Governance Review of Metroland Australia Limited - Case Study Example

GOVERNANCE REVIEW OF METROLAND AUSTRALIA LIMITED Submitted to the Chairman Governing Board of Directors METROLAND AUSTRALIA LIMITED November 2014 GOVERNANCE REVIEW OF METROLAND AUSTRALIA LIMITED Executive Summary Background to the Review Being an integrated and innovative company, Metroland Australia Limited prides itself in property development, construction and building products, investment, funds and property management. The company deals with both commercial and residential sectors. The company is built on efficiency, diversity and experience. Through their understanding of property, they capitalize on its potential and maximise investment for the shareholders and clients. They uncover realistic opportunities for exceptional returns through their unique combination of expertise in property, funds management and a conservative risk assessment process (Farrar, 2001). Being a dynamic company, their core businesses revolve around property and property management. Their successful and unique developments in New South Wales in Australia topped with Metro Plaza Central in Haymarket, their largest development to date, shows the triumphs of the company. Supporting their property development and managing are the Metroland Construction which prides itself as the home of skilled and talented individuals and Metroland Funds Management which specializes in directing wholesale and retail investment towards investment assets and property development projects. The company is also listed on the ASX and though smaller than its competitors, it punches above its weight and develop property that home buyers and investors find adorable. The chairman of the governing board of directors commissioned the review of Metroland Australia Limited so as to identify reforms that might assist in improving the performance of the company. Promoting good governance is an important part of the company’s agendas as a whole and for its controlled entities (Mitchell, 2009). Introduction Terms of Reference In November 2013 the Chairman of the Governing Board of Directors announced the review. The terms of reference required examining the structures for good governance including relationship between the Directors, recommendations on options on its future leadership, financing and organisation with a vision of fulfilling the vision of the company (Farrar, 2001). The Review Process These terms of reference focussed the review process to identify best practices in the sector and therefore a consultative approach was used. In order to identify appropriate governance mechanisms, the review took a practical approach instead of a theoretical one by thinking from first principles. The core of the review and its conclusions, are an outcome of the consultations with the participants including the directors. The review therefore aimed at wide applicability and a timeless quality in providing insights and solutions to the leadership of Metroland Australia Limited. The core objective of the study therefore was to identify, develop and evaluate models that could be used for implementing the Metroland Australia Limited governance. The scope of the review included existing governance models within Australia, internationally and within related type organisations. It was the reviewers objective to recommend a preferred governance model and to offer guidance in case the organisation needed to progress to a new governance structure. The task also entailed developing an organisational and management structure with the help of the steering committee to manage the company. This included recommendations regarding current situations such as staff relationships and development of an organisational and management transition plan if needed (Kim & Nofsinger, 2007). Discussion Governance Corporate governance is basically a broad term describing the processes, policies, customs, institutions and laws that direct an organisation or a corporation in the way that it acts controls and administers its operations. The governances’ main objective is to achieve a company’s goals while keeping a good relationship among the stakeholders, including the shareholders and the board of directors. Corporate governance is an essential standard for dealing with accountability of individuals in an organisation, and establishing a striking environment for the competitive companies in order to gain strong positions in efficient financial markets. It facilitates the success of entrepreneurship and lays foundations for separation of ownership from control, thus, reducing agency problems faced by the firms. This is because most of the times, the interests of managers conflict with those of shareholders. Good governance should be reflected in both performance and conformance aspects of control. The general elements that are central to the governance of companies and their controlled entities, if any, include understanding success. The people in control need to be clear about the goals and achievements expected, and communicate the information to the management. There should be known clear expectations of performance and a clear sense of purpose. The other element is organising for success. Effective organisation should follow the clear set goals and achievements of a business. This includes implementing the right organisational structures in a way that will most likely achieve the objectives. This depends with the nature of the organisation. Power must also be in existent and clearly delegated. It should also be limited and exercised. There should also be clarity of roles and responsibilities and all parties involved should understand their personal accountabilities. The third element is making sure that