Corporate Governance is the mechanism of rules, processes and practices through which a firm is controlled or directed. It equalizes the interest of the various investors of the company such as financers, consumers, suppliers, government and community. Since it provides the framework for attaining the objectives of the company, it essentially comprises of every sphere of management ranging from the internal controls, performance measurement, corporate disclosure to the action plans (Tao & Hutchinson, 2013).
Corporate Governance essentially comprises of Board of Directors. They are the primary stakeholders impacting the corporate governance .They are appointed by shareholders or by their own colleagues and are representatives of investors of the company. As per ASX Corporate Governance Council (2014) good corporate governance endorses the confidence of investors which should be inculcated by listed entities on ASX in their commercial activities .So, in this assignment, the corporate governance of Common Wealth Bank would be assessed along with stating its various theories.
The Commonwealth Bank was alleged for the cases of money laundering and financing for terrorism. It was being prosecuted for 53,700 breaches as per the Anti –Money Laundering and Counter Terrorism Financing Act 2006 by the financial intelligence agency Austrac. It alleged that the bank permitted to use its smart deposit machines by four money laundering organizations, three of which were associated with distribution networks and drug importation.
As a result, a penalty of $375 million was imposed by the court on the basis of currently available data. It has to set aside $200 million in order to cover legal costs. The bank was being allowed to exploit loyal consumers as a result it has been facing a lot of criticism from the public. It has also seen a decrease in its half yearly profits after it was asked to set aside $375 million to set aside against potential fines. Adding on to the misery, the results came out when it was about to be declared as amongst one of the four biggest banking companies of Australia.
As a result, the Senate passed a bill to increase control in the banking sector. The Banking Executive Accountability Regime has been formulated which requires the banks to execute their business with full honesty and integrity along with imposing remuneration obligations on senior executives and directors.
According to the opinion of Knaus (2018) it has been accused of bribery, breach of money laundering laws, failure to provide advertised fee waivers, forgery, careless financial planning advice and for its unethical behaviors to avoid payouts of CommInsure Insurance.
A report of the flaws of the bank has been issued which criticizes the culture of the bank and the inappropriate oversight of the board regarding the emerging risks. In this context, the lawyers of the Banking Commission have suggested that the Common Wealth Bank has to face criminal charges for their treatment regarding the superannuation consumers. It is alleged to breach around 13,000 cases of superannuation law (Lannin, 2018).
The Colonial First State which was owned by CBA failed to move around 13,000 superannuation members into lower fees and nil commission accounts called as My Super within the legal dead line of 1st January, 2014. The Chief Executive of Common Wealth Bank has out himself into trouble by confessing that he has made a lot of mistakes in his previous role as the Head of the retail banking division of CBA (Verrender, 2018).
As a result, the Australian Prudential Regulation Authority (APRA) released a report about the Bank saying that it has followed a culture of smugness and money laundering scandal and with a board which was unsuccessful to provide an appropriate insight. The Bank was accused to break the counter terrorism and anti-money laundering laws more than 50000 times. The 500 executives of the Bank were given a week to respond to the report of APRA and asked to give suggestions on the changes to be brought in the culture of the bank.
In this context, the Corporate Governance Principles and Recommendations of ASX play a very powerful role in recommending the practices of corporate governance to the entities which are listed on the ASX. By following these practices, they would accomplish the desired outcomes and live up to the expectations of the investors. It has also established the ‘If not, Why not approach’ which says that the listed entities choose to adopt the principles for its board, it is entrusted with the lawful duty to manage its business with care and due diligence (Salim, Arjomandi & Seufert, 2016).
If in case, the board of that particular entity considers that the recommendations of the council are not appropriate for a particular circumstances, then it must explain that why it cannot adopted the recommendations. It has provided 8 principles which makes sure that the stakeholders receive a suitable level of evidence regarding the governance arrangement of the entity (Dalwai, Basiruddiz & Rasid, 2015).
The first principle pertains to laying solid foundations for the oversight and management. Secondly, the structure of the board should add value to the company. It should have appropriate composition, size, commitment and skills so that it can discharge its duties in an efficient manner. Thirdly, a listed entity should act in an ethical manner and in an accountable manner. Fourthly, an entity listed on ASX should adopt rigorous processes so that they can validate and protect the integrity of the corporate reporting framework (ASX Corporate Governance Council, 2014).
Fifty, a listed entity should disclose all the reasonable matters having a substantial impact on the value or price of its securities to an authentic person. Sixthly, the listed entity should admire the rights of the investors through providing authentic information and facilities to them so that they can exercise their rights effectively. Seventhly, a listed entity should formulate a comprehensive frame work of risk management and review its effectiveness on a periodic basis. Eighty, the company should pay attractive remuneration to the directors so that it can retain and encourage the senior executives to remain in the company (Benn & Dunphy, 2013).
