Corporate Governance in Australia Corporate

Corporate Governance in Australia

Australia Corporate Responsibility and Corporate Governance

The proper governance of companies will become as crucial to the world economy as the proper governing of countries... strong corporate governance produces good social progress. The two go together." James Wolfensohn, President of the World Bank (qtd in Detomasi, 2002)

Economic prosperity is a product of a strong collaboration between the investors and the government. Both local and foreign investors need an assurance of their security and protection of interests from the government. A call for a responsible corporate governance in return yields a rewarding economic stability that eventually contributes to the country's progress.

Corporate governance and responsibility of a particular country are measured up by international investors in order to protect their interests, especially in the global market. The rules concerning the implementation of these decrees should be in their favor.

Since the fall down of Enron and Worldcom, and the implementation of Sarbanes-Oxley Act of 2002 in the United States, domestic and foreign companies have become more prudent in analyzing corporate governance and responsibility. Because of theses incidents in the past, corporate governance is recently facing a stage wherein it has to meet up with global demands that recognizes the fact that every country has a need to attract and protect its investors. Once these conditions of global convergence are met, global capital will generally flow at favorable rates to where it is best protected, but will not flow at all or will flow at higher-risk rates where protections are uncertain or nonexistent. (Millstein, 2005)

Globalization has determined the trend in economic prosperity as with the appropriate and relative corporate responsibility exhibited by an enviable corporate governance.

Analysis of Major Schools of Thought on Corporate Responsibility and Corporate Governance

Corporate responsibility comes hand in hand with corporate governance. The practice of the latter is a representation of the former. Corporate governance provides the basis for a stable and productive business environment. It can be especially important in emerging markets and to firms that seek to distinguish themselves in the global economy. http://usinfo.state.gov/journals/ites/0205/ijee/ijee0205.pdf, para 5)

Knowing what corporate governance and responsibility is and its impact on the investors in a particular country had become one of the major concerns of globally competitive countries, as well as those who are only on their way to become one. Getting acquainted with the principles governing corporate governance will further help the economic progress of the country and create a strong and stable economic status. Good corporate governance attracts more investors upon which contribute to an increase in power in the global context.

After the famous Cadbury Report released by the Committee on the Financial Aspects of Corporate Governance chaired by Sir Adrian Cadbury, corporate governance had gained the awareness of the public, most particularly the investors. The report defines corporate governance as "the system by which companies are directed and controlled," although there are yet other definitions referring to the term. Other definitions involve "a system of checks and balances between the board, management and investors to produce an efficiently functioning corporation, ideally geared to produce long-term value," (Garrett, 2004) and others would refer it to the "rules that guide the behavior of corporations, shareholders, and managers, as well as to government actions to promote and enforce those rules." (http://usinfo.state.gov/journals/ites/0205/ijee/ijee0205.pdf, para 7)

Moreover, defining corporate governance using the Australian Securities Exchange (ASX) 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 optimized... Good corporate governance structures encourage companies to create value (through entrepreneurism, innovation, development and exploration) and provide accountability and control systems commensurate with the risks involved." http://www.shareholder.com/shared/dynamicdoc/ASX/364/ASXRecommendations.pdf, 5)

To be able to achieve a good corporate governance, it involves "no single model of good corporate governance...The ASX Corporate Governance Council believes underlie good corporate governance. Each principle is explained in detail, with implementation guidance in the form of best practice recommendations. http://www.shareholder.com/shared/dynamicdoc/ASX/364/ASXRecommendations.pdf, 6)

Although the Council's recommendations are not mandatory and cannot, in themselves, prevent corporate failure or mistakes in corporate decision-making, they can provide a reference point for enhanced structures to minimize problems and optimize performance and accountability..." (www.shareholder.com/shared/dynamicdoc/ASX/364/ASXRecommendations.pdf)

Under the Australian Securities Exchange, there are several fundamental principles that involve the achievement of a responsible corporate governance. The first principle establishes the roles of management and the board, with a balance of skills, experience and independence on the board appropriate to the nature and extent of company operations stated under the second principle. Integrity is as well significant in attaining a strong corporate governance thus, its importance among those who can influence a company's strategy and financial performance, together with responsible and ethical decision-making encompasses the third principle. http://www.shareholder.com/shared/dynamicdoc/ASX/364/ASXRecommendations.pdf,8)

