CORPORATE GOVERNANCE AND LAW

QUESTION

Length: 2300-2500 words.

Assignment

Your answer should include legislation and relevant case law.

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?

(extra teacher: hints are to discuss good corporate governess and what it consist?)

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

(extra teacher hints:what authority exercise and exist)

c)     Why is this concept important to Australia?

(extra teacher hints:how is achieved from so many sources)

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

(extra teacher hints:198A is the primary source of power of 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;(extra teacher hints: definition,examples,cases,statutory rules eg s181 etc,discuss why ,if at all ,this is a consideration of good corporate governess)

b)    Best practice for a board of directors;(extra teacher hints:ASIC practice of good corporate govt,definition,look at ASX corporate govt ,principles,discuss it importance.)

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;

 Important note=Plz try to use proper case studies ,lagislations ,put  intax reference,APA style referencing.2500 words

SOLUTION

Answer 1

1. a.               Corporate governance manages and directs the company as it is the framework of rules and relations, systems and processes in a company to exercise authority on a company. Corporate governance also a study of as how the goals of the company are set and how these goals are achieved, how a company assesses and monitors the risks  and also how performance is optimized(Butterfield,2002) Good corporate governance motivates companies to create a value system by ways of entrepreneurism, development, by adding innovation and also to create a system wherein accountability is measured in accordance with the risks. What good corporate governance consists of is an evolving process with the changing circumstance of a company and the principles of corporate governance need to be such that these changing circumstances of the company can be dealt with appropriately. Best practices of the company also evolve slowly with the development of the company. There is no single way to achieve good corporate governance but the basic principles that consists of good corporate governance are that (i)  the role and responsibilities of the board of directors and senior executives of the company should be properly established (ii) the division of the roles should be based on the skill and experience which is appropriate for the smooth functioning of the company (iii) the decision of the company need to be ethical keeping into consideration the obligations and rights of the stakeholders (iv)  proper company reporting standards both internal and external (v) disclosure of material information to be on time (vi) rights of the shareholders to be recognized (vii) effective oversight of risk and internal control (viii) reward system of the company so that talents and skills can be attracted.

b.         The authorities that exercise corporate governance and control in corporations are the Corporations Act 2001 (Cwlth), the principles laid by the ASX Corporate Governance Council and its recommendations, and certain regulatory guidelines which are promulgated by the industry itself.  It was in August 2001 that the ASX Corporate Governance Council was established which brings together 21 businesses, investments and shareholder groups. It is formed with a mission that there is a principle based framework for the companies which acts like a practical guide in the day today functioning of the company.

1. c.                The concept of corporate governance is important to Australia as the companies in Australia are required to be fully equipped with all regulatory procedures to have a strong footing in the world market(Cassidy,2006). If the company individually and the country at large has such corporate governance practices in place then confidence gets generated in the residential as well as overseas investors. The position of Australia is very strong in view of the corporate governance practices but with changing time and face of the world market it is very important to keep all the policies and practices current and applicable even in those emerging needs. These practices need to be reviewed and updated to focus on local and international developments taking place as well as these practices should be able to promote transparency in the dealing of the corporations.

1. d.               Section 198 of the Corporations Act 2001 empowers the directors to manage and control the business of the company. According to Principle 1 of the AXA Corporate Governance Council the board of Directors is usually responsible for the following:

• To keep a check on the affairs of the company including the control of the company and answerability system of the company;
• To take decision on the appointment and removal of the chief executive officer of the company;
• To take decisions on the appointment and removal of the senior executive of the company;
• To help in the making through experienced inputs and approve the corporate strategies and development programmes of the company in order to achieve the performance goal;
• To review, ratify and monitor the risk management methods of the company, internal controls of the company, codes of conduct, legal compliances and implementation of all corporate strategies;
• To provide adequate resources to the senior executives of the company;
• To approve and monitor all the capital expenditures, management of the capital, mergers and acquisitions of the company; and
• To approve and monitor the financial and other disclosure obligation of the company.

