Discuss about the Disclosure transparency about activity in valuation.
On March 18, the board of the Hydroponics Company Limited has been replaced in the midst of allegations against the company that it has poor corporate governance arising from the failure to fulfill its disclosures obligations. The Chairperson of Australian medical cannabis company, Ian Mutton and other three directors were expelled from the six-person board in votes that were supported by almost 68 percent of shareholders as per the statement made by the ASX.
The former chairperson and the Director of the company, Alan Beasley removed the four directors in January on the grounds of lack of transparency giving rise to other corporate governance issues as is stated in company filings. Beasley contended that Hydroponics failed to disclose that the head of the subsidiary Cannedeo was leaving the company in March. The company further, failed to provide a complete notice for its extraordinary general meeting until it was put under pressure by Beasley’s solicitors.
On the other hand, Mutton contended that the allegations made in the notice by Beasley were false. In regards to the replacement and expelling of the Board, Mutton asserted that his leadership was in accordance to the objective of the company, which was to ensure growth in manufacturing and availability of market medicinal cannabis products in Canada and Australia. It is solely the decision of the shareholders of the company to change the Board or they demanded to relapse to the Board in the same way as it used to function, which has been duly respected and accepted.
Ian Mutton also stated that the stocks of the company have been rising and falling in the emerging medicine cannabis sector since Australia has eased regulations, thus, promising to develop cannabis-derived pharmaceutical industry. He claims the company shall prosper as soon as the issues pertaining to the board of the company is resolved.
As it is a well-known fact that a good governance system is perceived to be as essential in obtaining debt capital for start-up business as it is, in maintaining shared positions among the stakeholders as well as the shareholders of the company. Corporate governance refers to the administration of an organization in a way it is controlled and directed (Tricker and Tricker 2015). It deals with the respective powers, responsibilities, roles and the accountability of the Boards of an organization. The primary issue that has been indicated in this article is related to the failure of the corporate governance of the organization on the grounds of lack of transparency in the business activities. Effective corporate governance framework requires that every organization must make timely and accurate disclosures regarding the material matters of the company, which includes governances, performance, financial institution and ownership of the company.
The concept of corporate governance entails the relationships, processes and systems that authorizes or exercises control over the corporation. It includes the mechanisms that hold companies and the persons exercising control over the company liable for any misconduct or failure of the company to follow the ASX corporate governance principles.
The stipulated principles and recommendations purport to achieve good governance consequences and mostly fulfill the reasonable expectations of majority of the investors. It accepted that several entities might adopt several principles that are based on several factors such as complexity, history, size and corporate culture (ArAs 2016). Therefore, the principles and recommendations are not mandatory in nature for the listed entities. However, if a board of a listed entity states a recommendation of Council is not appropriate, the listed entity is required to explain the reason for the same.
Corporate governance is often associated with major theoretical frameworks among which the most common theories include resource-dependence theories, stewardship theories, agency theories and stakeholder theories.
Agency theory deals with the distinction between the owners of the company known as the shareholders and the executives employed to manage the organization known as the agents. The assumption of this principle is that the principals suffer loss of agency that signifies lesser return on investment as the agents manages the company on behalf of the principals. The issue in this theory arises from the fact that the interests of the principal and that of the agents are not necessarily aligned (Cuomo, Mallin and Zatton 2016). For instance, a business owner/principal may hire employees to perform several tasks and spend less while selling them at lower price. On the other hand, the interest of the employees is to make more money for carrying out the tasks.
Stewardship theories deals with the fact that executives or managers of company have common goals which requires board to be less controlling and more supportive by authorizing executives to enhance the potential for higher performance. This theory is concerned about the managerial behavior and relationship between executives and boards, which includes shared decision making, training, mentoring etc. The issues arise if there is lack of understanding and communication between the executives and the boards.
Resource-Dependence theory talks about the resources that are provided to the executives by the board enabling them to attain the goals of the organization. It involves intervention by the Board while providing intangible, human and financial supports to the executives (Fung 2014). However, issues may arise when Board does not approve for most of the decisions made by the executives.
Stakeholder theory is based on the assumption that clients, surrounding communities, suppliers and customers also have stake in a corporation. The managers of an organization are obligated to ensure all the stakeholders including the shareholders receive fair return from their stake in the company. The stakeholder theory obligates organizations to carry out its corporate social responsibility, which is the duty of the corporation to operate ethically even if it results in a reduction in the long-term profit for the company.
Shareholders theory states that interests of the shareholders are considered fundamental for the directors even above the stakeholders like employees. The issues that may arise in this theory is when the business organizations strive to enhance the shareholder value, especially, when there is a reorganizing of business, it impacts employees such as loss of jobs, poor working conditions, etc. The reorganization of working and production systems may affect workers subjecting them to face worsening conditions and greater concentration of work effort (Schnackenberg and Tomlinson 2016).
In this article the issues that have arisen is related to non-disclosure resulting in lack of transparency of the Hydroponics Company Ltd. This issue is associated with the shareholder theory where the interest of the shareholder is given most priority. The concept of shareholder activism deals with the aggressive controlling and monitoring the management of the form for enforcing the changes in the structure of the internal control of the firm and accelerating wealth of the shareholders. In the article, Hydroponics Company Ltd has been alleged to have failed to disclose material facts like departure of the head of the subsidiary Cannedeo in March. It further failed to provide a complete notice for its extraordinary general meeting until it was put under pressure by Beasley’s solicitors. If the corporate governance principles are to be taken into consideration, it can be said that transparency is an essential part of effective corporate governance and is necessary for maintaining a relationship of trust between the shareholders and the management.
