Corporate Governance Practices At Caltex Australia Limited

Overview of Caltex Australia Limited

The present report is prepared to critically evaluate the corporate governance practices at Caltex Australia Limited which is a leading organisation in the energy industry of Australia. To identify and analyse Caltex’s corporate governance practices, the annual report for the year 2017 is examined. Along with that the corporate governance statement of Caltex has been thoroughly examined. As a part of this report, the importance of adoption of principles of corporate governance for the business is determined. A good corporate governance framework can make the existence of business easy because it allows it to comply with various theories such as stakeholder’s theory, shareholder’s theory and the legitimacy theory.

Caltex Australia Limited is an Australian stock exchange listed company which had started its operations in 1990. The company is headquartered in Sydney, Australia. Caltex is one among the leading corporations dealing in petroleum products in Australia. It supplies fuel used in the transportation vehicles and along with this it also deals in the retailing business of convenience stores.  It generates maximum portion of its revenues through the refinement and manufacturing of fuel products. The basic activities that Caltex undertakes as a part of its business include purchasing, refinement, distribution and marketing of the petroleum products majorly in the three countries: Australia, Singapore and News Zealand. Caltex Limited is operating through two of its major segments: Supply & Marketing segment and the Lytton segment (Bloomberg, 2018).  The segment of supply and marketing undertakes the activities related to selling fuels and lubricants, speciality products as well as the provision of goods at the convenience stores through the wide network using different distribution channels such as pipelines, terminals, transportation fleets and depots. The Lytton segment, on the other hand, undertakes the activities related to refinement of crude oil into various products like petrol, diesel, jet fuels and several speciality products like liquefied petroleum gas. The key products of the company are: Techron Fuels and Star Mart. Also, Caltex is engaged in the provision of various services such as online account management which allows the customers to order the company’s products and to obtain the price related information. Moreover, Caltex also provides the services such as engineering consultancy in the areas of hydrocarbon management and grease oil (IBIS World, 2018).

Caltex Limited operates within the energy sector of the Australian economy and is ranked at 11^th position out of 2000 corporations in Australia. In 2017, Caltex has earned total revenue of $21,421,233,000 from sales and other sources (IBIS World, 2018). In 2017, Caltex had an employee base of around 4700 persons working with the company and its subsidiaries. The company has a market share of nearly 30% in the products like petrol, diesel as well as jet fuels (Australian Government, 2009). It also account for approximately 35% of the total oil refining capacity of Australian economy. Australia holds the ownership of seven oil refineries and out of this two major oil refineries are owned and operated by Caltex. These refineries are: Kurnell (Sydney) & Lytton (Brisbane) with each having the capacity to produce 244000 barrels of crude oil every day. The energy industry of Australia aims at supplying the fuel products of high quality safely and reliably to the customers. Transportation in Australia is mainly dependent on the petrol-based fuel and hence the energy sector of the country is growing rapidly. However, since the business of manufacturing and refinement of petroleum products requires large investment hence risk of entry of new participants is low in this industry. Thus, there are higher chances of growth of the companies that already exists in this industry (Australian Government, 2009).

Corporate Governance and Caltex

Corporate governance is a framework consisting of various rules and policies though which a company is directed and controlled in such a way that enables it to protect the interest of its stakeholders. It is the system which could balance out the interests of the company with the interests of its stakeholders such as employees, creditors, investors, shareholders, government, community and so on (Psaros, 2009).

The corporate governance system of Caltex Limited is set by its Board. The board defines the corporate governance structure in accordance with the business operations of the company and in the best interests of the stakeholders of Caltex. The company is committed to adopt the best of the corporate governance practices to add value to the entire Caltex group (Caltex, 2017). The governance policies of the company are regularly and diligently reviewed by the company’s Board so as to ensure that all the legal and regulatory requirements applicable on the company are duly complied with and also to fulfil the expectations of its shareholders and other stakeholders so that needs of the business could be addressed in the best manner.

In order to meet highest standards in the corporate governance field, Caltex Ltd annually issues a corporate governance statement which contains the detailed information regarding the practices of corporate governance. The said statement is issued on 21^st March, 2018 and it sets out all the details of corporate governance practices undertaken by the company during the financial year 2017 (Corporate Governance Statement, 2017).