The fourth principle tries to meet the information needed of a modern investment community that is paramount in terms of accountability and attracting capital, as well as presenting a company's financial and non-financial position requires processes that safeguard, both internally and externally, the integrity of company reporting. The provision of a timely and balanced picture of all material matters makes up the fifth principle. The rights of company owners, that is shareholders, need to be clearly recognized and upheld is contained within the sixth principle. (www.shareholder.com/shared/dynamicdoc/ASX/364/ASXRecommendations.pdf)

The elements of uncertainty that carries a risk that can be managed through effective oversight and internal control holds the seventh principle, and the maintenance of the pace with the modern risks of business and other aspects of governance requires formal mechanisms that encourage enhanced board and management effectiveness is on ASX's eighth principle. http://www.shareholder.com/shared/dynamicdoc/ASX/364/ASXRecommendations.pdf,10)

ASX, furthermore, has added the principles concerning the rewards needed to attract the skills required to achieve the performance expected by shareholders that is contained in its ninth principle. Finally, the tenth principle talks about the impact of company actions and decisions that is increasingly diverse and good governance recognizes the legitimate interests of all stakeholders. (www.shareholder.com/shared/dynamicdoc/ASX/364/ASXRecommendations.pdf)

At the least, however, corporate governance is simply the relationship among various stakeholders with respect to the control of corporations. Corporate governance deals with these relationships and above all addresses the relationship between the owners of a company and those who manage the company's operations. The owners are as well the shareholders who are the principals and those who manage the companies are the executives hired by the owners to run the company as agents of the principals. Corporate governance encompasses the weight given to various factors in connection with the process for making strategic decisions, the adequacy and transparency of disclosures, the reliability of financial reporting, and compliance with laws and regulations. Corporate governance comprises a combination of regulatory rules and private sector-driven guidelines that takes in hand these concerns between the two most basic figures that run the corporation. (Millstein, 2005)

Countries around the globe formulate their own individual strategies regarding corporate governance. Meeting up with the demands of the different corporations in the country has become one of the main goals of the countries concerned with economic prosperity and its sustainable development. In relation to the desired corporate governance, governments have become more aware as to how they would help protect the interests of both the domestic and international investors such that they would remain stable for the benefit of the people and the country's economic progress as well.

Highly developed countries continuously struggle upon coming up with the perfect corporate governance such that those whose legal systems are rooted in British common law, the interests of shareholders are held to be dominant in most corporate decisions. On the other hand, for the developing countries that have traditionally fostered concepts of partnerships between management, employees, and other stakeholders, have other social priorities, or have mixed government-private ownership arrangements are now recognizing investor protection as an important signal to potential capital providers. They need to demonstrate adoption of corporate governance principles so as to promote investor trust and attract capital, which will in turn lead to investment and economic growth. Moreover, modifying these principles is necessary to be able to match the needs of its local or domestic investors. But there are certain fundamentals that cannot be ignored, which may be found necessary and significant in order to adapt to the demands of the stakeholders as well as the community itself. (Millstein, 2005)

On the other hand, countries with a more sophisticated financial market, their corporate governance rules and structures are contained in laws protecting property rights and shareholder rights through legislation, accompanying regulations, judicial decisions, and stock exchange listing rules. This situation has been the most important strategy that works for the government that is parallel to the need of their markets. It has been fundamental for these countries to utilize such strategies to meet the needs of their investors. In addition to formal rules, corporations adopt best-practice principles and guidelines, which are continually being developed by the private sector and academia in response to prevailing market conditions and investor demands. Developing countries need to take both elements -- governmental infrastructure and best practices -- into account. (Millstein, 2005)

Since United States and Australia are countries which are already considered to be globally competitive that has attained its almost perfect status in the world market, developing countries are basically taking into account every step that they make for which they might soon adapt to attain the same position in the global context. Therefore, studying both countries' corporate governance is necessary in order for other developing countries to learn from their experiences.