The shareholders have voted out the three directors and Ian Mutton with 68 percent because of lack of transparency due to the non-disclosure of the material information about the company to shareholders. Shareholder’s interest being held as fundamental in any organization, the company should have made disclosure about the meeting and departure of the subsidiary head (Stein, Salterio and Shearer 2017).
Corporate transparency refers to the extent to which the action of a corporation is observed or monitored by the outsiders. This has resulted from the local norms, regulation and set of privacy, information and business policies related to corporate decision-making ensuring the business operations are open to the stakeholders, shareholders, employees and public. There are two forms of corporate transparency: internal and external transparency within an organization.
External transparency is a measure that determines openness of business operations to public, shareholders, partners and customers. Internal transparency refers to the determination of the openness of the company with its employees. The disclosure of material facts to the shareholders amounts to transparency to the shareholders (Larcker and Tayan 2015). The significance of transparency has been stipulated in the ASX Corporate Governance Principles and Recommendations. According to the ASX Principles and Recommendations, it has been set out that any listed entity is required to make balanced and timely disclosure of all matters related to it. The disclosure should be such that a prudent person would expect to have a significant effect on the value or price of its securities.
Further, another principle of corporate governance is to have a Board of a listed entity that has an appropriate size, skills and is capable of discharging its duties effectively. Furthermore, the other corporate principle stipulates that a listed entity must ensure ethical practice while carrying out its responsibilities.
In the given article, the Hydroponic Company Limited failed to make necessary disclosures regarding material matter such as departure of the subsidiary head as it formed a part of the internal structure of the firm over which the shareholders had every right to be informed about, in case of any change. Further, the shareholders were not provided with proper notice about the special meeting, which also amounts to a failure on part of the Boards to ensure best interests of the shareholders. Moreover, the lack of taking such balanced disclosure that any reasonable person would have expected to have a significant effect on the stocks, which were not stable, results in the inconsistency with the ASX Principles and Recommendations (Cassell, Myers and Seidel 2015).
Transparency has rapidly gained momentum with almost more than half of the people across the world trust companies and follows the activities carried out within the organization. This requires business organizations to be more open to people to fill the gap. Trust and transparency are two factors that must be combined to support sustainable growth (Fung 2014). The companies are placing credible social, ethical and environmental and ethical data in the hands of the people, and making them more informed which further enables the company to take better decisions. The more companies inform the consumers about its activities, the consumers will be more trust the company and purchase more stock. This will further lead the employees work harder thus, leading to enhancement in the productivity of the company.
External transparency has an apparent implication on consumers as the consumers demand for honest, relevant and easily comprehensible information regarding the services or products of the company, as it would give them an idea to spend their money wisely. Thus, the transparency of an organization is important for the company, consumers as well as the environment (ArAs 2016).
However, Mr. Mutton claimed that they respect the decision taken by the shareholders of replacing the Board. Here, if the concept of shareholder activism can be applied it can be inferred that since the stocks of the company have been rising and falling lacking stability, and the non-disclosure made by the company, has left the shareholders with no other option but to replace the directors for the betterment of the company and enhance wealth of the shareholders. This is justified as the shareholders are conferred with the task of monitoring and exercising control over the management of the organization, which authorizes them to enforce changes in the structure of the internal control of the firm for its advancement and enhancing the wealth of the shareholders.
References
Aguilera, R.V. and Crespi-Cladera, R., 2016. Global corporate governance: On the relevance of firms’ ownership structure. Journal of World Business, 51(1), pp.50-57.
ArAs, G., 2016. A handbook of corporate governance and social responsibility. CRC Press.
Cassell, C.A., Myers, L.A. and Seidel, T.A., 2015. Disclosure transparency about activity in valuation allowance and reserve accounts and accruals-based earnings management. Accounting, Organizations and Society, 46, pp.23-38.
Christensen, J., Kent, P., Routledge, J. and Stewart, J., 2015. Do corporate governance recommendations improve the performance and accountability of small listed companies?. Accounting & Finance, 55(1), pp.133-164.
Cuomo, F., Mallin, C. and Zattoni, A., 2016. Corporate governance codes: A review and research agenda. Corporate governance: an international review, 24(3), pp.222-241.
Du Plessis, J.J., Hargovan, A. and Harris, J., 2018. Principles of contemporary corporate governance. Cambridge University Press.
Fung, B., 2014. The demand and need for transparency and disclosure in corporate governance. Universal Journal of Management, 2(2), pp.72-80.
Larcker, D. and Tayan, B., 2015. Corporate governance matters: A closer look at organizational choices and their consequences. Pearson Education.
Schnackenberg, A.K. and Tomlinson, E.C., 2016. Organizational transparency: A new perspective on managing trust in organization-stakeholder relationships. Journal of Management, 42(7), pp.1784-1810.
Stein, M.J., Salterio, S.E. and Shearer, T., 2017. “Transparency” in Accounting and Corporate Governance: Making Sense of Multiple Meanings. Accounting and the Public Interest, 17(1), pp.31-59.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
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