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Corporate Governance Roles

Question:

Discuss about the Corporate Governance Roles.

Answer:

Introduction

In the given report will analyse and study about the separation of roles and duties of the board and the CEO. Particularly, the structure of the board shall be critically examined under. Also, we will know how the non-executive directors contribute towards corporate governance of the company. In order to understand this; we need to learn the legal framework of the company structure along with duties of the directors. We have been given to study a case for a publically listed company. Publically listed company constitute only two percent of the register companies in Australia but due to size of their operations, they are very important (Bowen, 2006). There is strict corporate veil in such companies which will help us to separate the roles properly.

Separation of the Chairman and the CEO

As per the ASX Corporate Governance Principles and Recommendations ‘The chair of the board of a listed entity should be an independent director and, in particular, should not be the same person as the CEO of the entity.’

The Chief Executive Officer of a company is responsible for the day to day activities of the company. He is the mangling director or senior executive of the company. Therefore, their roles should be given to separate persons. The corporate governance principle and recommendation also state that once a person has served as the CEO, he should not be immediately appointed as the chairperson (Fich & Shivdasani, 2006). This is so because such person would not be eligible to be appointed as the chair. In order to qualify as ‘independent’ in order to be appointed as the chair, a person needs a minimum 3 year gap from the employment of the company. The trend to appoint a same person as CEO and Chair is not followed in Australia unlike in the US, where this trend is commonly accepted (Goergen, 2012).

Diversification of the board

Diversification in board has been one of the issues for a long time now. The same old method of appointment of directors based on qualification and references have left no scope for creation of innovative techniques. The directors all in all have same qualifications and need something to think outside the box (Coffee, 2009). In order to make this possible it is very important to create diversity in the board. Lack of diversification has led to the companies out of touch with various communities and societies within which they operate. Lack of diversification on the board has been a problem in most of countries, where such places on the board are held by men. But as per various reports and research, diversification is much more just than gender diversification. Diversification includes age of the board members, ethnic background, socio economic and cultural background, technical skill, life experience, personal attitudes, perspective, etc (Mark, 2010).

Committees set up by the Board

In order to establish a good corporate governance practice there are a few committees which are required to be established by the board. This way the board members can participate the corporate governance of the company. Few of such committees are:

  • Remuneration Committee
  • Audit Committee
  • Nomination Committee

Audit Committee

The most common duty of the audit committee is to monitor the internal control and internal auditing functions of the company. Also, it is the duty of the audit committee to recommend to the board the auditors which are required to be appointed. After the appointment, the board is required to review the financial reports which are prepared (Fernando, 2009). Also, they are responsible to look after the complex issues and implementation of new regulations and accounting policies & procedures. In case there arises any issues then they take seek help from the external auditors or consultants. The ASX’s listing rule requires all the listed companies on the ALL ordinaries index to constitute an audit committee. The ASX recommendation requires the board of the listed companies to have an audit committee which shall have at least three members, who shall be non-executive directors with maximum of them required to be independent directors. The audit committee so constituted shall be chaired by an independent director, who will not be chair of the board. The constitution, charter, qualification remuneration and other relevant details of the audit committee shall be disclosed in the report along with the financial statements of the company.

Remuneration Committee

The remuneration committee is required to review and recommend the company for its policy for remuneration, appointment, retention and termination of key managerial personals. The committee looks at the ground, qualification and requirements set by the nomination committee for the company to appoint its important personals. Also, they set grounds for dismissal. The remuneration committee looks after the remuneration of such personals so that no unfair advantage is given to any person. Just like audit committee, remuneration committee is required to appoint three directors all of whom shall be independent directors; also the chair shall be taken by an independent director (Goergen, 2012). The constitution, details, meetings and other details of this committee shall also be reported along with the financial statements of the company.

Nomination Committee

The nomination committee is required to set grounds, skill, requirements for appoint of personals for board or role of the chair. The nomination committee also recommends potential candidates which can be considered for appointment in the board or as a chairperson. The composition of the nomination committee shall be same as that of remuneration committee (Fernando, 2009). In many companies, the remuneration and nomination committee are constituted together; they carry on functions of both the committees.

Introduction

Corporate governance is the mechanism or a process or a set of rules which help the corporate to control and direct their activities. The principles of corporate governance help the corporate to act and make decision based on certain code. They distribute the rights and responsibilities among the board and stakeholders of the company. Since the rules and principles of corporate governance affect the decisions and actions of the company, they have a significant impact on the performance of the company (Goergen, 2012). A mid-sized or a small firm which applies ethical principles may or may not have positive affects all the time, but the large corporate have huge effect and derive benefits from the corporate governance policies.

Corporate Governance and Stock Performance

For most of the investors, stock price is the basis of measurement for the company’s performance whereas; wealth maximisation should be the basis of performance check for the companies. The earlier studies on corporate governance have provided a positive relationship between the firm performance and corporate governance implementation. But many a times this has not been proved correct (Crawford, 2008). Strict corporate governance policies lead to disciplinary actions. Also, if the management of the company is found to be stable, the investors are more reliable on the company. But if the management keeps shuffling in a short period of time, it becomes hard for the investors to trust the management. The strict corporate governance policies many a time lead to dismissal of the CEO’s or other important personals of the company (Clarke, 2010). This takes away the trust, and many a times the stock performance of the companies fall. Companies with poor performance but strong corporate governance policies are likely to face low management shuffles. Therefore, in case the management of the company adheres to the corporate governance policies, then it will have low management shuffles which will develop investor trust and high stock performance.