1. e.               The following steps can be taken to ensure that the board of directors add value to the company (Principle 2 of the AXA Corporate Governance Council) :

• The composition and size of the board of directors should be such that the responsibilities and duties on their shoulders can be discharged effectively. The board should be effective meaning that it should be able to discharge their legal obligations effectively and efficiently. The board of directors should be formed keeping in mind that there is understanding of all the issues of the company and board is competent to deal with all these issues. The board is in a position to take independent decisions and can manage the performance of the company. Board should motivate so that there is better performance of the company;
• The majority of the directors are independent directors and an independent director is one who is not a member of the management but a non executive director and free of any relationship with the business that can hamper his independent decision making. The directors should take independent judgements whether they themselves are independent or not. In order to take independent judgements it is important that professional advice be taken at the cost of the company;
• The chairman of the company should also be an independent director who is responsible to lead the board when the board functioning is going on. He needs to maintain respectful and constructive relations between all including the board, management and the directors.
• The chairman of the board and Chief Executive officer should be two different individuals. The responsibilities should be clear of the head of the company and their responsibilities should be approved by the board of directors and should be mentioned in a statement of position.
• Establishment of a nomination committee with a purpose that there is a proper methodology for choosing the practices of the company. The complete responsibility of practices is on the board of directors. There should be a charter with the nomination committee setting out its roles and responsibilities, compositions and structure.
• The selection and appointment of directors should be a transparent procedure and more transparent is the procedure more is the investor confidence that gets built for the company.

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1. f.              Companies can promote responsible and ethical decision making by the ways as mentioned in Principle 3 of the AXA Corporate Governance Council. Responsible and ethical decision making can be achieved by fulfilling all legal obligations of the company as well as considering expectations of the shareholders, the employees of the company, and customers of the company, its creditors, the consumer base and the whole community in which the company operates. To achieve this company should have clarified and have set of standards which are required and there should be strict compliance of those set standards of behaviour. The policies of the company should be published and within the reach of all in the company as well as outsiders like customers so that everybody is familiar with the company policies ethical behaviour. In order to achieve full satisfaction in the responsible and ethical decision making field it is important to follow the recommendations of AXA  Corporate Governance Council which are as below:

• Establishment of a code of conduct stating the practices that are required to maintain integrity of the company taking into consideration the legal obligations of the company and expectations of all related to company like the shareholders, employees, consumers etc. The code of conduct of a company should also contain provisions for punishment in case any violation of the principles and values stated in the code are violated.
•  Establishment of a policy and its disclosure is important to achieve ethical decision making. This policy stating the clear cut objectives of diversity should be reviewed on an annual basis to monitor whether the objectives of the company are gathered because of such policy in place or not.
• The annual report of the company should disclose the objectives which can be measured of the gender diversity which are in accordance of the gender diversity policy of the company. The annual report should also state the ration of women in higher positions in the company like senior executives and the board members.

1. g.             An organization can respect the rights of the shareholders by communicating with them in an effective manner and by giving them access to the information and proposals of the company which can be understood by them and making it easier for them so that they can participate in the general meetings of the company. In accordance with the Principle 6 of the AXA Corporate Governance Council the following is recommended for the respect of the shareholders of an organization.

• The company should have a proper communication policy in place so that effective communication can be promoted and this policy should motivate and encourage shareholders to be active participants of the general meeting of the shareholders.
• In the annual general meeting of the shareholders which is forum wherein companies can know the problems and expectations of the shareholders and these shareholders can have access to company information helping in informed decision making of the company. The Corporation Act 2001 section 250 RA does not make it compulsory for trust companies to hold such annual general meetings so it becomes important for such companies to devise a methodology wherein shareholders can be heard.

