rules for best corporate governance practices.
It opines that the diversity of companies it lists, the existence of alternative solution to address a problem and the development of corporate governance idea over time, mean that it is inappropriate for it to prescribe particular The effectiveness of the High standards of corporate governance are being achieved and maintained in Australia, but that some principles are not always relevant. Corporate governance cannot be measured using checklists. Quality governance is all about meaningful communication and information flow.
This has to be internally, between management and the board, and externally, between the company and its stakeholders. Checklists cannot substitute for a culture of accountability and intelligent decision-making. The underlying principles of the board understanding their role, and having meaningful risk management practices in place, making sure the decisions are made at the right level, managing conflicts of interests, and those sorts of issues. These are universal irrespective of the size of any listed company on the ASX.
ASIC and Corporate Governance: ASIC’s key challenge is to keep pace with rapid legislative change.
The Corporate Law Economic Reform Program (CLERP) is one of those which are focussed on market freedom, investor protection and quality disclosure of relevant information to the market. The BL915-Assignment 1 Corporate Governance reforms are mainly aimed to maintain pace with the rapidly changing business environment and with international best practice. One of the significant reform was its acknowledges that it acknowledges that a key failing in corporate governance over the previous five years has been the ability of boards to selectively filter auditors’ information to the CEO.
A comparison of business reaction to the mandatory CLERP9 regulations and the voluntary ASX Guidelines is instructive. Business clearly dislikes a prescriptive approach. In March 2004, a progress report on the implementation of the ASX Guidelines noted that the feedback from business was generally supportive of the ten principles, and ‘very supportive of the flexibility inherent in the disclosure-based, non-prescriptive approach,’. Why is it important that corporations succeed?
Corporations are the engines of economic growth and are increasingly responsible for providing employment, services, goods and infrastructure. OECD (Organisation for Economic Co-operation and Development): Many companies, including some ASX listed entities, have also chosen to report on their compliance with the OECD guidelines for Multinational Enterprises, whether that reporting is on the company’s website or in the Annual Report. The OECD Guidelines, to which Australia is a signatory, came into existence as a part of the 1976 OECD Declaration on International Investment and Multinational Enterprises.
The guidelines provide multinationals with principles and standards of good practice consistent with applicable laws and address a broad range of corporate sustainability issues, the environment and consumer issues. An important aspect of these Guidelines is their voluntary and non-binding nature. They allow for far-reaching discretions as to how to interpret the recommendations or whether to comply with the recommendations at all. But there has been a broad acceptance by member countries and the multinationals.
The effectiveness of these voluntary principles set out by the ASX: A principle or standard is effective when the members adopt those principles, abide by them and work towards better out comings. Effectiveness of the 10 principles can be understood by answering the questions: How much do the members subscribe to the notion of good Corporate Governance? How many listed Corporations are there in ASX? How many have implemented within their internal sig. Portion? Venture capital. BL915-Assignment 1 Corporate Governance
Factors which affect these answers are cost of implementation, membership structure and a country’s economic status. Compliance rate: A brief glimpse of the compliance trend of Corporate Governance Principles by the Australian Companies has been derived from Corporate Governance Reporting Review 2007 - Grant Thornton The review notes that, Australia publicly listed companies in the top 300 have disclosed that they are largely compliant with the ASX Principles of Good Corporate Governance and Best Practice Recommendations.
Overall there are three key principles scoring less than an average compliance, Principles 2, 4 and 7. The review indentified that only 134 companies or 45% of the top 300 companies provided adequate disclosure to be considered fully compliant. The review shows that Corporate Australia is in good shape but there are still challenges ahead for Australia’s larger public listed companies in complying with the Principles. BL915-Assignment 1 Corporate Governance Factors challenging the effectiveness of ASK’s Principles: Cost of Capital: in 2002, the US introduced the Sarbanes-Oxley Act that prescribes governance standards.
It was reported that the compliance cost of being a US-listed company with annual revenue of less than US$1 billion has increased by 130% since the introduction of Sarbanes-Oxley. Australia’s so called principles based system is seen as being less of a risk to the cost of capital. On this comparison it seems to be an effective system. Continuous disclosure : without continuous disclosure, shareholders and other market players would be less able to effectively supervise and control the conduct of those who control the corporation.
