CORPORATE GOVERNANCE LAW

QUESTION

1.       Discuss the following; 

a)    How is good corporate governance achieved and how does it assist with the framework of rules, relationships, systems and processes within an organisation?

b)    By which authority is it exercised and controlled in corporations”?

c)     Why is this concept important to Australia?

d)    What is the role of the Board and Management?

e)    How does the Board of Directors add value to a company?

f)      How can companies promote responsible and ethical decision-making?

g)    How can an organisation respect shareholder’s rights?

h)    How is power divided between the Board of Directors, individual directors and shareholders?  Why power is divided this way?  Does this division of power create any issues?  If so, for whom?

i)       How is the liability of directors limited? How is the liability of shareholders limited?  Are there any problems with this limitation of directors and shareholders liability?

2.  The following are important considerations for good corporate governance.  Discuss.

a)    Conflict of interest;

b)    Best practice for a board of directors;

c)     Managing a board’s performance;

d)    The protection of company funds;

e)    Proper disclosure of price-sensitive information;

f)      Transparency and sensible decision-making;

SOLUTION

Answer 1

1. The Corporate Governance is the system by which all the companies are directed and controlled for their development. Good corporate governance lies in the commitment by the companies to run their companies and businesses in legal, transparent and ethical manner. This dedication must come from throughout the organization. We can say that corporate governance is a set of rules, relationship, systems and processes within an organization and by which powers are exercised and controlled by the corporations.[Lipton, 2003] This corporate Governance is very influential in setting the goals or objectives of any company and also how the performance can be optimized. Effective corporate governance can be achieved by adopting a set of rules, principles and best practices. The best deal comes from honesty, integrity and transparency in your work.  Companies must make profit for their survival and growth but the pursuit of profit should stay within the ethical boundaries. [ASX Corporation Council, 2010] This effective corporate governance structures encourages the corporations to create their own values and provide accountability.
2. As it is clear now that corporate Governance basically the set of rules and the general practices through which the companies are governed. The business of a company is carried out by their directors, shareholder and the members hence the corporate governance involves a set of relationship among the companies management, its board, its shareholders and stakeholders. [Lipton, Herzberg and Welsh,2009]

The government agencies and authorities, stock exchange and management are the most influential parties related to the corporate governance. Here management includes board of directors and its chair, Chief executive officers, other executive and management, shareholders and the auditors. The other influential stakeholders are lenders, suppliers, employee’s creditors, customers and entire community at large. Effective corporate governance can be achieved only through the good relationship among these bodies. Everyone is very important. Good corporate governance is not just a matter of prescribing the good corporate structure and complying with the hard and fast rule but with the broad legal and ethical values.[Surendra, 2009]

1. Few years back, the corporate governance was the barely known concept but now like changing climate, corporate governance is the staple of everyday business language. Corporate governance structures and practices are important in determining the cost of capital in global capital markets. [ASX corporate governance, 2010] In August 2002 Australian security exchange corporate governance council was established and it is chaired by the ASX group since its inception. For Australian companies it is necessary to be well equipped in competing with other companies globally and to maintain and promote the investors’ to invest in Australia and abroad both. Australia starts with the position of strength in the corporate governance however it is equally important to review those practices and insure that they must reflect the local as well as international development and also promote the high standard of practices and transparency about the corporate governance practices. Although Australia has a good corporate governance mechanism but we should always try to find the ways to improve it.
2. For better corporate governance all the essential elements of corporate governance must work properly. One of the major elements here is the board and the management. The directors and the other members who constitute a company owe a fiduciary duty towards their company or organization. The management of any organization is composed of the chief executive officer or equivalent to him, senior management and other staff. Collectively, they are responsible for the implementation of the decisions of the board and diligent conduct of day to day operations of the organization. Whereas, board members which comprises the director of the company or any committee members are individually or collectively responsible for the strategic directions and control over their organization. [Australian Government Handbook on Corporate Governance, 2012] For the corporate governance, the board and management of the company must be aware of the legal framework of their corporation. They also owe duties of care and diligence. They must take decision on behalf of their company in very good faith (Re Smith & Fawcett Ltd [1942] Ch 304). They must not have any personal interest and whenever taking any decision on behalf of the company they must be assured that the decision is going to benefit the company.
3. In continuation with the above point we are here presenting the board and the management as the valuable asset of any corporation. An organization can be divided in its four components:

• Legal entity
• Organization members
• Board
• Management

The board and management of the company are responsible for its internal management. It gives strategic directions and establishes the policies and manages company in day to day business development. They are then final responsible for the achievement of the ultimate goals set by the company. We cannot imagine corporations without their board and management. These members are appointed through the general board meeting done time to time in the company. A company should have a board of proper size and effective composition with a commitment of discharging their duties and responsibilities. An effective board adds value to the company by its efficient quality of discharging duties and liabilities as per the requirements of the company. The board of directors must have the capacity to tackle the emerging issues of the company and also the decision making power. They can effectively review the management and enhance the progress of the company. The performance of the board must also be looked over through appropriate measures. [Field and Pippit, 2004]

