Governance and Fraud- Australian Securities Exchange by the Corporate Governance Council - Assignment Example

MAA 763 GOVERNANCE AND FRAUD – T1 2017 Name: College: Course: Tutor: Date: MAA 763 GOVERNANCE and FRAUD – T1 2017 (1) For the year ending 2016 and using the ASX Principles and Recommendations (2014) version, provide response to the followings: i. Critically evaluate the depth of each company in their adoption of ASX CGC principles and recommendations (2014) The ASX CGC principles and recommendations are a prescription about corporate governance issues that have been devised and promoted by the Corporate Governance Council (CGC) of the Australian Securities Exchange (ASX). These principles and recommendations are directed towards business entities that are listed with the Australian Securities Exchange and are aimed at improving the manner in which authority within the listed companies is exercised, effected, and controlled. In addition, the principles and recommendations outline the approaches and instruments by which the business entities and those who control them are held accountable. There are 8 principles and 30 recommendations to be adhered to by the listed companies and it is advised that every publicly listed company adhere to them if they are to experience an open and candid relationship with their shareholders and the public as well (Kathy Rao, Tilt & Lester 2012). Both Coffey International Limited (CIL) and Mineral Resources Limited (MRL) are corporations listed in the Australian Securities Exchange (ASX). They have attempted to adhere to the principles and recommendations of Corporate Governance Council (CGC) of the Australian Securities Exchange (ASX), and have produced and published corporate governance statements that endeavour to outline and describe how they have adhered to these principles and recommendations. Specifically, depth of adoption of these principles and recommendations for the two companies is evident in the structure of their reports, which have evidenced concerted efforts to describe the level of adherence to each principle and recommendation prescribed. Notably, each of the company’s corporate governance statement is structured along each principle and recommendation prescribed and the companies declare that they have adhered to every principle and recommendation. The major differences noted in the corporate governance statements were noted. Specifically, while Coffey International Limited employed a prose approach to reporting, Mineral Resources Limited resorted to a tabular form of reporting. Therefore, the report provided by Mineral Resources Limited was easier to follow and evaluate for depth compare to that provided by Coffey International Limited. Noteworthy was the detailed manner in which the tabular form of the corporate governance statement of Mineral Resources Limited provided. Specifically, this report indicated the level of compliance for every recommendation, the availability of accompanying documents and the availability of the information on the website of the organization. ii. Discuss the link between corporate governance and performance. In your discussion, you are expected to analyse the underlying theoretical underpinning The debate of the presence of a link between corporate governance and performance is ongoing, the controversy remains unresolved, and where divergent and conflicting view regarding whether corporate governance enhances organizational performance. The difficulty in forming this linkage is premised on the multiple definitions of corporate governance that exist and the multiplicity of variables used to measure corporate governance, and the diverse metrics used to determine and evaluate performance of an organization (Tricker & Tricker 2015). The variables associated with the evaluation of the quality of corporate performance include the number of board members and ownership of the board of directors, the diversity of the board, the independence of the board, and the compensation level of the board members among others (Garnon et al. 2014). The performance of corporations is often measured using the prices of their stocks, the level of impact on the environment, the retention of valuable employees, and the amounts of profits. In this case, to help understand how corporate governance influences organizational performance, the fact that the two companies are based in Australia is pertinent. Australia has many commonalities with other countries governed under the common law such as the United Kingdom and United States and hence subscribe to the Anglo-American model of corporate governance as opposed to the stakeholder model, which is common in Japanese and German corporations. Australian, American and British corporations not only shared similar corporate cultures but also have undergone similar reforms in corporate governance that were instigated by the corporate scandals of the 1990s such as that of Enron. From this premise, some researchers find that large boards of directors are associated with better organizational performance while others have found a small-sized board to enhance the performance of an organization. The proponents of the large board size premise their favour on the fact that larger boards are able to bring an expansive wealth to the organization operating in a complex business environment. Indeed, the performance of the organization would be further enhanced if the board was diverse by having female board members. Indeed, studies have shown that female board members not only injected a deeper comprehension of the market and business environment but also helped improve the image of the