Corporate Governance And Ethics: A Case Study Of Commonwealth Bank Of Australia

Overview of Corporate Governance Practices

Corporate Governance is a topic, which is deeply connected with ethical practices. Corporations Act, 2001 is the legislation that provides the manner in which an Australian company should respond to it is stakeholders. These provisions are often known as Corporate Governance. This is to understand that corporate governance is nothing apart from following good and fair practices, which are also mentioned under the Corporations Act, 2001. The report attached herewith is focused on one of the Austrian Company. The Chosen Company here is Commonwealth Bank of Australia (the bank/CBA). This company is listed on the Austrian Stock Exchange (ASX) and as the same is a bank, the Royal Commission is considering the operations.

Similar to any other company, the bank also publishes it is corporate governance statement every year in which the directors and management of the bank describe that what they think about governance. According to the Corporate Governance Statement made by this company in the year the bank is focusing on the financial well-being of it is customers and choosing this way to ensure a long-term sustainability. Under the Culture heading, the bank has stated that the same is focused and committed to developing an accountable culture, which not only supports to business strategies of the bank but also coordinate with law and ethics. Similar statements were there in the annual reports for the year 2016 and 2017. By looking after the statements this can understand that management of the company is concerned about corporate governance and directors and officers of the same are adhere to follow good practices and governance is their day-to-day activities.

However, the other side of the coin is also significant to study. Apart from the written statements, the reality is more important to know. In the recent years, many of the Austrian banks have reported negatively and it has come into light that they are not co-operating with the fair practices. Commonwealth Bank of Australia is also one of them. After that in the year 2017, Royal commission has established. 

This commission checks out the suspicious activities in bank, finance, and superannuation services industry. The chosen company i.e. Commonwealth Bank of Australia has acted negatively in the area of corporate governance. The following discussion provides a justification for this statement.

Recently in the year 2017, Australian Transaction Reports and Analysis Centre (hereinafter mentioned as AUSTRAC) has made a claim against the Commonwealth Bank of Australia (hereinafter referred as a bank), in which it has been reported that the bank failed to make follow Federal Government’s anti-money policies. The authority claimed that the company has not made a disclosure regarding around 54000 account transaction that consisted of value more than $10000. These transactions were required to be reported. Each such transaction if proving to be breached could attract the penalty $18 million. In this manner, the bank was in danger to pay hundreds of billions of dollars in penalty. As soon as this news has published the market price of shares of the company fall down very speedily. The shareholders of the company have faced a heavy lose cause of such a fall in the prices of shares of the company. The reason behind such fall was the negative impression on the reputation and financial position of the company cause of heavy penalties. Later on, shareholders have initiated a class action against this company. In this settlement, the bank becomes agreed to pay $700 million as a penalty. In addition to this, when Royal Commission has alleged many of otter banks about unethical practice, CBA also accepted that the same has charged the customers for no services. The commission further found that the bank has also breached the provision of law by outlining some accounts and investment products as commission free and later on charging commission and keeping them in bank account. 

Case Study: Commonwealth Bank of Australia

After discussing the previously mentioned case, it is far clear that the bank failed to perform good corporate governance practices. The two major issues and breach were there. One is a breach of director duty and another one is a failure to submit a continuous disclosure.

Division 1 of Corporations Act, 2001 provides the duties and requirements that every director and officer need to perform. Section 181 is a significant section, which says that directors and officers of the company must act in good faith and in the best interest of the company. This section further states that these officers perform their duties for a proper and meaningful purpose. In addition to this section, section 182 requires the director and officers of the company to not to take unfair advantage of their position. Further section 2M States that director of the company must inform the shareholders of every possible aspect of the financial results of the company. By reviewing the aforementioned cases, this can be stated that the director of the bank has breached their duties prescribed under corporations act, 2001. Being the director of the company, they must be aware of non-compliances and they must ensure the prevention of such issues.

Australian Stock Exchange has published some recommendations and 8 principles on corporate governance. Every company of the nation whose securities are listed on an open platform is required to meet out the requirements of these principles. According to the principles issued by ASX, director and officers of the company should adhere to good and ethical practices. Further forth principle says that every listed company should develop a procedure for reporting to authorities. As CBA has done many of the unethical conducts, this can be stated that the bank has noy followed good governance practices.  By charging the accounts for no fee and in an unreasonable manner, the bank is proven for breach of ASX principles. 

Conclusion 

In conclusion, of the discussion, this can be stated that the bank is not adhering to the principles of good corporate governance. Although the bank is trying to develop a good governance culture, the same is missing somewhere in the operations.

There is a need to understand that what the corporate governance is. This is to be stated that this is a system and a set of rules, which provides the manner in which a person required to do the conduct. This is nearly related to ethics. Further, why corporate governance is a significant topic is also an important topic to know. This is a topic which enhances good practices in an organization, this is the reason for that the authorities such as the Australian Securities and Investments Commission and Austrian Stock exchanges ensure that every company follows this. The importance of Corporate Governance can also be understood by reviewing the consequences in cases of failure. Some serious results can come to the company when the same becomes fail to perform the corporate governance. These consequences as follow:- 