Similarities and Differences of U.S. And Australia's Corporate Governance and Responsibility

Global trends in the corporate governance made the countries more or less similar when it comes to their responsibilities concerning the issue. Not only in the implementations did these countries have become similar, but even with the different issues involving controversies and failures connected to corporate governance as well.

These failures have further stimulated the debate about corporate governance, leading to regulatory action and other reforms. One of the most significant cases in corporate governance failures were those of the United States' Enron, Worldcom and Tyco that later initiated the major debate and legislation in the country. Australia has its own significant issue that of the HIH, an insurance company that collapsed in 2001 with debts of about $5.3billion (Saville, 2003). There were also other businesses that had collapse such as the Ansett Airlines and One Tel in Australia. http://www.oecd.org/LongAbstract/0,2546,en_2649_37439_21755679_1_1_1_37439,00.html, para 17)

As both countries had been practicing the common-laws, United States and Australia are more "shareholder-focused" in their governance and accounting standards, in contrast to the code-law countries of Japan, Germany, and France which represent bank-dominated economies and are more "stakeholder focused." (Holcomb, 2004)

Australia's system of corporate governance is usually said to be similar to those of the United Kingdom and the United States in terms of ownership and control. Dispersed shareholdings where shareholders and companies interact on an arm's-length basis, largely determined by market forces characterizes its securities market. This is the reason why corporate governance system in Australia is referred to as an "outsider" systems wherein its shareholders are more dispersed and are indirectly involved in the control of companies. (Dignam & Galanis, 2005)

Moreover, this idea of the Australian corporate governance is somehow proven to be true since many of the key institutions present in countries with outsider systems are as well present in Australia. A securities market, a securities regulator, a takeovers panel, a disclosure regime and outsider corporate governance codes evolve around the Australian corporate governance system. (Dignam & Galanis, 2005)

Australian Stock Exchange (ASX) had become an essential matrix for the country regarding legislation, accounting standards which have the force of law, ASX Listing Rules, and voluntary self-regulatory codes of practice. (www.treasury.gov.au/documents/178/RTF/ch4.rtf)

The Corporations Law are addressed with the basic rights of shareholders and duties of directors are contained both in legislation and in the common law, as well as financial reporting requirements in accounting standards, and in the ASX Listing Rules. Self-regulatory codes of practice also cover aspects of the internal management of companies such as the structure and make up of boards. http://www.treasury.gov.au/documents/178/RTF/ch4.rtf, para 4)

The Australian Securities and Investments Commission (ASIC) oversees this matrix with wide ranging enforcement powers. ASIC undertakes a range of activities in order to facilitate improved corporate governance. In addition to enforcing relevant provisions of the Corporations Law, ASIC sets standards, issues best practice guides, and has a key role in disseminating information to the market together with the ASX. (www.treasury.gov.au/documents/178/RTF/ch4.rtf)

There is at the same time a wide range of disclosure requirements on listed companies wherein disciplinary actions may be taken by the ASX against companies in breach of its Listing Rules. These actions may include suspension of an entity's securities from quotation or, ultimately, delisting. The ASX also requires each listed company to disclose the main corporate governance practices it has had in place during the year. Under this rule, the ASX does not require that particular practices be adopted or that companies report against prescribed checklists. Rather, it aims to promote disclosure of the corporate governance practices a particular company already has in place. (www.treasury.gov.au/documents/178/RTF/ch4.rtf)

Being a member of the Organization for Economic Co-operation and Development (OECD), Australia adheres to its draft Principles, although its general nature does not lend itself to a clear cut 'checklist' assessment. Australia meets, and in some cases exceeds, international accounting and auditing standards. Disclosure of matters not covered by accounting and auditing standards are met through legislative requirements or Stock Exchange Listing Rules backed by enforcement mechanisms, or in some cases through the encouragement of best practice. http://www.treasury.gov.au/documents/178/RTF/ch4.rtf, para 14)