success is achieved. All parties should understand what outcomes they are required to achieve, their accountabilities, and then get provided with the capacity to do so (Mitchell, 2009). There are eight major characteristics of good governance. These include ensuring that it is consensus oriented, accountable, participatory, responsive, effective and efficient, transparent, inclusive and equitable, and that it follows the rule of law. This means that good governance will make sure that there is minimal or no corruption and the voices and the views of all parties involved are taken into account, as well as included in decision making. It should also be responsive to the present and future needs of the people involved and the society at large. Additionally, good governance protects shareholders by having sets of mechanisms that protect them from inside investors or managers. This is because it spells out the rules and procedures for corporate affairs’ decision making. It also allows them to monitor the performance of all parties involved including the managers, thus ensuring that the managers’ interests do not diverge from the shareholders’ interests. The agency problem will, therefore, not emerge. The governance should also be designed in accordance to firms’ environment since some mechanisms are more important to some firms than others (Mitchell, 2009). Data and Information Collection The data and information collection started by assembling and reviewing various policies that were prepared by Metroland Australia Limited and its entities, including their technical reports. With a small tour by John Wardman, a non-executive director since 1996, one could not help discovering that the board and the company are committed to achieving and demonstrating corporate governance of the highest standards. The board is always reviewing the framework to make sure that they meet the interests of the shareholders. The company’s board and senior management have a promising relationship that is very critical to the success of the company and its controlled entities (An, Halligan & Wilks, 2002). . The directors are aware of their responsibilities to the shareholders, and they seek to balance competing objectives with an aim of gaining the best for the company in both short and long term. While properly managing the company, they also focus in enhancing the interests of the shareholders and other key stakeholders. The company’s day to day affairs, policy initiatives and implementations of strategies are formally delegated to the Managing Director and the senior executives and then reviewed on an annual basis. Having adopted the best practice recommendations of the ASX Corporate Governance Council as illustrated by the Revised Corporate Governance Principles and Recommendations, their governance practices were as follows (Australian Securities Exchange, 2008). Board of Directors The board of directors’ primary role is to protect and enhance long-term shareholder value. They are, therefore, responsible for the overall corporate governance of the company and its entities. They formulate strategic directions, approve and monitor capital expenditure, set remuneration, remove, appoint and create succession policies for senior executives and directors. This is done by establishing and monitoring the achievement of management goals and ensuring the integrity of management information systems and internal control. It also approves and monitors financial and other reports. The Chief Executive Officer together with the executive management have been delegated responsibility by the board to operate and administer the company. In September 2004, the board established an Audit Committee to help it execute its responsibilities. There are, however, no Remuneration and Nomination Committees. They argued that the size composition of the current board did not require a separate Nomination or Remuneration Committee. This is against the recommendations of the ASX Corporate Governance Council (Australian Securities Exchange, 2008). The full board, therefore, oversees the appointment and induction for directors and committee members. It also selects, appoints and plans for the succession processes of the company’s CEO and also sets the remuneration levels for directors and senior executives. The whole board held seven meetings during the year (An, Halligan & Wilks, 2002). Each director is entitled to access of all relevant company information and company’s executives. A director, subject to prior discussion with the chairperson, can also seek independent professional advice at the company’s expense from a suitably qualified adviser. The advice received copies are however made available to all board members. Composition of the Board The board is comprised of Eddie Lee, the Chairman, who is a civil engineer and is extensively experienced in corporate management. He is also director of two other companies in the ASX namely Allegiance Mining NL and Gullewa Limited. Then there is Frank Shien, the Deputy Chairman and Chief Executive Officer, who is said to have construction and development experience and business associates in Malaysia, Hong Kong, China and Indonesia. These two directors have been directors with the company since 1994 and 1997 respectively. The other directors who are non-executives include John Wardman, Da Cheng Zhang, Steam Leung, Shuqing Wang, Henry Tsang and Wei Li. These directors have been in office since the beginning of the financial year. The principles for determining the composition of the board are as follows; A minimum of five greatly experienced directors, nationally and internationally. A majority of independent non-executive directors. Directors having extensive knowledge of the companies’ industries