1. Economic Consequences: -Penalties and fines will be there for sure in cases of non-compliance and failure of performing corporate governance. Companies, when not complies with the requirements of corporate governance, become liable to pay a heavy amount in the form of penalty to government or damages to the victim parties, which brings an adverse impact on the economic condition of the company. In the case of Commonwealth bank also, a heavy penalty has levied on the company.
2. Social Consequences: -The issue of failure to perform corporate governance also brings out some social impacts. Trust and reputation are the aspects, which develops a company in a long term. When a case comes out in the news in relation to non-compliances of corporate governance principles, then trust and reputation of the company diminish. People of Australia had a huge faith in commonwealth bank, but after the scandal and beaches of compliances, the trust level of this bank has diminished.
3. Political Consequences: -Cause of Poor Corporate Governance, the government of the country and authorities thereof need to make amendments to the policies. These cases forced the authorities to make further restricted provisions and policies, which results in a prevention of business growth in the nation.
4. Legal Consequences: – Governance is all related to Law. Sometimes the act of management of the company is of illegal nature. In such circumstances, the law attracts challenges. Breaches in the same become so casual. Many of the cases are there which made a new law in the area and acted similarly to a legal precedent. For instance, the non-disclosure of some transactions by the management of the Commonwealth Bank of Australia, bring the issue of breach of the law.

The above are the consequences of poor corporate governance. The reputation of the bank has decreased to a significant level after the said class actions and cases against the bank. This is the reason that authorities continuously focuses on following good corporate governance. Australian Stock Exchange has developed principles and recommendations on corporate governance. These principles provide a way, a guide for directors and officers of the company, and tell them how to behave and act while doing business activities.

As corporate governance is a topic related to ethics, some of the ethical theories also apply to the corporate governance. These theories are a branch of philosophy, which describes that what is correct or incorrect and provides implications. They provide different concepts and beliefs. Two most important theories of Corporate Governance are stated below-

1. Shareholder Theory: -Milton Friedman originally introduced this theory. This theory only keeps shareholders into consideration. According to the theory, shareholders are the most important person in an organization. They are the persons who take a part in the profits of the company and introduce the capital to the same. Without a proper capital amount, a company cannot run it is business; this is the reason that shareholders are a significant group of a company. According to this theory, boards of directors have a prima facie duty to maximize the profits and economic interest of the shareholders. In the case of CBA, because of the conduct of bank, share price of the same has fallen down and shareholder had to suffer with a huge loss. As shareholder theory demands that interest of shareholder should be priority, CBA has not worked according to this theory as the bank has not reviewed the long term effect of unethical practices on value of shareholders. 

1. Stakeholder Theory: -As the name implies, this theory is related to a stakeholder of a company. The theory says that the focus of the management of the company must not be only on shareholders. A stakeholder is a wider term and includes many of the group of people such as employee, customers, government, and others. The theory believes that a company cannot run in a long way if the same do not consider the interest of other stakeholders apart from shareholders. As per this theory, the board of directors of a company works to check the interest of every possible stakeholder and considers the same while making plans and policies of the company. In such a scenario, it becomes a difficult situation for the company and the same can have to face serious consequences. CBA has also breached this theory. By non-reporting suspicious transaction to the authority CBA has not considered the interest of government and authority here. Further, by charging commission for no commission accounts was also an act that CBA has not done outside of the interest of it is customers.

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Leng Jing, Corporate Governance and Financial Reform in China’s Transition Economy (Hong Kong University Press, 2009) 28.

Legislation 

Corporations Act, 2001 (Cth)

Other Resources 

ASX Corporate Governance Council, Corporate Governance Principles and Recommendations (2018) <https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf>.

Austlii, Corporations Act 2001 – SECT 182 (2018) < https://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s182.html>.

Caputo lawyers, Consequences of Poor Corporate Governance (14 January 2014) < https://www.caputolawyers.com.au/consequences-of-poor-corporate-governance/>.

commbank.com.au, Commonwealth Bank Lodges Response to amended AUSTRAC and class action claims (23 FEBRUARY 2018) < https://www.commbank.com.au/guidance/newsroom/response-to-amended-AUSTRAC-and-class-action-claims-201802.html>.

commbank.com.au, Corporate Governance Statement (2018) <https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/corporate-profile/corporate-governance/CBA-2018-Corporate-Governance-Statement.pdf>.

Corplaw Blog, Shareholder & Stakeholder Theories Of Corporate Governance (16 July 2013) < https://www.corplaw.ie/blog/bid/317212/Shareholder-Stakeholder-Theories-Of-Corporate-Governance>.

James Hancock, Commonwealth bank Shareholders launch class action over money- laundering scandal (9 October 2017) <https://www.abc.net.au/news/2017-10-09/commonwealth-bank-shareholder-class-action-set-to-get-underway/9029988>.

Lawrence Hsieh, Long-term value and shareholder theory of corporate governance (12 January 2016) < https://www.eiuperspectives.economist.com/strategy-leadership/long-term-value-and-shareholder-theory-corporate-governance>.

MBA Program Journey, The Social Responsibility of Business is to Increase its Profit (16 August 2010) < https://livingmba.wordpress.com/tag/shareholders-theory/>

PubMed Health, Theories about boards (2018) < https://www.ncbi.nlm.nih.gov/pubmedhealth/PMH0081078/>.

Sarah Danckert, Clancy Yeates and Ruth Williams, NAB, CBA recommended for criminal charges in commission findings (24 August 2018) < https://www.smh.com.au/business/banking-and-finance/nab-cba-recommended-for-criminal-charges-in-commission-findings-20180824-p4zzna.html>.

The Business professor, Stakeholder Theory of Corporate Governance (2018) < https://thebusinessprofessor.com/knowledge-base/stakeholder-theory-of-corporate-governance/>.

William Roberts, Directors’ Duties (2018) < https://www.williamroberts.com.au/News-and-Resources/News/Articles/Directors–Duties>.