Concerning the roles or duties of the director, the Australia's corporate governance involve the independent directors and independent chairs to meet 8/10 times a year which is very close to what the governance activists would like to see as the norm. By way of comparison, many large, successful U.S. multinationals have vested much greater power in the chairman/CEO and senior management, and often have as few as four to six meetings a year. (Wallis, 2000)

The legal component of corporate governance covers directors' duties, shareholder remedies and meetings. There is a debate whether it covers other law which imposes liability on directors. Systems of self-regulation range from what could be called hard/soft law like stock exchange listing rules and statements of accounting practice, to institutional codes such as the ASX Principles of Good Corporate Governance and Best Practice Recommendations to the codes of individual companies. Sometimes corporate governance is thought to cover business ethics. The form of self-regulation tends to be analyzed in terms of rules vs. principles, but to these we can add the norms of best practice. (Farrar, 2005)

The United States' corporate governance however regards corporate law as but one small part of a complex U.S. corporate governance system comprising a wide array of complementary institutions, incentive structures, constraints, and practices that work together to create a whole that is greater than the sum of its parts. (Paredes, 2004)

The complex governance system of the United States requires the country to put the importance on shareholder performance while catching up with the managerial action in a strong legal and regulatory framework designed to ensure legitimacy and prevent conspiracy. The emphasis of the corporate governance in the United States is towards the protection of its shareholder rights and maximization of shareholder return, and meeting the metrics imposed by an active, liquid, and deep capital market. (Detomasi, 2002)

One could postulate that in relation to corporate performance, the Walmart board, who meet only four times a year, would be in an inferior position to the boards of David Jones and Coles Myer, who meet close to monthly throughout the year in Australia. However, the results show that the Walmart board has delivered outstanding results for its shareholders no matter. (Wallis, 2000)

Around 80 per cent of U.S. companies combine the (chairman and CEO) role, while that of the European countries including Australia, its advisers and others with relationships to the company are valued as directors.. (Wallis, 2000)

The U.S. corporate governance system also relies on directors and officers "to do the right thing" by voluntarily taking steps to maximize firm value even when nobody is watching and there is little if any risk of market or legal sanction. Norms have received a great deal of recent attention as an important extralegal governance device.. (Paredes, 2004)

Consequently, relying too much on the directors may develop a negative effect on the system's governance. Given such very strong authority, officers and directors are challenged to control agency costs. Therefore, whenever the interests of directors and officers conflict with the best interests of the corporation and its shareholders, the concern is that management will tend to act in its own self-interest. For example, managers might decide to avoid, pay themselves excessive compensation packages, have fancy corporate jets and other perks, or build an empire by acquiring companies, all to the detriment of the company and shareholder value. (Paredes, 2004)

The United States corporate law, though a state law, the mandatory disclosure regime of the federal securities laws makes possible the market-based corporate governance system of the United States. Mandatory disclosure, backed by stringent antifraud provisions, plays a critical role in U.S. corporate governance by ensuring that investors, with the assistance of the supporting institutions described above, have adequate information to exercise their rights to vote, sell, and sue. The ability to exercise these rights allows investors to protect their interests without the need for more substantive regulation of internal corporate affairs at either the state or federal level. (Paredes, 2004)

On the other hand, the role of the directors in the corporations does not mean anything as such the shareholders do not have any "positive" control rights over the corporation granting them direct input into and say over how the corporation is governed or whether certain business opportunities are pursued. Shareholders are still given the right to vote for the board of directors, most importantly, and can make recommendations on governance and business matters to the board through the shareholder proposal process. They also have the right to vote on certain mergers and on any proposed sale of all or substantially all of the corporation's assets. Their approval as well recognized such that the company's articles of incorporation cannot be amended without them saying yes. They are also given the right to vote to amend the bylaws. Nevertheless, they do not have any authority to manage the day-to-day business directly or to set overall corporate policy and strategy, unless granted such control in the certificate of incorporation, which happens rarely, if ever. (Paredes, 2004)

Moreover, the U.S. corporate governance, public enforcement is limited to a few cases of serious fraud. As a result, there is no civil penalty regime and very little disqualification of directors compared with Australia, and that is a problem. In Australia, enforcement of civil penalties and disqualification of directors are increasing significantly. (Farrar, 2005)