The Expectation of the Corporate Governance Council and Independence of Directors - Case Study Example

The Expectation of the Corporate Governance Council and Independence of Directors Student’s Name Instructor Institution Course Date The Expectation of the Corporate Governance Council and Independence of Directors The discussion on the expectation of the Corporate Governance Council that the majority of directors on the board of Australian Securities Exchange (ASX) companies should be independent remains contentious. The need for the independence of directors is solely based on the need to fiduciaries not to be in a situation of conflict between those who they serve and their personal interests; which has come to be known as the conflict rule. Based on Recommendations from ASX Council, independent directors are not supposed to be members of management thus are free of any business and to some extent, other relationship that could possibly interfere with or that which could reasonably be seen to interfere with the independent exercise of the judgment they make (Brooks and Veljanovski, 2009). Based on these arguments, it is essential to assess a number of issues including whose interest must a director act? The answer to this question revolve around the definition of independence where Recommendation 2.1 of Corporate Governance Council. Secondly, directors are supposed to act in a manner that suits the general public and the company. The fiduciary relationship in this case is the one which can be pegged on the relationship between the agent and the principal. The extent to which the directors are independent to discharge their duties will be in most cases, regulate the extent to which obligations of a fiduciary nature are applied in determining the interest the directors’ act. On the other hand, Corporate Governance Council recommends that directors must act in good faith, in the best interest not only of the company but public and other shareholders and balancing the two in a proper purpose (ASX, 2014). It therefore insinuates that their actions stretch beyond the sense of honesty by touching on issues such as independent judgment when presented with facts when assessing the interest of the company. The argument regarding the interest a director must serve can be contextualized within the primary role of a board of directors. Basically, the primary role of a board of directors is related to the principles of good governance. Good governance on the other hand, goes hand in hand with the primary role of the board of directors. In some cases, basically from Corporate Governance Council recommendations, it can be a manifestation of how the board fulfills their duties and a framework that have been laid to fulfill these duties. To such extent, the board will be concerned with the quality of information within their companies---meaning that they have to perform oversight roles. On the other hand, they are supposed to deal with conflicts of interests emerging from the company. This touches on issues such as accountabilities and transparency especially to shareholders. This means that as board of directors, they have the primary role of acting in good faith and in the company’s best interest. Making this argument practically, it will be essential for the board to make decisions regarding the benefits and costs of a given strategy if the company they are acting on behalf is already undertaking its risks appetite and has process in place that helps in assessing the strategic risks. This argument is in tandem with provisions of Corporate Governance Council and ASIC that board of directors should not consider corporate governance as just compliance box ticking instead, they should ensure that good governance is part of their mindset when undertaking their duties (Coleman and Pinder, 2010). In summary, they are obligated to ensure that the company is involved in a culture of good governance. Independent and non-independent directors have been given different means. According to Australian Stock Exchange’s Corporate Governance Principles (ASXCGPs) independent directors as individuals free from any position, interest or relationship that is likely to impair their real or perceived objectivity and impartiality (ASX, 2014). As such, the directors provide the primary role by which corporate governance can protect against the faults and whims of management. In streamlining the functionalities of independent directors, the challenges that have been witnessed by corporates such as HIH Insurance, Enron and WorldCom globally have been cited. The other hand, legal requirements and statutory duties pursuant to the Corporations Act 2001 consider non-independent directors as any director who is not obligated to take part of the executive team. In most cases, they can be distinguished by the fact that they do not engage in the daily operations of the management of the organisations in a as much as Corporations Act 2001 may require them to take part in planning and making policies that influence the management of the organization (Hooghiemstra and van Manen, 2004). Non-independent directors are responsible in monitoring the independent directors by also acting in the interest of different shareholders. Legal strategies in the management of the independence of a board’s decision making have been well spelt in Corporations Act 2001. To begin with, directors under Corporations Act (2001) are employers and for that matter, breach of common law duties to conduct business rightfully or obey commands will render them liable. However, the stretch or scope of legal responsibility may be defined or understood differently with regard to laws guiding different decisions which again can be pegged on recently concluded court cases.1 On the other hand, there are also duties of confidentiality and fiduciary, breach of which in most cases accompany a claim. In accordance with section 180 of Corporations Act (2001), directors are obliged to act with care and diligence in making their decisions. Section 180(1) on the other hand attempts to codify the general law as well as duty that directors should consider when making different decisions especially with regard to their duties. In some case, directors have been making decisions that suit their personal interest. However, directors are prohibited, in accordance with Corporations Act (2001) to improperly use their position to obtain undue advantage for their on benefits. This is prohibition is in accordance with s 182 of Corporations Act (2001). This position is related to s 183 which prohibits directors from making decisions using the information that they obtain as a consequence of their objectives and roles with the company so that they can gain an advantage for their personal benefit. On the other hand, directors are obliged to make decisions that comply with disclosures. According to s 191 of