Question:
Discuss about the Corporate Governance Principles Of Bellamy’s.
The issue presented in the case study is that the company named Bellamy’s has performed very poorly in the current financial year therefore the key reasons as to why such a condition had occurred and the specific areas where the loopholes lie that have led to such a downfall has to be identified. Whether the company has adhered to the corporate governance principles laid down by the Australian Securities Exchange has also to be judged and then relevant solutions are to be provided. Therefore in this study a brief understanding of the corporate governance principles can be achieved along with its practical applications.
The major issue that led to the downfall of Bellamy’s is a range of expenses that formed a greater part of the revenue earned by the company in the financial year of 2016. Marketing and promotion costs contributed to a 4.5% of revenue. This particular expense in relation to marketing was not at all effective. An unprecedented increase in the cost of overhead also contributed to the critical condition faced by the company. In order to improve and come out of the problem the company decided to reconstruct its composition of the Board of Directors. Moreover the composition of the previously formed Board of Directors was only partially compliant with the ASX Recommendations (Bellamy’s Annual Report, pg – 22). As a result the composition of the Board of directors was changed due to the decision taken in the general meeting held in the date of 28 February 2017 (Tricker & Tricker, 2015). The composition of the Board was changed on the belief that the new composition will make the Board more efficient in nature and will result in more business opportunities. The new composition will make the Board more effective in monitoring the activities of the management along with the implementation of the organizational plans that aim at increasing the revenue of the firm.
The management of Bellamy’s after the change in the composition of the Board of Directors stated that the newly created Board of Directors complied with the 3rd edition of the ASX Governance Principles and Recommendations. The new Board came out with an optimistic approach and claimed that the Board was constructed in such a way that it would be able to guide and look out for the management of the company and help it in effective decision making that would enable the business to get a hold of the long term opportunities of the market. But there have been certain recommendations that restricted the Board from exercising its fullest potential. (Van den Berghe, 2012).
A major issue is that as mentioned in the disclosure, half of the Directors are independent Non-executive Directors (Bellamy’s Annual Report, pg – 22). This evidently does not comply with the recommendations of the ASX, as according to the recommendations the majority of the members of the Board should be independent. The belief of the board that non executive directors bring into the company new perspectives and viewpoints is not totally accurate. Though it is acceptable that the non executive directors are experienced as because they have worked in different domains of the same industry and climbed the ladder to such a high position in the hierarchy of authority, non executive directors do not really have detailed information about the happenings or tips and tricks of the organization which is very easily available to an executive director (Kathy Rao, Tilt, & Lester, 2012). This fact is proven from the information published in the disclosure of the company that the company having majority of independent non-executive directors is not a very practical idea because of the size of the Board and the current conditions in which the company operates (Bellamy’s Annual Report, pg – 23). Moreover the non executive directors having independence may prove to be more fatal for the company as the entire power is given to the members who do not belong to the company intrinsically and work due to performance remunerations (Ahmed & Henry, 2012).
In addition to this the performance evaluation of the board also may not have been done properly. It should be checked whether the requirements of the Charter are met by the Board of Directors of the company.
Now in order to lift the condition the company and to increase the efficiency of the presently changed Board of Directors Bellamy’s should strictly adhere to the Corporate Governance Principles and recommendations provided by the council. Therefore the first governance structure where the company made a mistake is that it did not give prior importance to the composition of its Board of Directors.
Now in case of Bellamy’s, both majority of the members were not independent and the most of them were non executive directors. Many experts are of the opinion that hiring directors from outside the company lead to increase in effectiveness of the work performed by the Board because it leads to a distinction between the top level decision management and control. These experts are of the opinion that these outside directors work with more efficiency because of the fact that they get performance incentives along with increased reputation due to their work (Corporate Governance and Company, pg – 375). But this is not completely true as because the outside directors may be very sincere in their work but they will definitely not have the knowledge about the inner techniques and knits and grits of the company (Recommendation 2.4, page – 17). Some experts recommend non-executive directors in the board of members as because they believe that this reduces the chance of non compliance with the GAAP (Corporate Governance and Company, pg – 375). But this is not the real case as an executive member is informed about the company in all aspects, that is, he knows the areas where fraud may occur or the transactions that are more likely to be subjected to the risk of material misstatement, hence violating the GAAP (Yarram, 2015).
Bellamy’s though tried its level best to adhere to the Corporate Governance structure as mentioned by the ASX but also failed in the area where it had to be maintained that the chairman of the Board should very importantly be independent (Recommendation 2.5, page – 18).
According to the principle of the ASX Corporate Governance Council the board of directors is a very important component of an organization. The Council is of the recommendation that there is an inverse relationship between the number of directors in a Board to the performance of the company (Tao & Hutchinson, 2013). This means that more number of members in the Board will lead to unnecessary confusion and complexities. The process of decision making will unjustifiably be delayed and this will also lead to communication issues among the members (Corporate Governance and Company. Pg – 374). Ultimately too many members will definitely spoil the effectiveness of the Board (Recommendation 2.1, page – 14). Though some experts are of the opinion that a greater number of Directors will definitely increase the effectiveness of the Board because of the vast range of specializations and skills that they have an expertise in but they tend to forget the fact that only specializing or having a particular skill set will not increase the effectiveness of the company because ultimately what matters is the accurate implementation of those skill sets in the interest of the company (Corporate Governance and Company. Pg – 374). Therefore the recommendation that smaller boards will lead to higher company performance should be followed by the company (Tao & Hutchinson, 2013).
