Corporate Governance is the mechanism through which the corporates are administered and regulated . The board is the main stakeholder which implements the corporate governance in the company. The six pillars of the corporate governance are fairness, responsibility, assurance, transparency, leadership and stakeholder management. These are critical for running an entity and formulating professional relationships amongst the stakeholders such as board, employees, managers, consumers, regulators and investors (Gupta, Krishnamurti & Tourani-Rad, 2013).
In this context, the corporate governance and flaws of Australia and New Zealand Banking Group Limited was known as ANZ would be exhibited in this assignment. Its conduct is being investigated by the Royal Commission. The principles of corporate governance would also be examined in the light of corporate governance charter of ANZ along with elucidating the examples of good or bad corporate governance by the bank.
The various consequences of not following the governance charter by the bank would also be described along with its theories which can drive corporate governance in the bank.
Australia and New Zealand Banking Group Limited is known as ANZ and it is the third biggest bank in Australia. It deals into commercial and retail banking. It is also the biggest bank in New Zealand. Along with conducting its transactions in Australia and New Zealand, it also conducts its transactions in 34 countries. It was formulated on 1st October 1951 through the merger of Union Bank of Australia Limited and Bank of Australia.
As per BBC News (2018) ANZ which is one of the big four banks of Australia was alleged for the placement of almost 80 Million shares in 2015. The affair started when ANZ was required to raise $3 Billion so that it can increase its capital reserves so it decided to raise new shares. For this, it employed three investment bank viz. Deutsche Bank, JP Morgan and Citigroup. They were to raise $2.5 Billion through raising funds from big institutional investors to purchase new shares.
The balance amount of $ 500 Million was to be raised by offering additional shares of up to $15000 to the existing retail shareholders of the bank. These three banks were to underwrite the shares which meant that they had to guarantee that they would find purchasers for the shares by charging a particular amount of fees. In case they fail to do so, they would pay the amount themselves. The main event started when the three banks were unable to pump up enough amount for ANZ. They managed to sell $1.7 Billion out of $2.5 Billion of the new underwritten shares. They were left with a shortfall of $800 Million with the only option to buy these shares amongst themselves and sell them at a future date.
In this case, a cartel was formed in which there was an agreement amongst the four banks about dealing with the shortfall. They decided that the shares would not be sold at a lower price below a certain value. This would ensure that the share price would remain artificially high so that the investment banks would not be out of pocket.
A cartel is formed when two or more companies decide to set prices and not compete with each other which is not allowed as it undercuts competition and splits off the consumers. As a result, there is potential harm to customers as they cannot get the price they would get if the banks were competing in the market. This would weaken the innovation and choice. SO the four banks were alleged to keep the price of ANZ artificially high for their mutual benefit.
In this context, ANZ is one of the major financial institutions of the country and the price of its share impacts its economy in all sorts of ways. The integrity of the financial mechanisms is dependent upon the situation when the shares of the company are being priced by free market forces (Fernyhough, 2018). The Royal Commission inquired into the matter and has heard the evidence of rampant misconduct of the bank.
In this context, the Corporate Governance Principles and Recommendations are formulated by the ASX Corporate Governance Council which should be followed by every listed entity on the Australian Securities Exchange (ASX). Good corporate governance principles help in promoting confidence amongst the investors. The if not why not approach forms the basis of these principles and recommendations (ASX Corporate Governance Council, 2014).
The if not why not approach says that if the board of directors of the entity is of the opinion that these recommendations are not suitable for the company in certain situations, so it is not entitled to adopt them. In that case, they must explain why the company cannot adopt the recommendations under the “if not why not approach.”
The principles and recommendations promote the following principles in this behalf. Firstly, it is the responsibility of the listed company to formulate and disclose the responsibilities of the board and the way its performance is being supervised and assessed. Secondly, the board of the listed company should add value to it. The board should comprise of appropriate composition and expertise so that it can discharge its duties in an efficient manner (Keay, 2012).
