The Debate over ASX Corporate Governance

Outlining and summarising the key arguments made in the given article

The commonwealth bank chief executive named David Murray agreed to become AMP chairman. New corporate rules have overweighted to avoid ASX corporate principles. Murray announced in the Australian Financial Review that he would not follow ASX corporate governance that was currently updated with various proposals. This proposal includes the concept of gaining social licence to operate business. He believes that these corporate principles create distraction so that, they can focus on bigger strategic issues. The concept of social licencing was not given preference by renowned Australian Institute of Company directors (Bhatt, and Bhatt, 2017). They argue that the existence of laws and ethics are enough and imposing a new concept of social licence may create unnecessary obstacles and risk (Bhimani, 2008). Whereas, the law council of Australia, Australian Financial Market Associations, Chartered Accountants, and Individual director and various shareholders are asking for change (Kathleen, and Wilburn, 2011).

The principle of social licence is issued by CGC (corporate Governance Council) especially for the business and investors groups. The concept of “Social licence” has been made legally mandatory for top listed companies to respond to social licence from investors. On the other side former chairman ASX Maurice Newman questions the concept of social licence (Hanrahan, 2016). They argued that rather than distracting due to new concept of social licencing, an organisation should focus on reducing the cost and satisfying the customers. AICD (Australian Institute of Company Directors) support changes for climate risk and gender targets. If a corporation engages in gas exploration activities near rural areas, it can suffer from legal issues. However, if the company has regulatory approvals and licencing from the authority.

AICD (Australian institute of company directors) says that in this case, there are opposing views on whether the investment would start to become socially obliged behaviour (Bury and Leblanc, 2007). According to Armour, the shareholders should address the issues that are emerging from Hayne royal commission and APRA (Australian Prudential Regulation Authority) report on Commonwealth Bank. The case is-

• In 2013, the audit committee of CBA (Commonwealth Bank of Australia) have noticed that they have high potential risk for business. The bank has repeated issues with the anti-money laundering and terrorism-countering financing rules. In 2015, it was noticed that the issue is not yet resolved die to lack of effective ownership of group procedures (Braddon, and Hooper, 2018).

Discuss the corporate governance issues and their importance

Awareness regarding corporate governance is both a source of protecting and creating wealth for the shareholders. However, for the last decades, the situation of corporate collapsing due to failure of several high profile governance has been drastically increasing. Constant increasing cases related to fraud, incompetence to accomplish judicial rules and regulations enforced strict corporate governance. The royal commission identifies failure of governance activities in form of mismanagement, breach of director obligation, and various accounting issues (Taxmann, 2018). The collapse of bank of credit and commerce international led British accounting bodies and London exchange to establish various corporate governance committee to implement updated governance rules. There are various cases hampering the society`s and shareholders interest- 

• In 2004, National Australia Bank disclosed that it had been suffering losses due to unauthorised trading in the foreign currency nearly about 360 million. Continuous issues related to failure of bank operations led to more scandals such as 1.4 billion loss for Homeside loan. Due to lack of efficient auditor`s report, the risk associated with US securities and exchange commission reinforces the corporate governance to prioritise and monitor failure of management and BODs (Board of Directors) performance in handling the bank.
• Since 2012, the cases of failure of corporate governance have been continuing. Financial disasters have been occurring in different sectors named automotive, medical products, and banking industries. As per the 2016, global business ethics survey reveals that more than 59% of the employees don not report of corporate misconduct (Rossouw, 2009). More than one-third employees, who actually report for the misconduct suffers from revenge strategies from the supervisors.  
• The Valukas report for General motors provide that not every corporate governance issues are caused due to directors, sometimes directors do not know the ignorance of rules and regulations by their employees. In the case of General Motors, directors were not informed of problem caused by Chevrolet Cobalt ignition switch. Until 2014, internal managers have the knowledge of defects and after 2015, GM (General Motors) was held responsible for 124 deaths and 274 injuries due to faulty ignition from vehicles.
• In the case of Maxwell Communication Corporation and mirror, group newspaper, due to mysterious death of chairman of the company. Maxwell`s death triggered a flood of bank`s massive loans. The scandal of $530 million in form of pension fund of 16000 employees were discovered. Maxwell paid pension fund to the employees of Mirror group, which it borrowed from bank. The properties of Maxwell were sold to various media companies. The Maxwell`s case of insolvency is one of the famous case in the modern times. The reasons for the debacle were large acquisition through heavy debts, financial difficulties due to inefficient diversion of funds, uncertainties followed by Maxwell`s death (Othman, and Rahman, 2011).  

