According to Sharma and Khanna (2014) the key concern of corporate governance is to maintain the balance amidst economic and social goals and amid the goals of individual and community besides encouraging efficient utilization and managing of the resources. Organizations corporate governance addresses problems focusing on bringing out the best outcomes for their shareholders and simultaneously promoting the interests of stakeholders like employees, consumers and lenders. Within a corporate environment ownership (shareholders) separates from management (board of directors and managers) who are accountable for running the business and taking different decisions in the business context. Theoretically according to Clarke (2015) the board of directors and top management are controlled by the shareholders, which can be changed in failure to work in latter’s interest however, in actuality the situation is quite differing. Shareholders surmounting over a wide area do not attend the organizations general body meetings usually resulting into ineffective control over board of directors and managements functioning, which often leads to interests’ clashing. According to Stuebs and Sun (2015) corporate investors seek affirmations that the investments they make will remain secured from misappropriation and utilized as the corporate objective conceded. This assurance is what effective corporate governance pertains about. Maximizing shareholders value by protecting the interests of other stakeholders is the objective in corporate. For attaining the objectives of protecting investors investment from misappropriation of funds by corporate management and enhancing the long-term value of shareholders’, practicing good corporate governance such as transparency in corporate transactions with stakeholders, accountability and responsibility for decisions, maintaining accurate finance accounts and fair treatment is utmost important. According to Pintea (2015) the origin of the social responsibility concept in terms of modern management goes back to the 1950s and can be described as organizations voluntary efforts take as responsibility for eliminating or lessening the adverse effects of business activities on the stakeholders. Companies where in today’s contemporary world have gained ample freedom, playing social roles like mitigating climate change or protecting human rights is also expected from them. Understanding the need of corporate governance and social responsibility and presenting a case example where a company failed in meeting both is the purpose of this research study, the scope of which revolves around identifying how Westpac failed in fulfilling its commitment towards corporate governance and social responsibility. To collect relevant information different sources such as journals, research papers, online articles and books will be utilized while case study, which has a very narrow focus resulting into detailed and unique descriptive data, is the research method that will be applied throughout the study.
According to Kachouri and Jarboui (2017) the relations amid corporate governance and social responsibility of organizations although is debated, is a vital one besides being a key issue for the business of society. Both the concepts are overlapping, affiliated and are likely to be reciprocally adjusting or fortifying. It has been observed that while the primary emphasis of corporate governance is on organizations external regulation and internal control by legal means besides assuming that board of directors and senior managers control the monitoring function, social responsibility focuses on how own behaviour are regulated by the business enterprises in terms of social norms that includes external governance systems such as multi-actor, private codes of conducts, commitments, partnerships, and alliances. In today’s business environment according to Cullinan, Mahoney and Roush (2016) it has been widely agreed that social responsibility by some means should commence from the board of directors, which however at the moment is not a practice that has mostly established but to ensure that social responsibility trickles down across the organizational structure, it must be started from the top level. Controller, promoter and a judge’s role of the organizations framework revolving around social responsibility should be assumed by the board of directors (board chairman/CEO and senior executives) for ensuring the similar happenings across the lower levels, even though this will not debar the board from the formation of a social responsibility committee, where the CEO will get assistance in monitoring the areas of social responsibility by the SR management who will be remaining committed to the ultimate person accountable i.e. the top most person within the hierarchal management.
According to Long (2018) since early September 2018, the Australian bank Westpac is confronted with possible legal action over billions of dollars from its customers, funders and investors for lending incautious home loans by breaching the lending regulations and issued more than 10,000 wrongly approved mortgages. For the lawsuits filed with corporate watchdog Australian Securities and Investments Commission, the bank had agreed for a $35m penalty as settlement. Westpac mortgages which were funded by the international investors in the wholesale money markets besides making investment into residential mortgage-backed securities that were supported by its loans in future can have a valid reason for suing the bank, in case of rise in the default rates. Responding to the mortgage fraud and manipulation allegations by Westpac, the Australian Prudential Regulation Authority in 2017 had ordered targeted reviews for some major banks. The data and systems used by Westpac for assessing the applicants’ ability to service housing loans were probed and the findings were shocking. Eight from its ten poorly designed core lending controls were not effective in their operations and the bank failed in taking essential measures for precisely assessing the existing home loan customers’ debts and expenditures besides assessing their potential to service loans. However, despite the adverse findings by APRA with historically lower interest rates arrears and default rates on the mortgage bookings of Westpac, it maintained that loans subjected to its $35 million settlement with ASIC performed well. The targeted review of APRA had further exposed the bank to numerous litigation actions in case investors realise that they have invested in something that involves fraud eventually bringing losses to them. Although the targeted reviews were confidential when the documents surfaced earlier this year at the banking royal commission, the findings got exposed in public domain. Moreover, the final report of the targeted reviews was not submitted to the Treasurer and Minister for Financial Services by the banking regulator. On being questioned about why it allegedly failed in informing the banking royal commission about the results of the targeted reviews before the commission got a tip-off, APRA argued that the body as part of the normal supervision process can initiate targeted reviews across all industries it regulates while Westpac’s spokesman refrained from commenting as the Federal Court is yet to ratify its settlement with ASIC. According to an article reported by the Sydney Morning Herald (2010) Westpac had been identified as one of the world’s most ethical businesses where it was the only Australasian company represented in the list of World’s Most Ethical Businesses so the ethical question that arises here is How Westpac is ethical in the current scenario of anomalies of home loan charges?
