Corporate Governance And Investors: Current Framework, Issues, And Application

Current Framework and Issues of Corporate Governance

Discuss about the Corporate governance and Investors.

The current framework of Australian corporate governance is comprised of eight principles, which are described below.

Serial Number	Principles	Explanation Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
1	Laying off solid foundations regarding oversight and management	Considering a listed entity, it needs to establish and disclose the responsibilities and roles of the management and board (Beekes et al., 2015). Also the performance needs to be evaluated and monitored.
2	Structuring of Board to add Value	Considering a listed entity, it needs to have the board of accurate size, skills, composition and ability to discharge duties.
3	Acting Ethically and Responsively	Considering a listed entity, it needs to act responsively and ethically.
4	Safeguarding integrity for corporate reporting	Considering a listed entity, it needs to have rigorous and formal processes that verify integrity safeguarding of the corporate reporting (Miglani et al., 2015).
5	Making timely and balanced disclosure	Considering a listed entity, it needs to make balanced and timely disclosure of matters regarding a rational person expecting material value or price effect of its securities.
6	Respecting security and rights for holders	Considering a listed entity, it needs to comply with the rights of security holders and thereby providing them with appropriate facilities and information (Christensen et al., 2015). This will ultimately help to exercise effective duties.
7	Recognizing and Managing Risk	Considering a listed entity, it needs to build a framework of effective risk management and also review that with the progress of time.
8	Remunerate Responsively and Fairly	Considering a listed entity, it needs to attract high quality directors, managers and executives by paying direct remuneration (Bell et al., 2014). This should be enough for creating value for the security holders.

Table 1: Current framework of Australian Corporate Governance

(Source: Schultz et al., 2013)

Continued Regulatory Burden

More than ninety percent of the survey respondents from Directors Report 2015 indicated that Australian boards and directors’ compliance issues and regulatory burdens (Ayuso et al., 2014). Such issues have been not solved by the prior 11,000 bi-annual legislation ‘repeal days’.

Equipping the Board

According to Soleimani et al., (2014), the board of directors is often found to not have the accurate amount of knowledge and skilled associates, which could have otherwise solved the issues related to growth opportunities. Social media involvement and utilization of digital technology is quite lagging behind.

Cross Boarder Opportunities

Australian organizations are extremely centered to domestic operations and free trade agreement is not effective, resulting to inappropriate market expansion. Issues related to fluctuating political and economic turbulences have created the cross-border challenge.

According to Min and Smyth, (2014), while considering the eight principles, it can be said that balanced and timely disclosure of matters are preventing the small-scale organizations to act proactively. On the other hand, Seamer, (2014) pointed out the remuneration factors are the most responsible factor due to which organizations are not able to maintain best quality employee force. However, it must be said that the organizations that fall under the ASX list must comply with the corporate governance principles. Such organizations are having their own ASX code and referred to the GICS industry group (Min & Smyth, 2014). These companies fall under the industries such as energy, diversified financials, materials, real estate, software, food and services, retailing, media, capital goods, utilities and health care equipment.

Subramaniam et al., (2013) pointed out that the companies that are listed under ASX, needs to follow the regulations that are under guidance of ASX Council. The Council has the right to upgrade the recommendations and modify the principles. Each of the listed companies needs to follow the rules and eight principles. However, Clarke, (2014) indicated that the organizations has the liberty to not comply with the regulations if they understand the necessity to do so, but for that they need to inform and justify the reason for non-compliance.

According to Dou et al., (2015), principles and recommendations that are designed by any council are often found to be not complied by organizations as quite often emergencies and operations act in such a way that framework becomes a prevention for smooth business flow. (Soleimani et al., 2014) added that for non-compliance, certain objection from the investors and stakeholders are raised at several point of time, which raises the question of principles’ existence and value. Ultimately the council becomes responsible for the breach of activities. Therefore, it can be said that legal enforcement of the Corporate Governance Principles and Recommendations is extremely important.

Application of Corporate Governance Principles and Recommendations

While considering the view of Christensen et al., (2015), it can be said that hard law is the only way by which the corporate governance principles can be strengthened. This will make the actual binding of legal laws and instruments, which the ASX listed organizations will need to abide by in future. Statutory regulations through hard law will eventually help in legal enforcement of the principles and in this way excuses and explanation of breach can be averted.

Corporate Governance is the system of rules, processes and practices, which direct an organization towards its effective operation. Corporate governance mainly involves the balancing interest of the stakeholders like shareholders, customers, management, financiers, Government, suppliers, employees and communities (Schultz et al., 2013). The boards of directors are mainly responsible for framing the corporate governance and maintaining its application all throughout the business towards sustainable business. “If not why not” or “comply or explain” is an approach, which different organizations can follow for framing their corporate governance. In this approach, the regulatory bodies prescribe a set of rules, which the organizations are to comply with for conducting unethical business practice (Min & Smyth, 2014). Moreover, in this approach, the regulatory bodies do not actually set out the binding laws, but they set come code of conduct, which the organization may either follow or not as per their nature of the business.