The second governance structure that should be followed by the company is that the Board of Directors should ensure clear and transparent reporting on the part of the members of the Board. It has been mentioned previously in this study that the performance evaluation of the Board of Directors has not been done accurately. Though Bellamy’s has tried its level best to increase and improve the performance of the company and has also for this reason has decided to change the composition of its board of directors but the company should follow the governance structure in relation to diligence of the Board, that is the Board should meet at regular intervals and proper evaluation of the tasks carried out by the Board should be evaluated. Therefore the company should definitely adhere to the recommendation (Recommendation 1.6, page – 13) of the Council that states that increase in the number of board meetings will lead to better performance by the company (Chan, Watson, & Woodliff, 2014).
Thirdly the governance structure that should very importantly be followed by the company is the governance structure related to the board independence. Here comes two most important theories that run parallel to each other and has led to a lot of arguments as to which theory should be followed. These two theories namely are agency theory and stewardship theory.
Agency theory refers to the theory that mentions that the effectiveness of the Board of Directors is directly related to the number of independent members in the Board. In simpler terms the perspective of the agency theory is that the control executed or the power exerted by the Board members are most effective when they are not controlled by the management of the company (Biesenthal & Wilden, 2014).
Stewardship theory on the other hand mentions that there should be more executive directors in comparison to non-executive directors. This is because the executive directors who have worked inside the organization since long act as stewards and can guide the company to safe shores as because they are familiar with the knits and grits of the company.
Therefore the structure recommended by the Council as arises from the above discussion is that the Board of Directors should be such that not contain a huge number of members, the number should be optimum and majority of these members should be independent of the management of the organization (Recommendation 2.3, page – 16). Secondly the members who are independent should on priority be the executive members of the organization and not non-executive members (Nana Yaw Simpson, 2014).
Lastly as recommended by the ASX the board of directors should contain majorly of independent directors (Corporate Governance and Company, pg – 375). Another recommendation that should be adhered to by the company is that the company should incorporate a separation in the roles of the chair person of the Board of Directors and CEO. When such a situation arises then the matter should be handled with utter importance, this is because if the role of the CEO becomes heavy on the chairman of the Board then the entire Board would be dominated by the management (Recommendation 2.5, page – 18). On the other hand if the role of the chairman of the Board becomes heavy on the CEO then the needed control on management would again suffer (Yarram & Dollery, 2015).
Therefore all the above mentioned governance structures and recommendations not only remove the governance policy issues but also filter and increase the accuracy of the management of the financial statements of the company. But most importantly Bellamy’s should follow one of the above mentioned governance structures and recommendations in order to increase the effectiveness of the reconstructed Board of Directors. The particular recommendation should be that the Board of Directors of the company should have more independent directors (Recommendation 2.4, page 17). This is because having more independent directors would definitely render to the fact that more and more decisions are taken or more and more action plans are implemented out of the scope of the management. In case of freedom from the control of the management, the Board would definitely be able to get the inputs from the management but there would be no mandatory rule that it would have to adhere by the decisions of the management. Therefore it will definitely be more effective in resolving the issues with increased effectiveness, thus proving the decision of change of composition of the Board of Directors to be correct. In the present situation the management may be overpowering on the Board but if the recommendation is strictly followed then Bellamy’s will surely improve its performance.
The only limitation that apparently may hamper the working of Bellamy’s is the control of management over the Board of Directors. The management if imposes much control over the Board of Directors then very naturally the performance of the Board becomes poor as because the management will continue putting its demands and wants on the Board thus hampering its own plan of work.
References
Ahmed, Kamran, & Henry, Darren. (2012). Accounting conservatism and voluntary corporate governance mechanisms by Australian firms. Accounting & Finance, 52(3), 631-662.
Biesenthal, Christopher, & Wilden, Ralf. (2014). Multi-level project governance: Trends and opportunities. International Journal of Project Management, 32(8), 1291-1308.
Chan, MuiChing Carina, Watson, John, & Woodliff, David. (2014). Corporate governance quality and CSR disclosures. Journal of Business Ethics, 125(1), 59-73.
Kathy Rao, Kathyayini, Tilt, Carol A, & Lester, Laurence H. (2012). Corporate governance and environmental reporting: an Australian study. Corporate Governance: The international journal of business in society, 12(2), 143-163.
Nana Yaw Simpson, Samuel. (2014). Boards and governance of state-owned enterprises. Corporate Governance, 14(2), 238-251.
Tao, Ngoc Bich, & Hutchinson, Marion. (2013). Corporate governance and risk management: The role of risk management and compensation committees. Journal of Contemporary Accounting & Economics, 9(1), 83-99.
Tricker, RI Bob, & Tricker, Robert Ian. (2015). Corporate governance: Principles, policies, and practices: Oxford University Press, USA.
Van den Berghe, Lutgart. (2012). International standardisation of good corporate governance: Best practices for the board of directors: Springer Science & Business Media.
Yarram, Subba Reddy. (2015). Corporate governance ratings and the dividend payout decisions of Australian corporate firms. International Journal of Managerial Finance, 11(2), 162-178.
Yarram, Subba Reddy, & Dollery, Brian. (2015). Corporate governance and financial policies: Influence of board characteristics on the dividend policy of Australian firms. Managerial Finance, 41(3), 267-285.
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