1. For good corporate governance a company must promote ethical and responsible decision making. For this the company must comply with its obligations and the expectations of other members and the entire community through which they operate. The circumstances in every company differ from the other hence the company must look into their own structure which suits it. The companies should clarify the standards of ethical behavior to all its managements and employees too and encourage the observance of these standards. A company must publish their policies with all diversities and also their objectives. There are few recommendations for the company to achieve ethical and responsible decision making that it must establish a code of conduct and disclose the code or its summary. For good corporate governance ultimately the thing required is the people of integrity. Hence the investors will be confidant if the company clearly articulates practices for directors, senior executive and employees.
2. The companies should always respect the rights of their shareholders or take it seriously  and provide the effective exercise of those legal rights. From recent past we have reviewed great scandals and resulting push for legal reform have revived the role of shareholders in the company as a matter of great debate. A company can give importance to their shareholders through proper communication with them and promote their interest in the meetings of the company. The communication of company’s policies to the shareholders will help the investors to understand how to access the impotant information about the company. Companies should also try to communicate with the shareholders in its general meetings. An organization can respect the rights of shareholder also by taking their legal rights seriously such as right to vote and right to sell their shares. They must also be given importance in the election of the directors in the general meetings.[ Julian, 2009]
3. An active, well informed and independent board is very important for any company. Hence they must exercise their powers very carefully. It is best for the corporate governance that all the members of the company must know their responsibilities very well. The powers are divided among all the participants of the company. Such as the board of directors have power to take decisions on behalf of the company and the shareholders can take derivative actions. The individual directors are appointed through the nomination process and their powers are in accordance with the Director’s code provisions which must be incorporated in the board regulations. There powers are so divided for the good corporate governance. No one can interfere with the roles of another and also this helps in the checking of one another. The main issue that arises due to the distribution of powers is the corporate governance conflict between them. The conflict may be related their own interest or any of the company’s interest.
4. Having limited liability here means the status of being responsible to a limited extentfor the debts of trading company. In a limited liability, which is limited by shares or they are limited by guarantee, the shareholders and directors are not liable for the debts incurred by the company. Directors have the power to act and take decisions on behalf of the company and shareholder also enjoys many rights, hence both the directors and shareholders are liable towards the acts of company to the extent of their personal actions. After the incorporation of a company it becomes a separate legal entity and liable for its own activities and directors limitedly liable. [Northern Counties Securities Ltd. v. Jackson & Steeple Ltd.] Whereas the memorandum of association of a company can make them liable unlimitedly. If we look in the broad way there is no such problem with the limited liabilities of shareholders and directors but in contractual terms, they are excused with responsibilities and few debt are left unpaid.

Answer 2

1. a.     Conflict of Interest

In the corporate governance we can imagine the conflict of interest between various constituents of a company. The conflicts are unavoidable as the boardroom consists of numbers of individual with all different mindset and strategies. A board that never argues or disagrees is likely to be the inactive and passive board which is not carrying its duty properly. The fertile source of conflict and misunderstanding may be the governance issue, standards and requirements. It is the duty of the chairman and lead directors or the head of board to address these disagreements and resolve them. The most important is to keep them within the boardroom because it is not good for the corporate governance that there disputes are going out with public. It will harm the repute of the corporation. These small disputes can turn into big issues in the company and may divide the whole corporation into polarized camps. This situation came up with the Hewlett Packard over its merger with Compaq. Ultimately the merger occurred but with great loss of time and money. There is another example of boardroom conflict is the dispute over the appointment of new board members in phoenix timber corporation in 1985.[ Eric, 2007]

1. b.     Best practice for board of Directors

The board of directors is very important for the working and progress of any corporation. The directors must clearly understand the expectations of the shareholders and the company from them. The duties apply on the board individually but the powers must be exercised jointly. An active, well informed and independent board is very important for any company. The best practice for the board of directors is that they must act in a good faith. The substantive test of this is the belief of the director that whatever he is doing is in the best interest of the company. The directors must do his duties for some proper purposes not only to suppress any of the shareholders, as it was held in the case of Howard Smith Ltd v Ampol Ltd (1974) AC 821. The case was about the issuance of shares by the directors. The directors should not put themselves into a position where their personal interest and duties are in conflict with the duties and interest they owe to the company. The directors should not compete with the company without any conflict of their personal interest or they must not govern that company which is in competition with their company.

1. c.      Managing a board performance

For good corporate governance the factor that works is the management performance of the board. As described earlier, an active board is the essence of any corporation. The performance of the corporation can be enhanced by managing the performance of the board. A company should allocate the individual responsibilities at the time of appointment of the members of board. They must be very clear about their duties and responsibilities. The corporation should have a mechanism to check all of them. The board of the company must be responsible for reviewing, rectifying and monitoring the system of risk management, internal control, code of conduct and legal compliance. [John, 2005]   The company should be monitoring the senior executive performances and implementation strategies and also must disclose the process for checking the executive of the company.

