Importance Of Corporate Governance & Risk Management In Business Organizations

Why is Compliance of Corporate Rules and Regulations Important?

Discuss about the Dexus Units FP’s Compliance.

Every business in today’s world face insurmountable amount of risks on a daily basis. How successful any business organisation becomes, is only depended on the very major fact, that how well, they have been able to mitigate these very risks. As it has been seen, many organisations face failure because of their inability to assess these risks in a time bound manner. Effective management of risks provides a wide range of comfort to all the stakeholders of the company. It also helps in confirming the compliance with the corporate governance requirements. No matter how big or small the organisation is, risk management is relevant to each and every business organisation. Its effectiveness ensure an all round efficacy throughout the organisation. Similarly the importance of corporate rules and regulations cannot be ignored at all. A set of rules and regulations is necessary to manage the business entity, in order to prevent its diversion from its prescribed path. With these two important things, this report aims to delve into Dexus Units FP’s compliance of corporate principles of governance and its risk administration procedures.

Why is it necessary?

Why is compliance of corporate rules and regulations so necessary in today’s world. There are numerous reasons for this, a handful of them have been diagrammatically shown below:

Each of these reasons form the crux the advantages which is provided by the compliance of these corporate rules and regulations. These have been explained below:

• Successful management: By complying with the corporate rules and regulations advocated by bodies like ASX, companies could find a balance in the dual objectives of maximisation of profits and economic interests and welfare of society. By striking a balance between the two, successful management is ensured.
• Stability in stock prices: Stock price’s play a significant role in the performance of a company. This stability of stock prices is only possible through proper corporate governance. Investors want to invest in those companies which have high standards of governance, better accountability and higher profits, which is only possible through better corporate governance.
• Director’s training: Directors are the main architects of any business organisation. If they underperform, are incompetent, selfish or careless, the company would suffer, as a result of which, their importance cannot be ignored (Al-Malkawi et al., 2014). Therefore proper governance, monitoring and training of directors is necessary.
• Involvement of stakeholders: There is genuine disconnect between the stakeholder and the company board and management. Sometimes the company; looks after their own interests and ignore the stakeholders, but they deserve more attention and respect from the company board and management (Garcia, Aguilera and Ariño, 2013). This could only be done with the compliance of corporate governance principles.
• Better shareholder communication: An effective communication with the shareholders is very necessary for any successful business organisation. This communication serves the basis for a sound transparency and is only possible through company governance.
• Motivated work force: A talented, skilled and motivated work force is the main driving machine behind each and every organisation’s success. The ability to retain this human capital is possible through proper governance of corporate principles.
• Checks and balances: The importance of checks and balances is very important to ensure transparency towards all the stakeholders. The directors are in a strong position to exploit the company’s resources for their self interests (Honoré, 2015). The current financial crisis is the result of the high risks and irresponsible handling of company’s resources by senior management and board members.
• Goodwill and market reputation: Corporate governance helps in improving the company’s reputation and overall goodwill. It helps in developing good customer relationships and in its absence; the fraudulent activities might affect the company’s repute.
• Absence of exploitation: In the absence of corporate governance, the directors of the company and the rest of the board or the senior management might be able to deviate from the goals of the company and start exploiting the employees of the company (Garcia, Aguilera and Ariño, 2013). This could have an adverse impact of the company.

• Board’s role and objectives: The robust kind of outline adopted by Dexus ensures a thorough level of accountability and authority by specifically mentioning the work and functioning of each and every director and member of the board. The board deals with the determination of overall business strategies relating to real estate, approve business plans, implements market plans, and approve disclosure of financial statements. The Chair’s role includes leading the board and maintains a peaceful relation between the management and the board. National police check, directorship checks, public record checks and bankruptcy record checks are done before appointment of directors.
• Proper structuring of the board: The following committees assist the board in implementing its duties and functions; audit committee, nomination committee, risk committee. The membership of these boards is regularly revised in order to attain maximum efficacy in discharge of duties. These committees are again supported by various management committees in their daily discharge of duties.
• Acting in accordance to ethics: Dexus, being one of the most recognised real estate companies in the world, follows the rules and regulations and acts ethically while discharging its duties. Each of them are as follows:

1. Dexus considers it important that all of its members must meet and adhere to the highest ethical and professional standards and has also established a ‘code of conduct’ for this purpose.
2. In case of trading in Dexus securities, the directors and the employees must obtain the due permission of the Chair before engaging in any investing activities involving the shares of Dexus. If the Chair wishes to trade in any security, he or she must obtain approval from a non-executive director.
3. Dexus conflict of interest policy ensures that the conflicts which might arise during allocation of property transactions, negotiation of leases or when the self-goals of an employee or director is involved is resolved amicably.