or similar sized companies. Chairperson must be a non-executive independent director. A non-executive director holds less than 5% of voting shares and should not be an officer of, or associated directly or indirectly with shareholder who holds more than 5% of voting shares. He or she must also not have been an employee of the company in an executive capacity or another group member for the past three years. Additionally, he or she should have not for the last three years been a material professional adviser or consultant to the business or its entities. He or she should also have no material contractual relationship with the company and is not a material supplier or customer to the company or its entities. There should also be no material interference to the directors’ ability to act in the best interests of the company. The Chairman and Chief Executive Officer’s responsibilities include ensuring that directors are well briefed in every issue relevant to their responsibilities and rules. He or she should also facilitates the discussions of the board and manage the board’s relationship with the firm’s senior executives. The CEO also implements group strategies and policies. The process of nomination is overseen by the full board. When there is a certain vacancy or the company is in need of particular skills, the board controls the selection criteria based on the necessary skills. They will enquire from an external consultant if necessary so as to identify and appoint the most suitable candidate. Board candidates stand for election at shareholders’ general meetings (Metroland Australia Limited, 2013). The effectiveness of individual directors is reviewed annually by the board. The entire board will after that vote on the recommendations generated by the review. Unsatisfactory performing directors will then be required to retire. The full board will also conduct an annual review on the performance of the CEO and the senior executives reporting to the CEO with the results being discussed in a board meeting. The company and audit committee policy is to appoint external auditors for quality and independent results. The external auditor’s performance is also reviewed annually. The audit committee also expects an annual declaration of independence from the external auditor and the auditor will also attend annual general meetings so as to answer the shareholders questions about the conduct of the audit. The risk management system which monitors assesses and manages operational, compliance and financial reporting risks are also overseen by the board. The CEO must then declare in writing that the risk management and associated compliances are well assessed and are working efficiently and effectively. The risk managements should cover the whole financial year up to the signing of the annual financial statements. Before the financial reporting, the CEO must certify to the board that the statements are complete and present fair and true view and that they were founded on a sound system of risk management and internal compliance. In the case of ethical standards, the employees and the directors are expected to act with utmost integrity and objectivity. They should always enhance the reputation and performance of the company. In case of conflict of interests, directors must keep the board informed. The director involved will then be kept out of the loop on relevant board papers and on meetings discussing the issue. The Audit Committee was made up of three non-executive directors, Shuqing Wang, Henry Tsang and Wei Li. There were no breaches to any significant environmental regulation as set by the Commonwealth or State legislation. The constitution of the company dictates that the remuneration of directors must be determined by the shareholders. The remuneration policy ensures that the remuneration package reflects the senior executives, the directors and any other party’s responsibility and duty and the level of performance (Metroland Australia Limited, 2013). Recommendations and Conclusions The CEO should be responsible for all communications with the ASX. The full annual report should be available to all shareholders in case they request it. The external auditor should also be changed after sometime since staying with the company for long may make him discover ways of altering information. There should be proposed changes in the leadership of the company as it has been running at a loss for a long time now. The directors should also form a remuneration committee which will basically focus on the payment and compensation issues. This is because not all directors are experienced in matters of remuneration, meaning that they are likely to make unwise decisions. There should also be remuneration based on achievement of certain performances for all parties involved in the company including the non-executive directors. The corporate governance of Metroland Australia Limited is, however, efficient for a company its size and for a company with such experienced leaders (Mitchell, 2009). References An, P., Halligan, J., & Wilks, S. (2002). Reforming public and corporate governance: management and the market in Australia, Britain, and Korea. Cheltenham, UK: E. Elgar. Australian Securities Exchange. (2008). Trading ASX CFDs, options & warrants: The ASX way. Milton, Qld: John Wiley & Sons. Farrar, J. H. (2001). Corporate governance in Australia and New Zealand. Melbourne, Oxford: University Press. Kim, K. A., & Nofsinger, J. R. (2007). Corporate governance. Upper Saddle River, N.J.: Prentice Hall. Metroland Australia Limited. (2013). Annual report. Retrieved from http://www.metroland.com.au/s18_Investor-Relations.html Mitchell, L. E. (2009). Corporate governance. Farnham, Surrey, England: Ashgate. Read More