Corporate Governance and accounting

During the last few years, there have been reported huge downfalls of famous and very trustworthy corporate around the world. This downfall was due to scams being covered by the companies in order to create a good public image and hike the share prices. This was due to lack of corporate governance (Clarke, 2010). This downfall also affected the economies of various countries and also constituted a part of economic recession which affected almost all the economies in the world. The continuous downfall and discovery of a new scandal took away the trust of the investors from the auditors. All the scams included falsifying and inflating the revenues, profits or balance sheet of the company in order to create a good public image. When the auditors failed to report such false statements, the investors started to hesitate in investing in these publically listed enterprises (Steven, 2009).

In order to bring back the trust of investors Sarbanes Oxley act was introduces. Also, strict corporate governance policies were introduced. This created fear in the minds of the management of public companies. There were introduces huge penalties along with prosecution for the people participating in any scams. Introduction of corporate governance helped the investors regain trust (Clarke, 2010). Now the investors were satisfied that strict actions against the wrong doers will be taken. Regain of trust of investors again started investment in these enterprises. Investment leads to growth and further development of the investors and the company.

Corporate Governance and environment

Corporate Governance if implemented by strong CEO’s and management can result is policies which do not affect the environment. Taking in view the current environment scenario, the nature needs attention. The corporate governance policies include the responsibilities of the huge corporate to contribute toward environment safeguarding and taking initiatives which least harm the environment (Colley et. al, 2004). If the companies follow this policy properly then it helps them create a good reputation and an image amongst the public. This adds value to the firm. Indirectly, it creates the shareholders wealth, which is what an investor wants.

Corporate Governance and corporate failure

There are a lot of examples where lack of corporate governance implementation has lead to corporate failure, few of these famous failure include corporate like, Lehman Brothers, Enron, Parmalat, HIH insurance etc.

The main reason for failure and financial crisis in these cases were lack of autonomy and power in the hands of non-executive directors, too close relationships of the auditors with the working directors, CEO being the founding member have strong and controlling power over the board of directors (Lubatkin, 2009). The work culture of these organisations was found to be very hostile. Any person who tried to think outside the box was dismissed or removed.  All these factors lead to downfall of many great corporate. Lack of corporate governance in a company can be indicated by strong influence of the founder over the board of directors, weak board and audit committee, secrecy in financial statement disclosure, lack of display of relevant information, sudden movement in stock price and financials of the company, etc (Benz & Frey, 2007). Therefore, if the corporate governance in these companies had been in first in place, they wouldn’t have collapsed. Hence, corporate governance policies are very relevant from the investor point of view.

Conclusion

Corporate governance is a planning tool which not only assists the management of the companies to take appropriate decisions and actions, but it also helps the companies to build an image. Above we have seen examples of corporate failures because of lack f corporate governance.  These are the set of principles which help to mange and balance the interests of the stakeholders of the company (Gillan, 2006). It covers almost all the spheres of an enterprise, be it internal control or appointment of a CEO. Now a day it is not enough for the companies to be just profitable. In order to move toward growth and development they need to have ethical working environment and image. Else, if the investor loose trust from the company, then the company may collapse. Failure of huge companies such as Enron, WorldCom, etc, lead to development of strong corporate governance policies and management responsibility (Nestor, 2010). Therefore, for a company in order to survive in the cut throat competition economy, it is very necessary to abide by the corporate governance policies.

References

Benz, M. & Frey, B.S 2007, ‘Corporate Governance: What can we learn from public governance?’ Academy of Management Review, vol. 32, no. 1, pp. 92-104

Bowen, W.G 2006,  The Board Book: An Insider's Guide for Directors and Trustees, W.W. Norton & Company: New York & London,

Colley, J., Doyle, J., Logan, G., Stettinius, W 2004, What is Corporate Governance, McGraw-Hill

Clarke, T 2010, International Corporate Governance, London and New York: Routledge

Crawford, C. J 2008, Compliance & conviction: the evolution of enlightened corporate governance, Santa Clara, Calif

Coffee, J 2009, Gatekeepers: The Professions and Corporate Governance, Oxford University Press

Fernando, A C 2009, Corporate Governance Policies and Principles, Oxford University Press

Fich, E. M., & Shivdasani, A 2006, ‘Are busy boards effective monitors?’, The Journal of Finance, vol. 61, pp. 689–724.

Gillan, S.L 2006, ‘Recent developments in corporate governance: an overview’, Journal of Corporate Finance, vol. 12, pp. 381–402.

Goergen, M 2012,  International Corporate Governance, Prentice Hall.

Lubatkin, M.H 2009, One more time: What is a realistic theory of corporate governance? Journal of Organizational Behaviour, vol. 28, pp. 59-67

Mark, J. R 2010, Political Determinants of Corporate Governance - Political Context, Corporate Impact, Oxford University Press.

Nestor, S 2010, Avoiding Pitfalls in The New Bank Governance Framework, The Banker, pp. 8-12

Steven,  N. K 2009, Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts and Challenges, Chicago Booth Paper No. 12-42.


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