Thirdly, the company should act in a responsible and ethical manner. Fourthly, a listed company should adopt strict procedures which could examine and protect the integrity of the corporate reporting. Fifthly, it should make timely disclosures regarding all the matters which would have a significant effect on the price of the securities. Sixthly, the listed company should respect the rights of the investors through providing them suitable information which can enable them to exercise their rights in an effective manner. Seventhly, the listed company should formulate a risk management framework and review their effectiveness. Lastly, the company should pay the remuneration to the directors so that high-quality directors can be retained along with the alignment of their interest with creating value for the security holders (Wang et al., 2012).
As per ANZ (2017) the corporate governance charter lays stress on the director’s duties and the composition of the board as per Part 2 D.1 of the Corporations Act 2001. The directors of the company should take part in training programs along with updating themselves through rebut bulletins so that they can execute their duties and responsibilities in an efficient manner.
But in reality, the bank has contradicted its own charter. The criminal allegations have been charged against the global head of treasury of ANZ, Rick Moscati along with the chairman of Citigroup’ s operations in Australia, Stephen Roberts. Furthermore, the heads of Citigroup and Deutsche Bank have also been accused of the same. The charges are associated with the sale of $2.5 Billion of shares of ANZ to the institutional investors in 2015. The Royal Commission , Reserve Bank and Financial Authority (FMA) had enquired into the banks in Australia for seeking evidence for the incident(RNZ,2018).
Thus it is clear that the directors have violated their duties and the corporate governance charter and principles of the bank thereby revealing an example of bad corporate governance in the company.
The probable legal consequences to be borne by the bank are the criminal cartel charges laid by the Australian Competition and Consumer Commission (ACCC) and Australian Securities and Investment Commission against the senior executives of ANZ, Deutsche Bank and Citigroup. The matter was listed before the Downing Central Local Court in Sydney. As per the Competition and Consumer Act, the guilty individuals were liable to a confinement of 10 years and pecuniary fines up to $420,000 per offense of the criminal cartel and the institutions were penalized up to $10 Million per offense (Letts, 2018).
So the possible legal consequences also included the violation of Corporations Act 2001 and the principles of corporate governance (Tricker & Tricker, 2015).
The economic implications of the criminal cartel scandal were the fall in the share prices of ANZ by 2% while the fall in the prices of other banks was around 1% with an overall decline in the market by 0.2%. The political and social implications would be that the incidence would trigger reforms in the capital raising processes so that greater transparency can be ensured. It would help in eliminating the investment banks from securing profits as a result of share sale along with dilution in the share value held by the retail shareholders (Duran & Kaye, 2018).
The social implications would be a downfall in the goodwill of the banks with a loss of investor confidence. It would prevent more investors to invest in those banks and would instigate the current consumers to withdraw their accounts from ANZ and other three investment banks.
Thus the consequences of bad corporate governance in the banking sector of Australia would be a powerful negative force against the profitability and performance of the banks. It would lead them to financial distress and corporate failures. These incidences lead to lack of confidence amongst the investors and consumers. The main reason can be observed through the financial reporting practices of these banks and the inability of the auditors to provide assurance as required by the stakeholders.
It also questions the ability of the directors to manage their organizations. The lack of good corporate governance practices can lead to economic disturbances. Since banks and financial institutions are the center point of the economy of Australia, so the offenses committed by them can severely impact the economy of the country (Dibra, 2016).
While the consequences of bad governance have been analyzed, so it is important to evaluate the consequences of following good governance practices by the banks. Good governance safeguards all the stakeholders viz. investors, the public, employees and consumers. It reinforces collective oversight and responsibilities of risk governance on the board of the banks. It inculcates key components of risk governance like risk appetite, risk culture and strengthens its relationship with the risk capacity of the banks (Basuony, Mohamed & Baidhani, 2014).
It encourages greater involvement of the board in the evaluation and promotion of effective corporate governance in the bank. It also supervises the implementation of the principles in the governance framework in the organization. In this context, it creates awareness amongst the members of the board to identify and eliminate the risk-based conducts from the banks. These comprise of the misspelling of financial products to the clientele. It also helps in preventing the violation of international and national rules reacting to tax, money laundering , economic sanctions and terrorism. It also helps to safeguard the banks and financial institutions from the effects of manipulation of financial markets (Basel Committee on Banking Supervision ,2015).