1. h.             The power is divided so that there is no conflict of opinion and a proper corporate governance methodology could be followed. When power of the directors, individual directors and shareholders are divided there are fewer chances of confusion and conflict in the decision making of the corporation. In small companies where both the shareholders and directors are same there is no need of division of power between the independent directors, board of directors and shareholders. In case of larger corporation this division is specifically required and the Corporations Act 2001 outlines in separate sections various powers of these major positions of a corporation. This division of power does not create any issue in fact it is a method to achieve good corporate governance. Power is divided between the Board of Directors, individual directors and shareholders by recommendation laid in Principle 1 of the AXA Corporate Governance Council, such division of powers makes it easier to look for the person who is accountable for the act. In the appointment letter itself the responsibilities and the powers should be chalked out clearly.(Harris et al, n.d)

1. i.               The shareholders of a company are not personally liable for the debts of the company except for the amount of money that remains to be paid for the shares that they have purchased in the company(http://www.asic.gov.au/asic/asic.nsf,2012) A director can be personally liable for the debts of the company when the company becomes unable to pay those debts, he can also be liable to compensate the losses of the company suffered by the company because of any breach of the duty imposed upon directors under the Corporations Act 2001. When a company takes any loan there need to be a guarantee that needs to be provided by the directors. If the debts of the company become unpaid then the directors are liable for the debts of the company to the extent of the guarantee signed by them for such debts. A director is also personally liable if the company incurs liabilities when he is acting in the capacity of a trustee and also for any civil or criminal liability. When the company has taken excessive debts and liability of both the directors and shareholders is limited and the assets and properties of the company are not enough to pay all the debts then unsecured creditors are at a risk for not being paid their money.

Answer 2

1. a.         Section 181 of the Corporations Act 2001 states that it is a duty of the Directors to work in good faith for the benefit of the company but if a director has other interest in the company then his this decision can be jeopardised. It is important that there is no conflict of interest for the good governance of the corporation and the dealings of the company need to be transparent(Farrah,2006). Conflict of interest means that an individual or an organization has many interests in the company which has the potential to corrupt the act in the other capacity. In a corporation conflict of interest can occur like a company is engaged in two types of businesses with the government like manufacturing of tyres and then also e participant in the selection committee comparing various tyres available in the market. Conflict of interest situations can be avoided by bringing in transparency in the dealings of the company and disclosure of personal relation as well of the members and directors and senior executives.

1. b.         Best practices for the board of directors of a company are to manage the affairs of the company in total control, to make ethical and reasonable decision, the composition of the  board of directors to be such that they are able to understand the issues of the company and are in a position to take independent decisions, the appointment of senior executives and other employees should be based on merit, skill and experience, there should be proper disclosure made of all the company related information, timely review of all policies so that these can kept updated, all responsibilities of different employees to be chalked out clearly, to ensure that there is no conflict of interest situation arising because of the dealings of the company.(Shailer,2004)

1. c.           There should be disclosure of the performance of the board which will evaluate the performance of the directors of the board. It should be reviewed regularly taking appropriate measure to make it effective. A board performance can be managed when they take independent decisions for the benefit of the company and board of director consists of people from diverse backgrounds so that all the issue of the company can be understood. It should be included in the corporate governance document of the company whether that year performance evaluation of the board took place or not.

1. d.         There should be proper disclosure of financial information of the company in a timely manner. The funds of the company need to be protected from being misused or diverted and it is possible if there is proper following of the corporate governance principles with respect to disclosure.

1. e.         The price sensitive information should be first made available to the stock Exchange and should not made available to anyone else before it is released in the market by stock exchange (Section 1000A of the Corporations Act 2001 and the ASX listing rules 3.1 and 15.7).

1. f.          Transparency and sensible decision making is one of the core principles of corporate governance and it generates confidence in the investors in Australia as well as outside Australia to invest the company which has more transparency in its dealings and the board of directors consists of members based on their experience and skill that there is sensible decision making.

References

Books

1. Butterfield, C (2002) Governance: concepts, principles and applications
2. Cassidy, J.(2006) Concise Corporations Law, (5th ed) Federation Press, Sydney
3. Farrar, John (2005) Corporate Governance: theories, principles, and practice  (2^nd ed)
4. Harris, J; Hargovan, A; Adams,M  Australian Corporate Law (3^rd ed)
5. Shailer, G (2004) An Introduction to Corporate Governance in Australia

Others

1. ASX Ltd 2010, ASX Group, viewed on 25^th may 2012,http://www.asxgroup.com.au
2. CSA annual Corporate Update, viewed on 25^th may 2012, http://www.csaust.com/
3. Australian Securities and Investment Commission, viewed on 25^th may 2012, http://www.asic.gov.au

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