The board of Caltex Limited comprises of seven directors in total and out of those 7 directors some are independent, non-executive and MD’s and CEOs of the company. These directors are:

• Steven Gregg (Chairman) Independent and Non-Executive Director
• Julian Segal, Managing Director & CEO
• Trevor Bourne Independent and Non-Executive Director
• Melinda Conrad Independent and Non-Executive Director
• Bruce Morgan Independent and Non-Executive Director
• Barbara Ward AM Independent and Non-Executive Director
• Penny Winn Independent and Non-Executive Director

The chairman of the Board of Caltex Limited is an independent director. There are 6 independent directors and a dependent director in the company (Annual Report, 2017).

From the annual report of Caltex Limited for the year 2017, it has been found the chairman of the company has reported that 2017 was a successful year for the company. It is also reported that the company continues to keep into consideration the past track record of company’s financial performance while undertaking crucial decision making processes. It also takes into account the changing business conditions, increasing demand of the products, new retail formats and the increasing operating efficiencies to formulate the strategic and operational plans for the sustainable growth of the business. It is also reported by the chairman that company has announced a drastic change to its organisational structure during 2017 as a result of which a cost saving of around $60 million has been achieved by the company. The matter of fatality loss of one of the employee of Caltex is also reported by the chairman. The CEO of Caltex has reviewed and reported on the financial performance of the company. The report shows that the company has achieved overall profit (after tax) of $ 619 million in 2017 and there has been an increase in the profits of the company in 2017 as compared to 2016 (Annual Report, 2017). It has also been reported by the directors that Caltex has a zero tolerance capacity for the illegal and unethical business practices. The audit program at Caltex is reported as an on-going event and the board is making required efforts for the underpayments of the employees of the company.

The Board of Directors of Caltex

The non-executive directors of the company are remunerated in the following manner:

Their fees are reviewed by Caltex’s human resource committee after taking into consideration the recommendations made by the consultant from the field of independent remuneration. Any changes in the remuneration fees after finalisation made by HRC are subject to the approval of company’s board.  Non-executive director’s remuneration is fixed in nature and is subjected to a pool of $2250000 (Annual Report, 2017). The non-executive directors are paid statutory superannuation fees however this fee is not paid to overseas directors.

The senior executive directors are paid the remuneration fees under the contract of employment and there were no changes made in the remuneration structure of managing directors of the company in 2017.

The function of the board of directors of Caltex Limited must be following:

• All the directors must attend each and every meeting of Board.
• Directors must voluntarily available to work with the committees of board at-least in the areas where they can use their practical knowledge and experiences.
• Directors of the company must make active participation in developing the policies and procedures related to the operation plans and budgets.
• The directors must be entrusted with the responsibility of the operating model for the company’s convenience store business.
• The directors must make efforts to avoid their conflicts between with the other members of the chamber of directors (Schwartz-Ziv & Weisbach, 2013).

Each member of the board is the official representative to their membership and is an unofficial representative of general public. He or she must be readily available to defend the company against any sort of criticism. In the present case of Caltex, where the investigation has been raised on the company where it was revealed that company is underpaying and exploiting its workers, the board must take appropriate action to allow the audit of the fraudulent practices and to respond properly to the investigation queries so as to maintain the trust and confidence of the stakeholders in the company.

Also after reviewing the corporate governance statement and annual report of Caltex, the fatality case on part of Caltex Ltd had been identified which caused various regulatory actions against the company and the company had to face heavy employee turnover. Therefore, the board of the company must have proper processes in place to nullify the employee fatality rate (Corporate Governance Statement, 2017).

Meetings of the board: The meetings of the board at Caltex must be conducted at the regular intervals as prescribed under corporations act, 2001. Each board meeting must be outlined by a way of agenda. The agenda of the board must include the key details related to the proposed board meeting such as the purpose of meetings, the business that are to be transacted. The meetings of the board must be duly convened.

There must be a committee for the determination of reasonable amount of wages and salaries payments to the workers of the company which must be consistently reviewed by the board of directors to avoid the occurrence of wage frauds (Ferguson & Christodoulou, 2016). The overall board of the company must direct and monitor the wage payment system in the integrated manner for all the operational sites owned and run by the company.

Meetings of the Board

There must be proper committees for the annual review and to audit the various compliance processes of the company so as to ensure that all the applicable laws and franchisees contracts are duly complied (Fleming, 2003).