As per Donnellan & Rutledge (2016), agency theory states that risk related decisions of the agents may be affected by his level of oversight. This theory is used to comprehend the relationships between the principal and agent. The agents i.e. the board is the representative of the principal i.e. the shareholders in various commercial transactions and they are expected to act in the best interest of the principle without regards to their selfish motives. The conflict between the agents and the principal can be resolved by adopting the principles of corporate governance.
The investors elect the executives or the board to make the decisions on their behalf. Their aim is to be the representatives of the investors and execute the commercial transactions in the interest of the investors. Despite the clear justification for the election of the board of directors by the shareholders, there are lots of instances in which the directors unintentionally or intentionally take such decisions which might not favor the best interests of the investors (Van den Berghe, 2012).
The aim of the agency theory in corporate governance is to evaluate the incidences of conflicts among the various interest groups in the corporates. The banks and financial institutions aspire to reduce the risks while investors are interested in maximizing the profits. The main function of agency theory is to maintain the cost of the division of labor amongst the various stakeholder groups such as managers, creditors and shareholders. So the agency theory can safeguard the interests of the investors as well as directors of ANZ (Chan, Watson & Woodliff, 2014).
The second applicable theory to the given case can be stakeholder theory of corporate governance. It targets on the effects of the activity of the company on its identified stakeholders. It states that the managers i.e. officials and directors should contemplate the interests of all the stakeholders in the management processes. It comprises of taking efforts to eliminate the conflicts between the interests of the stakeholders.
It considers the interests of the third parties which have some level of dependence on the company. Stakeholders are those groups which are affected or affect the accomplishment of the objectives of the company. So, if the organization wants to effective, then it must be concerned with those relationships which are influenced or influence the achievement of the purpose of the company. The stakeholders can be divided into internal and external stakeholders. Internal stakeholders pertain to the directors and officials who are involved in the process of corporate governance. The external stakeholders comprise of creditors, consumers, auditors, suppliers, agencies of the government and society. The external stakeholders create an indirect impact though they are indirectly involved in the process (Epstein, 2018).
This theory can be summarized in conjunction with the belief that all the stakeholders involved in some way with the bank with the expectation that it shall deliver the desired value to them. The benefits may include salary, dividends, bonus, tax revenue etc. It maximizes the economic benefits of the corporations. It addresses the concepts of organizational management and ethics which cater to the moral values in administration of ANZ (Fernando, 2012).
Conclusion
This assignment can be concluded by stating the fact that the board is the primary stakeholder of the company and it influences the cooperate governance of the bank and financial institutions. It is tasked with taking the most significant decisions regarding the management of affairs by the company. So they must adhere to the principles of good corporate governance in order to attain a balance amongst the interests of the various stakeholders of the company.
References
ANZ (2017). 2017 Corporate Governance Statement. Retrieved September 13th , 2018 from https://shareholder.anz.com/sites/default/files/anz_corporate_governance_171105.pdf
ASX Corporate Governance Council(2014). Corporate Governance Principles and Recommendations.. Retrieved September 13th , 2018 from https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf
Basel Committee on Banking Supervision (2015). Guidelines Corporate governance principles for banks. Bank for International Settlements 2015.
Basuony, M.A., Mohamed, E.K.A. & Baidhani, A.M.A.(2014) .The Effect Of Corporate Governance On Bank Financial Performance: Evidence From The Arabian Peninsula. Corporate Ownership & Control ,11(2),178-191.
BBC News (2018). ANZ, Deutsche Bank and Citigroup face ‘criminal cartel’ charges. Retrieved September 13th , 2018 from https://www.bbc.com/news/world-australia-44326034
Chan, M. C., Watson, J. & Woodliff, D. (2014). Corporate governance quality and CSR disclosures. Journal of Business Ethics, 125(1), 59-73.
Dibra, R.(2016). The Role of Corporate Governance Failure in the Banking Sector. European Scientific Journal, 12(34),68-74.
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