Corporations Act (2001), they are supposed to make decisions that show full and frank disclosures.2 The arguments on whether specific board positions should be held by independent directors have become contentious with scholars arguing different regarding the matter. The consensus that has been reached by these arguments is that it is essential that specific board positions be held so that such positions can be used to provide effective as well as independent oversight roles to different companies especially in the wake of collapse and mismanagements that have been witnessed recently. On the other hand, currently there have been debates regarding the lack of information on whether board composition as well as the nature of those appointed to boards has actually changed. These levels of uncertainties have called for the need to have specific board positions for independent directors to oversee challenges that might arise as a result. On the other hand, Principle 2 of the ASXCGPs has solely focused on the structure of the board, specifically, majority of the board being independent directors. Relating this principle with the argument on whether specific board positions should be held by independent directors, the position of this report is that there is need for such step since it will highlight the importance that has been placed on accountability role that have been played by independent directors as far as corporate board is concerned. While studies have indicated that there may have been no significant change in disclosures that have surrounded roles of directors, it has to be noted that indeed there have been changes with increase in management and monitoring and risk management. As a result if specific board positions are held by independent directors then there is likelihood that such position, for instance chairman, will help in proper corporate governance especially in making decisions relating to disclosure practices or practices that have included ineffective oversight of the board and board competence. Secondly, when such position are created, there is likelihood that it will support the idea that corporations have been making attempts to restore their management and accountability relationships as these positions may provide an opportunity where there is transparent mechanisms of governance. Better corporate governance and better corporate performance are two paths that have been used in defining better approaches in management of corporations. Indeed they remain conflicting with other schools of thoughts showing that better corporate governance is essential in limiting incidences of corporate failures that have been witnessed recently. The position is that better corporate governance will lead to better corporate performance. On the other hand, the waves of corporate scandals that have been witnessed have necessitated the need to develop management of corporations around the importance of better corporate governance to individual companies. Currently companies are under pressure to implement better corporate governance in their specific management approaches. These measures indicate that there have been needs to have better corporate governance rather than better corporate performance since the latter gives companies’ one-size-fits-all model. On the other, an approach to work on better corporate governance rather than better corporate performance helps in independent board committee that will make sense across the board. Just like Kirkpatrick (2009) noted, failures in corporate governance and their impacts not only on the shareholders but also other stakeholders have attentions from different agencies with regulatory agencies concerned with the need to develop accountability mechanism that will help in proper management of corporations. As a result, better corporate governance has been preferred to better corporate performance because it will ensure financial stability and good corporate governance frameworks that helps companies and countries to improve the needed levels of accountability. The relevance of the disclosure requirement in ASX Listing Rule 4.10.3 is specific in its applicability. Unlike before, Listing Rule 4.10.3 provides an opportunity for a listed entity to make arrangement of a Corporate Governance Statement. The relevance of this point is that the preparation will be to an extent to which the entity has been in compliance with the 3rd Edition in the period of reporting. Furthermore, it provides an opportunity to separately identity the kind of recommendations that were not followed, reasons why they were not followed and other possible governance practices that need to be put in place. On the other hand, Appendix 4G has been relevant in its applicability unlike before. That is there is new Appendix 4G which listed entities are needed to complete as well as provide to the ASX pursuant to new Listing Rules 4.7.3 and 4.7.4. It actually acts as a checklist as well as index for relevant corporate governance disclosures or directing investors where to find corporate governance disclosures. Principle 2 and Recommendations of the ASX’s Corporate Governance Council remain relevant in the wake of corporate governance which has continued to be dynamic force and has kept evolving. The Principle 2 and Recommendations of the ASX’s Corporate Governance Council therefore ensure that corporations remain relevant to investment communities and Australian business. As a matter of fact, they reflect the contributions of more than 100 different submissions thus far. The more transparent corporations are made to be through Principle 2 and Recommendations of the ASX’s Corporate Governance Council the more it will be better for investors in making informed decisions while investing. This relevance are specifically contextualized in Principle 2 where an effective board will be regarded to be one which facilitates efficient undertakings of their duties as imposed by frameworks of Corporations Act 2001 on the directors. References ASX Corporate Governance Council (ASX), 2014, Corporate Governance Principles and Recommendations, 3rd Edition, Canberra, Australian Stock Exchange, Brooks, A., Oliver, J. and Veljanovski, A., 2009, "The Role of the Independent Director: Evidence from a Survey of Independent Directors in Australia", Australian Accounting Review, 19(3): 161 – 177 Coleman, L. and Pinder, S., 2010, “What were they thinking? Reports from interviews with senior finance executives in the lead up to the GFC”, Applied Financial Economics, 20(1-2): 7-14. Hooghiemstra, R. and van Manen, J., 2004, "The independence paradox: (im)possibilities facing non-executive directors in the Netherlands”, Corporate Governance: an International Review, 12(3): 1119 – 1129. Kirkpatrick, G., 2009, “The Corporate Governance Lessons from the Financial Crisis”, Financial Market Trends, OECD Journal, 1: 61-87. Read More