The purpose of this approach is to ensure that the set of codes are appropriate for individual companies. While an organization deviate from the code of conduct, this approach may violate the view of “one size fits all”. In this approach, if the code of conducts set by the regulatory bodies are appropriate for one company then it should comply with that code of conduct (Clarke, 2014). On the other hand, if the code of conducts is not appropriate for one company then they should explain the reasons of rejection to their stakeholders. However, when the explanation of rejection is not satisfactory to the investors then they can invest their money in other company, which is complying with the code of conduct. Moreover, this approach is best applicable, where uniform standards fit the all types of organizations.

In contrast to “If not why not” or “comply or explain”, statutory provisions mandate the organization to follow the legal rules for practicing the businesses. Moreover, the approach of statutory provision follows the rules of hard law.  As per the statutory provision, the rule of corporate governance should have actual binding of legal instruments and laws. The legal enforcement of the statutory provisions mandates the corporate bodies towards aligning them with legal corporate governance principles (Ayuso et al., 2014). Moreover, statutory provision of corporate governance can penalize an organization, while it violates the legal enforcement of the corporate rules. In the light of recent constitutional conflict, corporate collapse and the push of national uniform regulation, the regulatory regime of corporate governance is in a state of flux.

Legal Enforcement

Day by day, the organizations in Australia are increasing their sizes. The urge of providing specialized benefits is leading the owners towards controlling the day-to-day activities of the organizations (Bell et al., 2014). Moreover, there is a significant role of board of directors towards observing the management activities for maintaining the business ethics. Moreover, making corporate governance mandatory through statutory provision can protect the rights of all the stakeholders of an organization. The acts set by the Government and regulatory bodies direct the organizations towards practicing transparent businesses. Hence, the legal framework of corporate governance can protect the right of every business stakeholders.

The “if not why not” or “comply or explain” gives ASX listed companies a scope for not adhering to the codes of the regulatory bodies. Moreover, in this approach, the organizations may reject the regulatory code of conducts by explaining the reasons of rejection to the stakeholders. In some cases, the organizations can reject the regulatory code of conducts for their own benefits by sacrificing the interest of their stakeholders (Clarke, 2014). Moreover, the organizations can get the scope of practicing unethical businesses by keeping only the intension of earning profit. Furthermore, due to lack of legal enforcement, the organizations can also show casual approach towards maintaining the codes of the regulatory bodies. In this contrast, making corporate governance principles mandatory through the statutory provision, will bind the organization through some legal frameworks.

The ASX listed companies will be penalized, while deviating from any of the legal corporate governance principles. Hence, the organization can never dare to break the legal framework of the corporate governance and maintain transparency in all through their business practices. Moreover, the legal enforcement of the corporate governance through hard law will force the organization towards adhering to more ethical business practices (Dou et al., 2015). Therefore, while comparing “if not why not” or “comply or explain” with statutory provision of corporate governance, it can be said that statutory provision is much more effective for long lasting and efficient corporate governance.

References

Ayuso, S., Rodríguez, M. A., García-Castro, R., & Ariño, M. A. (2014). Maximizing stakeholders’ interests: An empirical analysis of the stakeholder approach to corporate governance. Business & society, 53(3), 414-439.

Beekes, W., Brown, P., & Zhang, Q. (2015). Corporate governance and the informativeness of disclosures in Australia: a re?examination. Accounting & Finance, 55(4), 931-963.

Bell, R. G., Filatotchev, I., & Aguilera, R. V. (2014). Corporate governance and investors’ perceptions of foreign IPO value: An institutional perspective. Academy of Management Journal, 57(1), 301-320.

Christensen, J., Kent, P., Routledge, J., & Stewart, J. (2015). Do corporate governance recommendations improve the performance and accountability of small listed companies?. Accounting & Finance, 55(1), 133-164.

Clarke, T. (2014). The impact of financialisation on international corporate governance: the role of agency theory and maximising shareholder value. Law and Financial Markets Review, 8(1), 39-51.

Dou, Y., Sahgal, S., & Zhang, E. J. (2015). Should independent directors have term limits? The role of experience in corporate governance. Financial Management, 44(3), 583-621.

Miglani, S., Ahmed, K., & Henry, D. (2015). Voluntary corporate governance structure and financial distress: Evidence from Australia. Journal of Contemporary Accounting & Economics, 11(1), 18-30.

Min, B. S., & Smyth, R. (2014). Corporate governance, globalization and firm productivity. Journal of World Business, 49(3), 372-385.

Schultz, E., Tian, G. Y., & Twite, G. (2013). Corporate governance and the CEO pay–performance link: Australian evidence. International Review of Finance, 13(4), 447-472.

Seamer, M. (2014). Does Effective Corporate Governance Facilitate Continuous Market Disclosure?. Australian Accounting Review, 24(2), 111-126.

Soleimani, A., Schneper, W. D., & Newburry, W. (2014). The impact of stakeholder power on corporate reputation: A cross-country corporate governance perspective. Organization Science, 25(4), 991-1008.

Subramaniam, N., Stewart, J., Ng, C., & Shulman, A. (2013). Understanding corporate governance in the Australian public sector: A social capital approach. Accounting, Auditing & Accountability Journal, 26(6), 946-977