Challenges Faced By Australian Institute Of Company Directors Regarding Its Corporate Governance Practices

Reason for the Case Study

Discuss about the Challenges faced by Australian Institute of Company Directors regarding its Corporate Governance Practices.

Corporate Governance involves a set of rules, regulations, procedures with which a company is controlled and directed (Farrar, 2008). Primary scope of corporate governance involves balancing of interest of various stakeholders of the company. Stakeholders of a company can be internal or external involves, government financiers, customers, suppliers, shareholders, community and so on. Corporate governance provides a framework whereby a company is able to meet its objectives, undertaking internal controls towards performance measurement and corporate disclosures. The scope of this report is to undertake Corporate Governance review of Australian Institute of Company Directors (AICD), such that they are able to meet interests of its stakeholders (Mallin, 2011). As corporate governance aim is to understand best ways in which stakeholders interests of the organisation can be met, the report connects various reasons to the same.

Corporate Governance involves each and every sphere of the management thus, rules needs to be applied for dictating of a corporate behavior. While there are a number of advisors, who are in position to dictate corporate behavior it cannot reflect governance. The Board of Directors is critical in corporate governance for appropriate equity valuation. Board of Directors has a direct impact on stakeholders for influencing corporate governance. Members of the Board are elected by shareholders or appointed by other members from the Board, such that they form a representation for the company (Bebchuk, 2009). There are various functions, which are undertaken by the Board for making of important decisions, they appoints corporate officer, conducts dividend policy and does executive compensation. Board obligations are way beyond financial obligations and they often need to undertake shareholder resolution for social or environmental priorities. Hence, it is the responsibility of the Board to apply Good Corporate Governance. Bad Governance can create doubt on a company’s integrity, reliability and obligations to its shareholders. It also creates intolerance towards stakeholders in cases of bad governance. In case a company does not apply corporate governance then there can be noncompliant financial results, bad compensations packages as well. On the other hand, good corporate governance creates a positive ambience towards the company Boards and creating a transparent rules and controls. Companies generally strive to apply highest levels of corporate governance, for reflecting good corporate citizenship by various endeavors. Thus, it is critical that all stakeholders interests are met adequately for apply corporate governance (Larcker, 2007).

Background Purpose and Scope

Corporate Governance is often focused by multiple top corporation as being the primary obligation of their businesses (Adams, 2010). Australian Institute of Company Directors’ (AICD) opinion is that company’s board of directors has responsibility of placing shareholders’ interests prior to stakeholder’s interests. There have been multiple instances where shareholder’s interest has been prioritized over stakeholder’s interests. AICD however, wants that all its stakeholders’ interests be met and satisfied for better public appraisal in regards to its corporate governance endeavors (Brezeanu, 2008).

Proprietary Theory is one in which there is no fundamental distinction between legal entity and its owner. It implies that an entity does not exists separately from its owners for accounting purpose.

Entity Theory is applied with three basic assumption as economic activity being of business conducting being distinct from its owners. Its primary activity is that a company can and will be accounted as separately from its owner’s activities. 

Enterprise Theory establishes that there are two clashing motivation of business, which is for making profits, where production in curtailed for purpose of price and making high profits. 

Stakeholder Theory is a theory for organisational management and business ethics that establishes morals and values for managing organisation. Till date the organisation had been overlooking needs of various stakeholders and been concerned with only needs of its shareholders. Such point of view can give rise to challenges from not only current situation but also for the future. It might decrease sustainability aspect of the business. There might be substantial amounts of issues created from implication of such challenges, which might further replicate in the future. Purpose and scope of this report concerns highlighting various problems faced by organisation in connection to its prioritizing of various shareholders’ interests. While safeguarding stakeholders interests and looking after their concerns is of importance, the organisation has been overlooking and ignoring the same. Thus, the report highlights critical recommendations that the organisation needs to accommodate in order to overcome particular challenges that it faces currently (Kang, 2007).          

Organisations need to strive to attend to maximize stakeholder’s interests compared to those of its shareholders. Various stakeholders can have multiple conflicting interests which has raised several scandals across multinational organisations (Aguilera, 2007). Cases of Enron, ImClone, Global Crossing, Tyco International and WorldCom have provided immense insights regarding authorities who have highlighted shareholder’s interests supremacy. Thus, theory of corporate governance prevails that establishes its supremacy and also applicability. Below are mentioned some problems that AICD faces and there solutions, with certain recommendations.    

Problems and Solution

1^st Problem:

Balancing of shareholder’s interests against those of stakeholder’s might lead to financial interests of shareholders. Increasing financial returns of shareholders from accounts or other discrepancies might lead to corruption. Auditors are also made to view shareholder’s return, manipulating returns of the company often reflecting losses for the same. This, problem can lead to a long term issue and raise external stakeholder’s concern in regards to auditing. Thus, the first problem concerns highlighting shareholders theory compared to stakeholder theory.   

1^st Problem:

Solution to all problems faced by the current organisation is adapting corporate governance procedures and highlighting interests of stakeholders (Kayode, 2015). Looking after shareholder’s interests can lead to viewing their interests which is to maximize their returns. Shareholder’s interests can be balanced by the organisation, but its fallouts can be explained to the Board of Directors. Thereafter, discussing the long term sustainability of the organisation appropriation of profits to stakeholders can be attempted. Focusing on appropriation of profits will enable building of trust in the organisation.         