According to Mohammed, Salim and Sitraselvi (2017) for developing the alternative forms of corporate governance systems across the globe the foundation have been provided by various theories and philosophies. It appears that corporate executives with the evolution in economies have drifted away from the sole objective to maximize the wealth of shareholders who have responded to these forces in order to preserve their capital besides reaping an average return. Corporate Governance is a system designed for managing organizations like Westpac. Its development stages synchronize with Australia’s economy, corporate structure, ownership groups, political and legal evolvements. Different theories and models defining the diverse aspects of governance and its practices have been evolved by researchers besides designing the metrics for measure the corporate governance and its processes. The four key pillars of CG according to Glinkowska and Kaczmarek (2015) are accountability, transparency, fairness and disclosure help it in delivering structure and plan for setting organizations goals besides identifying the ways of attaining them and offering structure for monitoring their performances. To fulfil its purpose of growth Westpac attracts funding from investors who in return seek assurances that the investments made will be yielding greater returns. For analysing the financial stability and profitability investors rely on the company’s annual reports for gaining a comprehensive view about its performance. However, despite of publishing sound annual reports, a high profile disaster has hit the bank further adversely affecting the stakeholders that include shareholders, workers, creditors and vendors etc resulted from its fraud revolving around irresponsible home loans. Lack and misuse of CG and its practices is primary reason behind the factors leading to this collapse. According to Borlea and Achim (2013) agency, stewardship, resource-dependence, and stakeholder theories are the major theoretical frameworks around which the corporate governance is often analysed. Surfaced from difference amidst company owners (shareholders) and hired executives (agent), it has been argued by the agency theories that the agent’s goals differ from the principles creating conflicts while companies’ managers or executives are contemplated as stewards of the owners by stewardship theories, both sharing common goals. Resource-dependence theories assert that a board acts as resource provider to executives for achieving the organizational goals while the base of stakeholder theories is the presumptions that shareholder are not the only one having interest within a company and includes customers, suppliers, and local communities.
According to Balqiah, Astuti, Yuliati and Sobari (2017) CSR is also defined as social responsibility intends of reconciling as governance and operational function besides corporations social, economic and environmental responsibilities. It revolves around a three-domain approach that includes economic, legal, and ethical based on which CSR is categorized into ethical (economic, legal, and ethical responsibilities), altruistic (actual caring not matter if it will be reaping financial benefits or not), and strategic (attaining the strategic goals of organizations while promoting societal welfare). The corporate social performance model outlined by Carroll, which comprises of social responsibility, issues and responsiveness, emphasizes that social responsibility is both good and bad thing
Figure 1: Carroll’s Corporate Social Performance Model
Source: ReserachGate (2018)
As cost effective way the social responsibility according to Cho and Lee (2017) benefits organizations in improving their competitive position by announcing their good actions, environment protection leading to productive utilization of resources, boost social conditions, attracting investors and tangible benefits. It is also contemplated as a bad thing by arguing that organizations spending corporate dollars on social programs burden shareholders and customers unfairly by using their money without consent further ruling out actions not directly leading towards profitability. Issues in organizations social environment revolve around individual and organizational ethics, organizational and systemic governance, stakeholder behaviours, relationships, and systems.
Porter and Kramer’s Creating Shared Value is a strategy companies use to develop the future market while strengthening economies, the marketplace, communities, and corporate cash boxes. According to Høvring (2017) by redefining its purpose as creating shared value thereby, producing value for society by addressing its challenges Westpac can bring back together business and society. This can be done by re-conceiving products and markets, redefining productivity within value chain besides piling supportive industry congregate at its locations just like Nestlé. CSV would help the bank is reshaping capitalism and its relations with the society besides driving innovation and growth of productivity.
According to Adeneye and Ahmed (2015) organizations are adapting the CSR model to ensure that stakeholders are served ethically and socially within their operating philosophy besides incorporating them in their business models to ensure compliance with law and norms to perform different activities that serves stakeholders interests.