• Protection of authentication of corporate reporting: Dexus aims to present each of its financial statements in a fair manner and with genuine authenticity. Dexus has built a robust structure and review system and it looks into the following matters; financial statements of each of entities, the independence and honesty of each auditor, treasury and other tax related matters and matters related to the semi-annual management representation to the committees.
• Timely disclosure of material information: Dexus ensures complete and comprehensive disclosure of all its reports and material statements by conducting ongoing education and training of directors regarding the ASX rules and regulations, by initiating efficient reporting channels by passing through the CEO or the General Counsel. An efficient system of monitoring is also in place which would help in complying with the disclosure principle.
• Ensuring respect for shareholder’s rights: The board routinely conducts Annual General Meetings for better communication with the shareholders, by providing a authentic financial information and by increasing the opportunities for better communication. Dexus also ensures better participation from the shareholders end by informing them about the happenings of the company from time to time.
• Risk administration: The Risk Committee looks after risk management in Dexus. The Committee carefully looks into the company’s various risk management procedures, as well as job, proper health and safety, environment protection, sustainability procedures, acquiescence with internal audit rules (ASX, 2018). It also looks into the effectiveness of the company’s Risk administration Framework, Compliance Management Framework and Risk Appetite Statement.
• Better and just remuneration: The Company follows a strict pay to performance criterion for the payment of wages. The company looks into the director as well as other board members in order for a just remuneration. The board has separate remuneration committee which oversees the remuneration framework of the company.

Risk administration and assessment:

The Board Risk Committee has the job of looking into the risk management within Dexus. This Committee fulfil its responsibilities by looking to the Group’s enterprise risk management practices, as well as work, health & safety, environmental management, sustainability initiatives, compliance and various internal audit practices. It also looks into the effectiveness of the Dexus’s Risk Management Framework, Compliance Management Framework and also checks the Risk Appetite Statement.

All members of the Board Risk Committee are independent including the Chair. The Board Risk Committee meets at least four times during the Reporting Period and each member attended all meetings. This is mandatory in order to discuss and take important risk related decisions (Davenport, 2013).

While most kind of risks are identified, managed and monitored internally, Dexus has appointed independent experts for monitoring of work, health & safety, environmental risks and other risks where expert knowledge is required in order to ensure  the fact that Dexus has in place best practice processes and procedures in order to identify and avert any kind of risks.

Comprehensive administration of risk is an imperative part of Dexus’s functioning, and the company has a separate risk function reporting to the General Counsel on a daily basis, as well as a Group Risk Committee comprise of senior executives that supports the Board Risk Committee (Dexus, 2017).

Risk Administration and Assessment

The Risk as well as the Compliance team aims to endorse an effective risk and acquiescence culture by providing assistance, drafting and updating relevant risk and compliance policies and procedures, conducting intense and rigorous training, monitoring and reporting by adhering to the main policies and procedures.

The Internal Audit Program of Dexus has a three year cycle period, the results of which are reported quarterly to the Group Risk Committee as well as Board Risk Committee.

Common size income statement for the year ended 31^st March, 2017 is as follows:

Analysis:

The company has faced a lot of flak due to its underperformance in terms of its financial results. The real estate giant has seen a dip in its revenue from ordinary activities by 14 million dollars. Consequently Dexus has also faced a drop in the annual total income in the year 2017 by 30 million dollars from the year 2016 (Dexus, 2017). Development costs have continued to rise, signifying an increase in the scale of real estate and property activities. On a positive front, the company has seen a drop in the property expense by 0.2%. As a result of which, the total expense of the company has dropped by 32 million dollars in the year 2017, which is a welcoming addition. In addition to this, the profits have increased too.

Common size balance sheet for the year ended 31^st March, 2017 is as follows::

Analysis:

Dexus’s balance sheet has been healthy, when compared with the income statement of the company. There have been a steady increase in cash; receivables have seen a dip by a minor amount. Noncurrent assets like plant and machinery and investment have seen a significant increase in the new financial year of 2017. The increase has been a sustentative one by 700 million dollars. On a welcoming note, the real estate company has seen a major decrease in the liabilities of the company from the year 2016 by 814 million dollars (Dexus, 2017). Thus, the balance sheet has shown a better financial picture of the real estate company. This is a better financial signal, but the auditor must be on his guard, while scrutinising the balance sheet of these companies, as fallacies as well as fraudulent window dressing might creep in.

Analysis:

The current ratio of the company is at 0.70, which shows it has decreased from 2016, which proves the fact that the real estate company has faced substantial amount of problem in honouring its short term obligation. The ideal current ratio for any organisation must be within 1 to 1.2, and this ratio is not at all in that category, although it once was in the year 2016. The auditor must use his knowledge to investigate this drop in the current ratio of the company and report it to the management.  Quick ratio is an appropriate measure of any company’s short term liquidity. It tells any user of financial statement, that their company has enough short term assets which could be converted into liquid cash in a very short period of time. Its increase is better for the company. In case of Dexus, it has dropped by .026. This dip is would eventually become a serious issue for the company if not addressed immediately. Dexus has also performed in terms of its debt to equity ratio, by decrease its overall dependence on debt as its debt to equity ratio has decreased by .17, which is a good thing for the real estate company.

Conclusion:

Whether it is real estate, automobile or food processing industry, risk assessment and applications of corporate governance principles are imperative for the company’s all round success and growth. This report has seen through a series of analysis and implementation procedures of corporate governance by ASX and risk administration through analysis of the financial statements of the company. The report has been successful in emphasising the importance of corporate principles of governance as well as it has been adeptly able to identify the major risk procedures in place in Dexus.

References:

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