2^nd Problem:

Shareholder and stakeholder theories are normative theories of corporate social responsibility. Role of corporate social responsibility concerns doing what is right. Thus, theories of business ethics for doing what is right are often contradictory to shareholder’s and stakeholder’s theory. The current organisation will not be able to apply ethical codes of conduct within the organisation if it is not able to able stakeholder’s theory appropriately. Second problem thus, concerns itself with application of ethics within the organisation.

2^nd Problem:

Ethics is critical to every business, especially for Australian Institute of Company Directors (AICD) (Friedman, 2007). Applying of ethics will yield long term benefits to the business of the organisation. An ethical code of conduct for the entire organisation needs to be developed and adopted by the Board of Directors. Such ethical codes will contains norms and clauses for highlighting of stakeholder’s interests. It is integral for an organisation for accommodating ethical codes, which includes shareholder’s interests within those of stakeholder’s interests. 

3^rd Problem:

Stakeholder’s theory asserts that managers of an organisation have duty towards corporation shareholders, individuals as well as constituencies who work for the organisation. Hence, according to fundamental concepts it is the sole responsibility of managers to look after interests of stakeholders even in case it reduces the company’s profitability. It can be drawn from the concept that stakeholder’s need to have a critical role to play in decision making, which is not the case as shareholder’s interests are taken care off. 

1st Problem

3^rd Problem:

Stakeholders interests can appropriately be reflected in their ideas incorporated into decision making. Board Members needs to adopt procedures such that all stakeholder’s decisions are incorporated into attaining of any particular objective of an organisation. When all stakeholder’s will gain consideration then an objective will be met appropriately.   

AICD will be able to overcome its current situation and apply corporate governance codes of practices (Young, 2008). Though there might be dispute over stakeholder’s or shareholder’s interests being of importance. While shareholder’s invests in businesses for financial returns, it can be argued that the will seek to maximize their profits or returns and have their say in business. However, for long term gains it can be said that all stakeholder’s ways and means needs to be evaluated. The following are some recommendations that can act in favor of the business; 

AICD needs to establish documented segregation concerning roles and responsibilities of shareholders, the Board of Directors and management. Clarification of roles and responsibility helps understand particular segregation in roles and execute them accordingly. This platform also provides for reduced conflicts amongst the various participants of a business.

Implementing Authority Matrix, such that there are no confusion regarding delegation of authorities. An Authority Matrix is especially useful in cases where there are multiple members in the management and no single grievance handling procedure.

Educating Board Members might seem a critical responsibility but includes an integral role. The Broad Members needs to know regarding the roles that stakeholders possesses within an organisation and its impact. Corporate Governance has already achieved its success across multiple multinationals.

Addressing transparency issues, is integral for any type of organisation. Especially in AICD, various stakeholders deserves the right to know ways decisions are made and impended upon them. Transparency has various other positive impacts as well, that can benefit the organisation in the long run by way of employee satisfaction, higher productivity and lower turnover rates.

Establishing Audit and Risk Committee and recognizing governance risks for the Board of Directors. Any fraudulent practices or any accounts discrepancy is supposed to be right and responsibility of the Board of Directors solely. Hence, it becomes crucial that an appropriate Audit and Risk Committee is established which recognizes such risks and files returns in compliance with all possible legitimate standards.

Lastly every stakeholder needs to realize their contribution to the organisation, which in totality is of much greater interests. Every form of strategic decisions taken by the organisation, by its Board Members has a long term standing impact on sustainability and viability of the business hence is crucial. Therefore, more the contribution from stakeholders towards an objective or decision better is the sustainability for the organisation.

Conclusion

Corporate Governance is seen as a key concept that can render efficiency and effectiveness to the functioning of an organisation. Primary responsibility of Board members is to abide by its stakeholders needs and necessities. An organisation that is capable of meeting such diversified stakeholders needs emerges as a leading one, with trusts from its customers and internal stakeholders. Good governance can be reflected through corporate governance endeavors which if applied by an organisation, AICD can earn interests form its stakeholders. AICD will accommodate recommendations provided for including relevant aspects to response to diverse stakeholder audiences. Corporate Governance practices application might require the organisation adopt a new set of standards, practices or rules. Such procedures will be developed in consultation with the Board Members. However, in this case the Board Members need to consider views of all relevant stakeholders of the organisation as it will allow development of better codes of conduct, roles and responsibilities. These recommendations will allow the company emerge as a corporate governance specialists and earn reputation in the field.

Reference Lists

Adams, R. B. 2010. The role of boards of directors in corporate governance: A conceptual framework and survey. Journal of Economic Literature, 58-107.

Aguilera, R. R. 2007. Putting the S back in corporate social responsibility: A multilevel theory of social change in organizations. . Academy of management review, 32(3), 836-863.

Bebchuk, L. C. 2009. What matters in corporate governance? Review of Financial studies, 783-827.

Brezeanu, P. a. 2008. Corporate governance models. VIII (I), 15.

Farrar, J. 2008. Corporate governance: Theories, principles and practice. Oxford University Press.

Friedman, M. 2007. The social responsibility of business is to increase its profits. In Corporate ethics and corporate governance. springer berlin heidelberg., 173-178.

Kang, H. C. 2007. Corporate governance and board composition: Diversity and independence of Australian boards. Corporate Governance: An International Review, 194-207.

Kayode, M. K. 2015. Managerial Incentives and Corporate Governance.

Larcker, D. F. 2007. Corporate governance, accounting outcomes, and organizational performance. . The Accounting Review, 963-1008.

Mallin, C. A. 2011. Handbook on international corporate governance: country analyses. Edward Elgar Publishing.

Young, M. P. 2008. Corporate governance in emerging economies: A review of the principal–principal perspective. Journal of management studies, 45(1), 196-220.