With reference to the duties of the directors, an efficient and high performing duty of the board is vital for the effective administration of the listed entity. The board should comprise of adequate number of non-executive and independent directors who can embrace the board into account. It has the duty to represent itself to the best interest of the company and its investors. Furthermore, the board should comprise of a nomination committee which should have at least 3 members and most of them should be self-governing. The chairman should be an independent director. If in case, it does not have a nomination committee, then it should disclose that it has employed appropriate processes so that the issues of succession of the board can be addressed. It should further ensure that it has a proper balance of knowledge, skills, diversity and expertise so that it can discharge its accountabilities in an effective manner ( Jizi et al.,2014).
In this context, the corporate governance of the bank summaries the roles and accountabilities of the board and the manner of discharging its responsibilities for the company and its subsidiaries. It also states that the role of the board is to formulate strategic goals and to appoint the CEO of the bank. It has to supervise the performance, management and governance of the banking company (Commonwealth Bank of Australia, 2017).
But the bank seemed to violate its own corporate charter. With reference to the corporate scandal in the Commonwealth Bank, the directors and officers had not complied with the duties as per the Corporations Act 2011 and bank had not complied with its continuous obligations of disclosure. It also inquired about the compliance with the licensing and financial reporting obligations along with reporting contingent liabilities.
An important question arises that if the board was aware of the non-reporting in the latter half of 2016, then it would be scrutinized that whether there was a necessity of the provision or announcement about the matter to the market. The vital terms of the obligations of continuous disclosure and sound corporate governance was also investigated by the regulator.
It was also enquired about the escalation of Austrac for the business of bank and its warning about the seriousness of the matter to the banking company. The role of chief executive Mr. Ian Mark Narev in this regard was also question. So these were some of the examples of bad framework of corporate governance of the banking company (Westland, 2017).
As per Eyers (2018) the legal, social, political and economic consequences of the money laundering scandal of the Commonwealth Bank can be that there was a decrease in the half yearly profits of the bank as soon as it was accused for money laundering and funding for terrorism .It pertains to the economic consequence of the corporate scandal. The possible legal consequences would be violation of the Corporations Act 2011, Anti- Money Laundering and Counter Terrorism Financing Act 2006, Consumer Action Law and the principles of corporate governance.
The social and political implications of the corporate scandal pertain to loss in the share price of the company and its goodwill due to the bad publicity of the bank and its breach of the Anti-money Laundering and Counter Terrorism Financing Act 2006.The political implications pertain to loss of reliance of the government on the bank as from decades the government and law enforcement agencies are dependent upon the bank to safeguard the economy from corrupt payments and inflow of black money into the main stream( Verrender,2017).
In this context, corporate governance is highly significant for the banking sector as it is a crucial component of the economy. Corporate government has been an established component in the banking sector over the past three decades. It is an important element in the operations in all the banks around the world. Banks play a significant role in the financial intermediation so any difficulties arising from short comings due to lack of corporate governance will lead to nervousness and unreliability in public and market as well.
Some of the deficiencies in the corporate governance became visible during the financial crisis of 2008.
As per Salim, Arjomandi & Seufert(2016) a successful corporate governance is a fundamental principle which is eh reason of performance of the banking sector and increase the attraction of various investors. A successful corporate governance framework can develop reliability amongst the general public, create value, boost operational efficiency and minimize the risk exposure.
The regulators, shareholders and banks themselves are interested in understanding if the efforts to assimilate good corporate governance structures shall lead to developments in the performance of the company. So, good corporate governance framework requires the board to fulfill its legal duties to supervise the management, guarantee the conformity with the legal requirements and safeguarding the interests of the stakeholders. The implications of non-adherence to the principles of corporate governance can be poor culture and governance practices and a fall in the goodwill and reputation of the company in the market (Effective Governance, 2018).
The risk of noncompliance of the corporate governance strategy can lead to decrease in the growth and lack of confidence in the company. It may lead to loss of confidence of the stakeholders. They feel mislead about the organizational structure and strategy of the business. It may also face difficulty in raising capital ( Felício et al., 2018).
The applicable theories of Corporate Governance to the given case are agency theory and stakeholder theory. Stakeholder theory identifies that origination of stakeholder groups as a crucial component to the banking sector. It recognizes that the stakeholders extend beyond the owners, managers and employees .Stakeholders are the group of persons who can impact or are influenced by the accomplishment of the objectives of the organization.
If the banks want to be efficient , they have to pay attention to all those stakeholders which can affected or are affected by the accomplishment of their purpose .Irrespective of the vision and mission of the banks , they have to manage the relationships which are important. In the context of Commonwealth Bank, it has to manage its relationship with all its stakeholders so that it can accomplish its goals and ensure its long term sustainability (Khan, Muttakin & Siddiqui,2013).
The agency theory consists of the fact that there are two participants in corporate governance viz. managers and shareholders. It explains the problems related to agency which arises from the separation of control and ownership. It provides a method for explaining the relationships in which the interests of the parties are at odds and they can be aligned with the help of well-planned system of compensation and proper monitoring. It arises from the fact that the goals of the agents i.e. mangers from those of owners or shareholders and they are contradictory. A board originating from the point of view of agency theory should exercise strict control monitoring of the performance of agents and supervision so that the interests of the shareholders can be safeguarded (The Conversation ,2016).
So, in this context, the board of Common wealth Bank should work for the interest of the investors.