board and organisation among the community and other stakeholders, which in turn, boosted performance. In the same light, some studies have indicated that independence of the board enhanced performance because it reduced opportunism that lead to corporate malpractices. Independent board members were not entitles to any connections with the organizations that would generate a conflict of interest and thus cloud their corporate judgement. Therefore, a diverse and independent board ensures that the interests of the stakeholders are well taken care of as prescribed by the stakeholder theory. One activity of corporate governance exercised by the board is being accountable to all stakeholders, both internal and external, and the society as well, particularly for listed corporations. The theory advocates for a wider perception of stakeholders as those giving corporations the licence to operate and thus their interests should be considered as well during corporate activities. Therefore, boards should not only focus on increasing profitability of a corporation but should focus on benefits that are inclusive of the society (Yusoff & Alhaji 2012). Focus on such inclusivity can be explained using the legitimacy theory, which asserts that corporations that honour their social contract with the society in which they are locate have a higher propensity to succeed. Indeed, it is recommended that the leadership of the board be divorced and detached from the position of the chief executive officer (CEO) of a company in order to prevent the complications that arise from the duality to the CEO. The separation of the director and the CEO, which can be equated to the principal and agent situation, is pertinent because the board of directors should act as the monitoring mechanism between the management as the agents and the shareholders and the owners of the company (Tricker & Tricker 2015). Indeed, the agency theory that informs such separation finds humans to entities that exhibit self-interest and have difficulty of sacrificing such interests, which often precipitates into conflict of interest in the corporate environment (Yusoff & Alhaji 2012). In addition, the board members should be drawn from a diverse pool of talented and experienced individuals to avail the wealth of knowledge they possess to the company. As such, a large and diverse board is said to enhance the performance of the business entity. The stewardship theory may help explain the value of a diverse and experienced board to an organization. According to this theory, a board that has the best and diverse interests of the corners and other stakeholders at heart is likely to reap the benefits of their commitment to satisfying these interests (Yusoff & Alhaji 2012). Such benefits would be in form of enhanced corporate performance. iii. Do you think the adoption of ASX principles and recommendations have made an impact on companies’ performance? Discuss. Adoption of ASX principles and recommendations has had a positive impact on the performance of the two organizations although the impact was more apparent in Mineral Resources Limited than it was in Coffey International Limited. Indeed, both companies detailed their level of compliance by attending to every principle and recommendation prescribed by the CGC of the ASX. Specifically, the structures and procedures in the companies were clear to the employees and the stakeholders, which helped increase accountability. In addition, the presence of a charter that outlined the corporate governance issues held dear by the companies and the way in which they were informed by the prescribed principles and recommendations helps the companies display their commitment to good corporate governance practices. In addition, the members of the boards were non-executive except for one executive director, who worked in close collaboration with the chief executive officer of the company. However, the presence of an executive director would have brought the issue of duality that becomes problematic when a board member performs executive duties. This may explain why the performances of both companies were not exemplary, despite the companies being highly diversified and having a global presence. (2) For the two companies you are allocated, provide response to the followings: i. Use a table to summarise the short term and long-term salary, board composition/ gender diversity and performance benchmarks of the executive directors over the 5-year period (June 30, 2012 to June 30, 2016). 2012 2013 2014 2015 2016 Short term salary CIL 1,948,370 1,944,828 1,933,133 1,828,882 MRL 1,966,566 2,438,238 2,372,477 1,557,260 1,944,672 Long term salary CIL 0 0 0 0 0 MRL 0 0 0 0 0 Board composition CIL 9 7 7 6 6 MRL 6 6 5 5 5 Gender diversity of the board CIL 2/9 2/7 2/7 2/6 2/6 MRL 0/6 0/6 0/5 0/5 0/5 Performance benchmarks of the executive directors CIL -holding and attending meetings -Safety improvement -profitability -Strategy implementation -holding and attending meetings -Safety improvement -profitability -Strategy implementation -holding and attending meetings -Safety improvement -profitability -Strategy implementation -holding and attending meetings -step up leadership -Strategy implementation -profitability -holding and attending meetings revenue targets -step up leadership -Strategy implementation -profitability MRL -holding and attending meetings -Return on invested capital (ROIC) -financial guidance -budget -holding and attending meetings - ROIC -financial guidance -budget -holding and attending meetings - ROIC -financial guidance -budget -holding and attending meetings - ROIC -financial guidance -budget -holding