It enhances accountability. Access to adequate, accurate and timely disclosure is essential to the proper monitoring of those in control of the corporation and is an important part of Corporate Governance. Private Equity: In private equity structures, funds can exert control over acquired companies by appointing nominee director. The business structures used allow Funds to operate without the scrutiny of publicly traded companies. The Funds do not have to adhere to the onerous reporting requirements placed on publicly traded companies.
These features of private equity structure have been facing criticism on the affect it has on Corporate Governance of target companies. The new developments in the industry where firms are going into debt and towards becoming an uncontrolled public company are a very challenging prospect for the regulators. The cloud covering Private Equity and their acquire companies can potentially hide poor governance and excessive risk taking which can cause major corporate failures. To regulate the industry with growing Private Equity structures, a balance must be worked out between the risks and benefits of Private Equity.
Regulators should focus on the impact it makes on national economy, banking sectors and taxation. The ASX chooses the British “comply or explain” approach when implementing its corporate governance rules, rather than the heavy – handed prescriptive approach of the in the US of the NYSE and NASDAQ Takeovers- The corporate governance principles evolved over the years are a result of formal and informal stakeholders (creditors, customers, suppliers and employees) interactions. Besides these principles, the probability of takeover is affected by several influences such as the BL915-Assignment 1 Corporate Governance range of defensive mechanisms available, attitude of the courts, the existence of anti-takeover legislation, the ability of offerors to offer to the minority shareholders and the voting structure of the firm. However, corporate governance adopted by the firm can influence how these factors are introduced, monitored and evaluated. Takeover panels are concerned to prevent anti-competitive activities by hostie horizontal acquisitions. Read about Corporate Governance at Wipro
Foreclosure Competition Policy:
The collapse of OneTel and Ansett Airlines reflect the aggressive competitive approach they had taken. Ansett had been hit hard by the cutthroat competition in the airline industry with the entrance of two airlines – Virgin Blue and Impulse-entered the Australian market creating a price war. The airline was also badly hit by rising fuel costs and falling value of the Australian dollar. These circumstances led to its failure which would not be alone corrected by good corporate governance.
Corporate governance is the system by which companies are directed and managed.
It influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimised. Good corporate governance practices are increasingly important in determining the cost of capital in a global capital market. Australian companies must be equipped to compete globally and maintain and promote investors confidence both in Australia and overseas. It is about the mechanism by which corporations are directed and controlled and It is about the mechanisms by which those who direct and control the corporation are monitored and supervised.
That is, it ensures those who are in control are accountable. The validly use governance behaviour in this context requires some connection to be proven between governance practices and business performance. Without this, there might be no benefit for shareholders and no basis for investors to prefer one set of governance practices over another. Corporate governance has received new urgency because of global financial crisis and major corporate failures that shock major financial centres of the world.
The governance framework should protect and facilitate the exercise of shareholders’ right. Adherence to the principle of good corporate governance serves to foster investor confidence.
BL915-Assignment 1 Corporate Governance
Therefore, in the wake of recent corporate collapse, ‘corporate governance’ has received a high level of attention like never before. Australian business regulation has given it a category of ‘enforced self-regulation combining the benefits of voluntary self-regulation with the coercive power of the State implemented via a compliance program.
However, there is a great possibility that the management might treat this as a mere ‘box ticking’ exercise. Thus, the willingness of various stakeholders to collaborate with the governance and setting up an effective mechanism is the key to avoid corporate collapses. BL915-Assignment 1 Corporate Governance References: Lipton P. , Herzberg A. , 2006. Understanding Company Law. 13th ed. Sydney: Thomson Lawbook Co. Hanrahan, P. , Ramsay L. , Stapledon, G. , 2004. Commercial Applications of Company Law. 5th ed.
Sydney: CCH Australia Limited. Websites: ASX Corporate Governance Council, ‘Principles of Good Corporate Governance and Best Practice’, Australian Stock Exchange, March 2003, http://www. shareholder. com/visitors/dynamicdoc/document. cfm? documentid=364&companyid=ASX (accessed 05 Feb, 2008). http://www. shareholder. com/visitors/dynamicdoc/document. cfm? CompanyID=ASX&DocumentID=364&PIN=&Page=3&keyword=Type%20keyword%20here (accessed 06 Feb, 2008) Faculty of Law, corporate Governance eJournel, bond university, year
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