1. d.     Protection of company’s fund

From the definition of corporation governance given by OECD we observed that the corporate governance is the system through which the business of the corporation is governed and developed. It is important for the development of company that there should be proper account of the company’s fund and it must be protected. Companies should have a proper structure to verify independently and safeguard the integrity of financial reporting. For this the establishment of an audit committee is necessary. The ultimate responsibility of the company’s financial integrity rest on the whole board whether it is a separate audit committee or not. It is supposed that all the members of the board must be financially literate. The audit committee should meet regularly to undertake their role effectively. Apart from the audit committee the board is also responsible for keeping records of company’s financial transactions. The directors should

not be involved in the misappropriation of funds of the company. [United Nation’s Guidelines on Corporate Governance, 2006]

1. e.      Proper disclosure of price sensitive information

Proper disclosure about the information of any corporation is considered as very important subject in corporate governance. In fact better disclosure is the way to reduce the problems of the company. A strong disclosure regime helps in attracting capital and maintaining confidence in the capital market. Also disclosure helps in public understanding of the activities and policies of the company with respect to the environment and ethical standards in relation with the other organizations. It is the major responsibility of the board of disclosure that they should disclose their financial policies to the shareholders and stakeholders. The proper disclosure will help them to take appropriate decision for the company. [ Lipton P. , 2003]

1. f.       Transparency and sensible governance

The system by which a corporation is governed and developed is known as the corporate governance. This corporate governance helps in the progress and performance and avoiding conflicts in the corporation.  Good corporate governance signifies the balance of rights and responsibilities among all of its participants, such as directors, chairman, shareholders, stakeholders and other members. For the good corporate governance there must be transparency in the working of all the elements of corporations. The board should make the responsibilities and working of company public. The company if incorporated under the companies Act it must be then governed in accordance with it. The board of directors must act in good faith. They also have the responsibility to take decisions on behalf of company. Hence they must be competent to take sensible decisions and not be influenced by the personal causes. The board must believe that the decision taken by them is in the best interest of the corporation. [ASX Corporation Council, 2010]

Referencing

1. Australian security exchange, Corporate governance principles and recommendation with 2010 amendments, 2^nd edition, P-3, viewed on 4^th May 2012 from http://www.asxgroup.com.au/media/PDFs/cg_principles_recommendations_with_2010_amendments.pdf
2. Lipton P. (Phillip), ‘Corporate Governance and responsibilities of the directors’, Understanding Company Law, 11^th Edition, (2003), Sydney Law book Co.
3. P. Lipton, A. Herzberg and Michelle Welsh, ‘Understanding of Company Law’, (2009), Thompson Reuters Publication, PP 430-35
4. Surendra Arjoon, Corporate Governance: An ethical perspective, University of West Indies, P-05, viewed on 4^th May 2012, from http://sta.uwi.edu/conferences/financeconference/Conference%20Papers/Session%205/Corporate%20Governance%20-%20An%20Ethical%20Perspective.pdf
5. Eric M Runesson and Marie Lawrence Guy, (2007)‘Mediating Corporate Governance Conflicts and disputes’, Global Corporate Governance Forum, P-15, viewed from http://www.ifc.org/ifcext/cgf.nsf/AttachmentsByTitle/Focus+Mediation/$FILE/Focus4_Mediation_12.pdf
6. Australian Government, Corporate Governance: Handbook for board, ‘Roles and Responsibilities of Board Members’,(2009), viewed on 4^th May 2012 from http://www.fahcsia.gov.au/sa/disability/pubs/general/CorporateGovernanceHandbook/Pages/RolesResponsibilities.aspx
7. Myron M Shield field and Judie Harris Pippit, ‘Fiduciary duties of a director in Corporation in the vicinity of insolvency and after intimacy of bankruptcy case’, Business Lawyer (ABA), [2004-05], Volume 60
8. Julian Velasco, (2009) ‘Taking Shareholders Rights seriously’, University Of California, Vol. 4, P-635, viewed on 4^th May 2012, from http://lawreview.law.ucdavis.edu/issues/41/2/articles/DavisVol41No2_Velasco.pdf
9. John Mc. Dermatt, ‘Understanding the Corporate Law’,(2005),LexisNexis NZ LTD, P-534
10. United Nations Corporation on Trade and Development, (2006), Guidelines on good practice in Corporate Governance and disclosure, viewed on 4^th May 2012 From http://unctad.org/en/docs/iteteb20063_en.pdf

Case Law

1. Re Smith & Fawcett Ltd [1942] Ch 304
2. Howard Smith Ltd v Ampol Ltd [1974] AC 821
3. Northern Counties Securities Ltd. v. Jackson & Steeple Ltd. [1974] 1 WLR 1133
4. Salomon v. Salomon & Co. [1897] AC 22.
5. Hewlett Packard v Compaq, Case No. COMP/M. 2609 HP/COMPAQ
6. Phoenix Timber Corporation Case

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