Conclusion
So, to conclude, it can be said that sound corporate governance system helps in boosting up the efficacy of the bank and it is beneficial for the profit of the banks and their investors. With the introduction of the ASX principles , it is seen that the banking industry in Australia has performed in a better way for maximizing its total revenue. The regulators must continue to develop the philosophies of corporate governance and empower the supervisory behaviors of the board.
References
ASX Corporate Governance Council(2014). Corporate Governance Principles and Recommendations Retrieved September 7th , 2018 from https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf
Benn, S. & Dunphy, D. (2013). Corporate governance and sustainability: Challenges for theory and practice. NY: Routledge.1-252.
Commonwealth Bank of Australia(2017). Board Charter. Retrieved September 8th , 2018 from https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/corporate-profile/corporate-governance/board-charter.pdf
Dalwai, T. A. R., Basiruddin, R. & Rasid, A.S. Z. (2015). A critical review of relationship between corporate governance and firm performance: GCC banking sector perspective. Corporate Governance, 15(1), 18-30.
Effective Governance (2018) .The year in review — A look at Australian corporate governance in 2017 and what’s ahead in 2018. Retrieved September 8th , 2018 from https://www.effectivegovernance.com.au/the-year-in-review-2017/
Eyers , J.(2018). Money laundering scandal: what CBA admitted to, and why it happened. Financial Review . Retrieved September 8th , 2018 from https://www.afr.com/business/banking-and-finance/financial-services/money-laundering-scandal-what-cba-admitted-to-and-why-it-happened-20180604-h10xm3
Farrer, M.(2018) . Commonwealth Bank profit falls amid money-laundering scandal . The Guardian .Retrieved September 7th , 2018 from https://www.theguardian.com/australia-news/2018/feb/07/commonwealth-bank-profit-falls-amid-money-laundering-scandal
Felício, A., Rodrigues, R., Grove, H. & Greiner, A.(2018). The influence of corporate governance on bank risk during a financial crisis. Economic Research,31(1), 1078–1090.
Jizi, M. I., Salama, A., Dixon, R. & Stratling, R. (2014). Corporate governance and corporate social responsibility disclosure: Evidence from the US banking sector. Journal of Business Ethics, 125(4), 601-615.
Khan, A., Muttakin, M. B. & Siddiqui, J. (2013). Corporate governance and corporate social responsibility disclosures: Evidence from an emerging economy. Journal of business ethics, 114(2), 207-223.
Knaus ,C.(2018). Commonwealth Bank board ‘asleep at the wheel’ during scandals, advocates say. Retrieved September 8th , 2018 from https://www.theguardian.com/australia-news/2018/may/04/commonwealth-bank-board-asleep-at-the-wheel-during-scandals-advocates-say
Lannin, S.(2018). Lawyers recommend NAB and CBA face criminal charges over treatment of super customers. ABC News . Retrieved September 8th , 2018 from https://www.abc.net.au/news/2018-08-25/lawyers-recommend-nab,-cba-face-charges-over-super-law-breaches/10163892
Salim, R., Arjomandi, A. & Seufert, J. H. (2016). Does corporate governance affect Australian banks’ performance? Journal of International Financial Markets, Institutions and Money, 43, 113-125.
Salim, R., Arjomandi, A. & Seufert, J. H. (2016). Does corporate governance affect Australian banks’ performance?. Journal of International Financial Markets, Institutions and Money, 43, 113-125.
Tao, N. B. & Hutchinson, M. (2013). Corporate governance and risk management: The role of risk management and compensation committees. Journal of Contemporary Accounting & Economics, 9(1), 83-99.
The Conversation (2016). Good corporate governance is good for banks’ bottom line. Retrieved September 8th , 2018 from https://theconversation.com/good-corporate-governance-is-good-for-banks-bottom-line-63270
Verrender , L.(2018). Banking Royal Commission: banks’ misconduct, not Kenneth Hayne’s inquiry, behind lack of confidence in sector. ABC News . Retrieved September 8th , 2018 from https://www.abc.net.au/news/2018-08-06/banking-royal-commission-not-to-blame-for-confidence-slump/10076084
Verrender, I.(2017). How the Commonwealth Bank laid the groundwork for a royal commission. ABC News . Retrieved September 8th , 2018 from https://www.abc.net.au/news/2017-08-07/commonwealth-bank-laid-the-groundwork-for-royal-commission/8779598
Westland, T.(2017). Comm Bank scandal: what happens when too much power is placed in too few hands. The Guardian . Retrieved September 8th , 2018 from https://www.theguardian.com/commentisfree/2017/aug/09/comm-bank-scandal-what-happens-when-too-much-power-is-placed-in-too-few-hands
Wolfe, N.(2018). Comm Bank’s in damage control as new CEO Matt Comyn admits he’s ‘made mistakes’. News.Com.Au . Retrieved September 8th , 2018 from https://www.news.com.au/finance/business/banking/comm-banks-new-ceo-matt-comyn-admits-hes-made-mistakes/news-story/f1502ca76c343fa6128fd6bff86b6a8e
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