Fig 2: CSR model
Source: wordpress (20180
Organizations social performance according to Bari? (2017) can be evaluated from the above depicted model from bottom to top, showing that CSR can be subdivided into economic, legal, ethical and discretionary responsibilities where according to the first criterion the operations of organizations should be profit-oriented however, this view no more is contemplated as appropriate performance standard. What is considered important by society regarding befitting corporate behaviour is defined by the second view. Fulfilment of economic goals within legal framework imposed by state and federal governments is expected from organizations. Deliberate violation of law is viewed as poor CSR, as was in the case example of Westpac. According to the third view for acting ethically it is important that organizational management acts with equity, fairness and impartiality besides respecting individual rights while fourth criteria is completely optional and driven by organizations wish for making social contributions not dictated by economics, laws or ethics and is contemplated as the apical benchmark of social responsibility.
According to Alonso, Sakellarios, Alexander and O’Brien (2018) in case of Westpac they did not worked in accordance to deontology perspective of ethics which states that business actions should have moral intentions and should follow proper rules in correct path of ethical conduct to attain proper outcomes. However there were huge discrepancies in activities of Westpac both in context to rules and corporate governance were fairness was not maintained in their disclosures and also they showed being irresponsive to customer who took home loans. As a result of this they had to face lawsuit and were charged huge penalties under federal law. The implication of this unethical conduct of Westpac was loss of confidence in customers, damage to their reputation and financial loss in form of compensation for penalties. The environment implication as outcome of Westpac was negative publicity in business circuit and damage to goodwill which will have long term impact on their business as they would not be trusted among business and consumer networks who would be likely to take home loans in future which means less business for Westpac that will impact their profit and earnings. Also Westpac according to Khalid, Eldakak and Loke (2017) went against Australia code of business practices standards that states a firm to be fair, transparent and true in their contract with customers while in case of Westpac they violated this parameter by sanctioning unauthorized loans and in wrong manner with significant negligence of governance. In order to regain the loss of confidence that occurred due to unethical practice of Westpac they have to compensate their customers but this is not enough to solve the problem. Further they need to call a public meeting or press conference where they should apologize and attempt to give some additional benefits to customers in form of goodwill gesture to whitewash their damaged corporate image and regain trust as well as business.
According to Poulton, Barnes and Clarke (2017) economic efficiency, sustainable growth and financial stability are supported by good CG besides facilitating access to capital for long-term investment for organizations like Westpac and ensuring that all stakeholders contributing in the organizational success are fairly treated. Although CG rules and practices have improved in Australia, challenges like increasing complexity of investment chain, changing role of stock exchanges and advent of new investors, investment strategies and trade practices are creating problems in adapting the CG structure in rapidly changing corporate landscape. For addressing these issues in-line by the OECD developed principles of CG it is recommended to build on the proficiencies and experiences of policy makers, regulators, business and other stakeholders for providing a requisite and internationally accepted standard to assess and improve CG.
According to Machan (2016) the normative perspective states on the manner activities should be carried out or are liable to be performed so that these can be valued as good or bad actions, right or wrong actions. The regulations and meaning of normative statements are very worthwhile and integral to human perspectives so as per these normative concepts the behaviour of Westpac towards their customers can be stated as irresponsible and untruthful as they comprised the principles of good ethics and moral conduct by duping their customer and sanctioning them unauthorised loans which resulted into serious governance issues. The action of Westpac can be stated as bad as they did not value the basic norms of normative statements and took wrong actions to earn benefits.
According to Rawls approaches a society is just if the basic structure in society is governed by fundamental principles that are chosen through a thoughtful process and is not restricted by veil of ignorance. So as per this approach the unethical practice of Westpac was unjust as it did not benefitted to social and economic distribution either in forms of wealth or equality by incentivizing productive behaviour and thus enhance prosperity. Also as per libertarian approach the role of justice and government is to protect economic domain by safeguarding rights, resolving disputes and by giving legal archetype to protect trade, but in case of Westpac their unethical conduct of sanctioning unauthorised loans reflected that they did not followed the regulations and even violated right of their consumers with dishonest contracts and intentionally hurting well being of people. So Westpac was not just in their actions and hence faced lawsuit by federal government which is responsible to constituting justice and as such penalised Westpac.
With deterioration in Westpac’s market image improving their image and regaining people’s trust has become very important. To do this it is recommended that a responsible corporate culture is cultivated by the bank focusing on ethical-social function with rational economic profits and social benefits. Social functions can be adhered by moving the assets saver deposit astutely besides making the loan process more transparent and smoother. This social function will justifiably bail out the bank. It is also recommended that Westpac acts with transparency and explain more relevant information than lawfully needed. The impact of irresponsible home loans through insufficient information was catastrophic and showing that lesson has been learned is important. Besides, it is recommended that loans are granted with a sense of ethical-social responsibility by taking into account the utility of money and its social value. Bankers are just not liable for profitability and solvency but an ethical and social responsibility involving the loans contributions in ethical generation of wealth.
References
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