The board of Caltex must have due processes in place to conduct the independent forensic investigation to determine whether any of its franchisees are violating the workplace laws as applicable to the Australian entities.

Further, as a part of good corporate governance practices the board must be comprised of equal number of women representatives as that of male representatives. Moreover, the Board of the company must provide appropriate and adequate developmental and promotional opportunities (Caltex, 2017).

The board of the company must also strengthen its environmental risk management strategy to promote the sustainable development practise. As the business of Caltex Limited requires the consumption of natural resources, the board of the company must ensure that it fulfil its responsibility towards sustainable reporting in the most effective manner. The board must ensure that only those business practices must be undertaken that are not harming the environment and its constituents (Ferrell, Fraedrich & Ferrell, 2015).

Further, a corporate social responsibility must be there in the board structure of Caltex Limited in order to ensure that the company takes necessary initiatives towards meeting its responsibilities towards the society in which it is operating its business. The CSR committee must be comprised of adequate number of independent directors and chairman of such meeting must be an independent director. The members of the committee must have requisite knowledge and expertise in the areas of environmental studies, economics, sustainable practices and human right protection (Du Plessis, Hargovan & Harris, 2018).

There must be the proper systems put in place in the areas of debt financing made by the company. The board of directors must have certain members who are authorised with the powers of approval of loans transactions undertaken by the company. In 2017, the gearing ratio of the company has increased from 13.9% in 2016 to 20.8% in 2017 (Annual Report, 2017). It reflects the increased financial risk on the company due to increase in the debt proportions of the company in its capital structure. Such loans must be approved by the proper board members.

Further, there must be appropriate bodies to consistently monitor the performance of the company against the Health, Safety, Environmental and Community standards for the protection of stakeholder’s interest.

Committees for wages and compliance

Legitimacy theory: The said theory works on the belief that there exists a social contract between the entity and the society within which it operates its business. Thus, those entities strives to legitimise their respective corporate actions by participating in the CSR activities and by adopting CSR reporting practices so as to seek approval from the society for their business practices for their continuous and smooth survival (Omran & Ramdhony, 2015). In the present case of Caltex Ltd., the company has adopted ASX principles and recommendation in relation to corporate governance practices and by way of this it has achieved a satisfactory degree of transparency in maintaining the sound relationship with all its stakeholders (ASX., 2014). To protect its shareholder’s interests company has effectively communicated its financial results by way of annual reporting. It has adequately disclosed the dividend payments made by it in 2017 and also in the financial reports it has incorporated the financial results of 2016 so as to allow the shareholders to compare the financial performance of the business and to analyse the overall return potential (Caltex Australia, 2017). Through the compliance with the requirements of financial reporting, Caltex has duly complied with the shareholder’s theory by proving them timely and balanced financial information so that they can make sound decisions. Moreover, the financial results of Caltex as provided in its annual report for the financial year 2017 are approved by the independent external parties called auditors of the company. Further, by way of issuance of corporate governance structure, Caltex has communicated in the most transparent manner to all the bodies that regulates it about the compliance with all the relevant laws and provisions applicable to the company. The issuance of corporate governance statement and sustainable reporting are the kind of voluntary disclosures which enhances the credibility of company’s ethical, social, environmental and other practices (Farrar, 2008). The communication of company’s performance toward environmental practices clearly reflects the level of regard that Caltex gives to the society in return of using society’s resources. Further, the code of conduct of Caltex Ltd. is applicable on the all the employees and other parties which are related to the company in any capacity such as suppliers, customers. The company has formulated its code of conduct to formally communicate to its associated parties about the desired ethical behaviour at Caltex so as to maintain the transparency in their business practices. The disclosure in relation to the employment initiatives shows tells the way Caltex protects the interests of its employees and avoids the ill-practices of exploitation and harassment. These disclosures suggests that Caltex is committed towards its workforce in the most loyal and ethical manner (Mohamed, Olfa, & Faouzi, 2014).

Conclusion

Conclusion:

After examining the annual report of Caltex Limited for the year 2017 along with the corporate governance statement which was issued recently in the month of March, it was observed that company is duly complying with the relevant principles of ASX in relation to good corporate governance and is also operating in the most ethical manner by maintaining a high degree of transparency while communicating with its stakeholders.

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