and attending meetings - ROIC -financial guidance -budget Sources: Coffey (2013, 2014, 2015, 2015), Mineral Resources (2012, 2013, 2014, 2015, 2016) ii. With reference to your table of summary in 2(i) above, discuss as to whether the performance benchmarks for remuneration are clear and appropriate The two companies have attempted to provide performance benchmarks for remunerating their members of the board of directors. Specifically, the two companies have stipulated the percentage of the companies’ profits that would constitute the reward perks for their directors. They have also pegged rewards to the number of board meetings held and attended by their directors. However, while this percentage guideline is provided, each company proceeds to provide other different criteria for rewarding their directors. For instance, Coffey International Limited pegs its reward on safety improvement, profitability and strategy implementation. On the other hand, Mineral Resources Limited pegged its rewards on Return on Invested Capital (ROIC), financial guidance and the company’s budget. Nonetheless, while these metrics are appropriate because they are cognizant of the performance of the companies and the environments in which they operate. The performance basis employed by both companies is essentially financial performance, which was premised on the performance of the stocks at the ASX and other stocks markets in which the shares were traded globally. Unfortunately, these benchmarks are not clear for Coffey International Limited. The lack of clarity emanated from the absence of specific levels of improved performance that warranted rewarding. In this case, although there was a mention of the percentage of the profits that would constitute the rewards, no mention was made on the percentage of improved profits that would warrant rewarding. However, in this aspect, Mineral Resources Limited clearly stated the specific amounts of improvements in Return on Invested Capital (ROIC) and the corresponding rewards they attracted. For instance, an ROIC achievement of 18 % and over attracted a reward of 150 % while an ROIC achievement of less than 20 % did not attract any reward. In addition, there was absence of rewarding metrics based on environmental and social performance for both companies. iii. Discuss as to whether there is a link between gender diversity of boards and performance. There is a link between gender diversity of boards and performance. Specifically, the more diverse the board of directors was, the better the performance of the business organization (Garnon et al. 2014). In this case, Mineral Resources Limited has a diverse board because it had two female members in its board for the span of five years interrogated while Coffey International Limited has an all male board of directors. Incidentally, the performance of Mineral Resources Limited was better than that of Coffey International Limited, which suggests a link between presence of female board members and corporate performance. Specifically, Mineral Resources Limited has increasing revenues and higher share prices compared to those of Coffey International Limited. In addition, the share prices of Mineral Resources Limited had generally increased within the five years studies while those of Coffey International Limited had tumbled in the same period. However, the effect of this link on corporate performance may have been disguised by the larger board size of Mineral Resources Limited, which was one member more than that of Coffey International Limited in the period investigated. It has also been shown that a larger board size may lead to higher performance, particularly, if the board injected diversity and expanded skill pool of the many members therein that would in turn, improve the guidance provided to the company. References Coffey 2013. Annual Report 2012. Coffey International Limited, viewed 14 march 2017, Coffey 2014. Annual Report 2013. Coffey International Limited, viewed 14 march 2017, Coffey 2015. Annual Report 2014. Coffey International Limited, viewed 14 march 2017, Coffey 2016. Annual Report 2015. Coffey International Limited, viewed 14 march 2017, Garnon, R, Morrow, M, Schmerl, J, and Tenneti, G., 2014. ASX Corporate Governance Council Principles and Recommendations on Diversity. KPMG, viewed 14 march 2017, http://www.asx.com.au/documents/asx-compliance/kpmg-report-diversity-2014.pdf. Kathy Rao, K., Tilt, C.A. and Lester, L.H., 2012. Corporate governance and environmental reporting: an Australian study. Corporate Governance: The International Journal of Business in Society, 12(2), pp.143-163. Mineral Resources 2012. Annual Report 2012. Mineral Resources Limited, viewed 14 march 2017, http://www.mineralresources.com.au/investors-and-media/annual-reports.html. Mineral Resources 2013. Annual Report 2013. Mineral Resources Limited, viewed 14 march 2017, http://www.mineralresources.com.au/investors-and-media/annual-reports.html. Mineral Resources 2014. Annual Report 2014. Mineral Resources Limited, viewed 14 march 2017, http://www.mineralresources.com.au/investors-and-media/annual-reports.html. Mineral Resources 2015. Annual Report 2015. Mineral Resources Limited, viewed 14 march 2017, http://www.mineralresources.com.au/investors-and-media/annual-reports.html. Mineral Resources 2016. Annual Report 2016. Mineral Resources Limited, viewed 14 march 2017, http://www.mineralresources.com.au/investors-and-media/annual-reports.html. Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA. Yusoff, W.F.W. and Alhaji, I.A., 2012. Insight of corporate governance theories. Journal of Business and management, 1(1), pp. 52-63. Read More