CORPORATE GOVERNANCE IN AUSTRALIA

QUESTION

(a)  Briefly explain how the ASX Corporate Governance Principles and Recommendations improve “transparency”.

(b)  Discuss the extent, or otherwise, to which the Trust Company Ltd has complied with Principles 2 and 3 of the ASX Corporate Governance Principles and Recommendations.

SOLUTION

Part (a)

To increase transparency, Australian Stock Exchange (ASX) has issued a principles related with good corporate governance. These are related with:-

1. Laying groundwork for oversight by the Board.
2. Structuring it with a view to add value to it.
3. Promoting decision-making which is ethical and responsible.
4. Maintaining integrity in the process of financial reporting.
5. Making disclosures which are balanced and timely.
6. Valuing the shareholder rights.
7. Managing and recognizing risk.
8. Paying remuneration which is responsible and fair.

The first principle encourages the role of the board in providing overall strategy guidance along with effective oversight of the management of a company. The second principle relates with the structured of the board. These require that the Board of a company should have the majority of independent directors and its chairperson should also be an independent director. It also requires that the chair and the CEO should not be the same person.

Similarly the recommendations regarding elimination required that it should be ensured by companies that are sufficient and reasonable level of compensation is paid and it should also be ensured that compensation is clearly linked with performance. There should be a remuneration committee and the structure of the remuneration of non-Executive Director should be distinguished from the Executive Director of the company. Information should be provided regarding names of members of remuneration committee and in case there is no such committee in a company, information should be provided as to how the function of the committee would be carried out. The companies are also required to provide information regarding the presence of a retirement benefit schemes for the non-executive directors other than the superannuation schemes (Geoff De Lacy, 2005). The framework regarding the remuneration focuses on the board a company to set a fair and responsible remuneration. It also includes remuneration disclosure, linking remuneration to performance and shareholder voting. The guidelines recommend that the board should establish a remuneration committee and should also take the advice of external remuneration consultants. A typical remuneration package includes fixed pay as well as the payment of long-term and short-term incentives. These payments can be in the shape of cash or equity (Smith, Milne and Morris, 2001). Different guidelines and surrounding regulations have been prescribed for each of these forms of remuneration. The companies are required to produce an annual remuneration report along with the annual report. The shareholders can vote during the annual general meeting on this report but this vote is only advisory and nonbinding in nature. Shareholders have a binding in case of termination payments more than a certain threshold and also on the remuneration which involves the issue of equity to the directors and also in the election of directors (Geoff De Lacy and Anne De Lacy, 2004).

The listing rules of ASX are connected with the necessities of market information, listing, quotation, trading, settlement and other general matters related with supervision. These rules apply to all the trusts (entities) and companies which are listed with the ASX. These rules are intended to look after the interests of the investors and also against repetition of market. They take into consideration the interests of entities listed with ASX (Investment and Financial Services Association, 2004). The main list includes that affect executive remuneration are related continuous disclosure, voting on the remuneration for non-Executive directors, issuing shares the parties and some voting exclusions. The listed companies are under a binding contractual obligation to abide by the listing rules of ASX. These rules can also be enforced under the Corporations Act. Any breach of these listing rules can cause the imposition of several sanctions against the erring company. These sanctions vary from censure to the compulsory education for the directors in cases of minor breaches and for serious breaches these sanctions can impose suspension or fines up to $1 million. These rules have reinforced the provisions of Corporation act relating to remuneration in response to the rising concerns in this area (Australian Institute of Company Directors, 2007).

Part (b)

The annual report of The Trust Company compliance with the requirements of ASX Corporate Governance Principles and Recommendations significantly. As per these principles the company chairperson is a non-executive independent director. Similarly, the people and remuneration committee of the company is also headed by an independent nonexecutive director. Likewise the majority of members of the board are independent nonexecutive directors. As the requirements of ASX Corporate Governance Principles and Recommendations, an initial report has also been presented along with the annual report of the company. The remuneration report provides complete information regarding the names of the nonexecutive directors who are members of the remuneration committee. The report contains complete information regarding the activities of the religion committee along with the remuneration philosophy of the company. As for the requirements of ASX Corporate Governance Principles and Recommendations, the remuneration report which is presented along with the annual report of the Trust Company Ltd. gives a detailed account of its executive compensation. It reveals that there are two components in the present remuneration framework of the company. These are fixed remunerations which is based on statutory superannuation contribution and it represents the total fixed remuneration. The component is risk remuneration which is performance related remuneration. It is a mix of cash and performance rights. The remuneration report the Trust Company Ltd. also reveals the remuneration mix in the company between fixed remuneration and performance related remuneration which includes long-term incentives as well as short-term incentives. The remuneration report of the company provides detailed information regarding the compensation paid to its executives as per the Corporate Governance Principles and Recommendations of ASX. The report also reveals that the fee of nonexecutive directors is determined by the board but within the limits prescribed by the shareholders.

The disclosure requirements in particular have contributed in increasing and improving transparency and accountability. A nonbinding vote by the shareholders has been introduced regarding the remuneration report of the company and the threshold regarding termination payments have also been lowered significantly.

References:

Australian Institute of Company Directors: Evaluating Board Performance, 2007

C Smith, N Milne, F Morris 2001; Australian Institute of Company Directors A Guide to Directors and Officers Liability Insurance, 1st edition.

Geoff De Lacy and Anne De Lacy 2004: How to Implement a Board Performance Management System.

Geoff De Lacy 2005; How to Review and Assess the Value of Board Subcommittees.

Investment and Financial Services Association 2004: Corporate Governance, A Guide for Fund Managers and Corporations – Blue Book, 5th edition.

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