The Principle of Social Licence and Its Advocates

Important factors that influences corporate governance issues

The ownership structure- The company`s ownership is distributed among various individual and institutional shareholders. However, the ownership structure unbalances when the power of holding concentrates in few large shareholder`s hands.

The company board`s structure- The company`s structure has considerable impact on the management of the company. The board is responsible for establishing corporate goals and objectives, making or formulating board policies, and selecting top-level managers to achieve and carry out policies and objectives.

The financial structure- Corporate governance implies proper proportion of debt and equity. Large acquisition through heavy debts has negative implication on society and shareholders interest.

Mechanisms of corporate governance

Formulation of Corporate governance rules have been increasing attention to relationships especially in relation to financial claimants such as equity holders and debt holders. Financial economics has become strong sub-field in corporate governance. Adoption of Australian best practises is associated with financial performance calculated in form/ of return on assets or investment. The evolution of corporate governance has been embraced due to various corporate practises in Australia. Especially, principles-based approaches act as a crucial tool to enhance and improve broad and management accountability and transparency to stakeholders. The framework of corporate governance in Australia has extended beyond the mere compliance with strict regulatory requirement (Pigé, 2017). The three key element includes-

• Hard laws- This law creates legal binding in relation to legislative requirements such as Corporations Act, 2001. This act legislates specific duties on board of directors and officers of an organisation. Specific duties involve the obligation of directors is to exercise power with hard work and care who is a reasonable person. Another duty involves the obligation to exercise power in good faith for the best interest of the company. Decisions formulated by directors for a good purpose require the interest of its creditors.
• Soft law includes listing procedures and rules related to ASX (Australian Securities Exchange limited) which has effect in form of contracts association with the law. Some Corporate governance principles are non-binding guidelines.
• These principle guidelines include ASX principles and recommendations. All the laws, rules, and guidelines has major impact on investors’ expectations. The framework consists of system adopted by Australian companies, policies and processes related to internal company, and timely disclosure of reports to shareholders. Listed companies are subject to follow common rules, law, and statutory corporate obligations and corporate governance principles.

                                                   

The issues in corporate governance generally relate to issues such as value based corporate culture, compliance with laws, relation between corporate governance and human resource management, innovation, necessity of judicial reforms, situations related to disclosure of financial accounts and creating transparency and accountability, holistic view (Albu and Girbina, 2015). ASX is a primary body who charges administering listing rules. The Australian court enforces the accomplishment of listing rules by contracting between listed corporation and ASX. Board of directors and practises of management of Australian corporations have remained with the executives. The board members supervise advice guidance and generally involve only in meetings. To reduce the risk associated with rigid board of directors, the listing rules made a rule that directors need not to attend office. However, this rule does not apply to managing director.

Corporate governance theories that are relevant to the issue in the article are discussed and outlined how they work and think in the given situation-

Mechanisms of Corporate Governance

The Social licence to operate has been increasingly becoming popular especially in extractive industries. A social licence to operate is defined as level of acceptance by local communities and various stakeholders of mining industries and its operations. It is a notion of corporate social responsibility (CSR) and essential part to reduce the risks related to public criticism and company`s reputation (Ayuso et al., 2014). Social licencing was initiated to neutralise the effect of landscape and livelihood strategies that has negative effect on nature and society. The main aim of corporate social responsibility is to enhance the element of corporate social responsibility such as transparency and accountability to its stakeholders. SLO is considered to be responsible towards society and community`s involvement in the operations (Prno, and Slocombe, 2012).

Various theories relevant to the issue of social licencing are-

Legitimacy theory

Legitimacy theory refers to the common perception that the activities of an organisation are proper, desirable, and socially constructed norms. This theory is relevant to the above issue mentioned as companies are opposing the implementation of social licence. The legitimacy theory is somewhere similar to social contract theory; both the theories state that there is a social contractual relation between society and the organisation. An organisation must receive legal acceptance by the corporate governance rules to operate their business activity without harming the environment (Cheng, Ioannou, and Serafeim, 2014). Organisations argue that empowering the issuing of social licence distracts the organisation to focus in one`s own operations. The Australian council believes that ethics and laws are not enough to control the corporate governance failures (Bonn and Fisher, 2005).

Traditionally, the organisations want to focus on profit maximisation. However, according to this theory, profit is not seen as complete measure of organisational legitimacy. This theory considers the rights of the public as a priority. Many empirical researches use this theory as a tool to study environmental reporting for community expectations.  

Social Contract theory

The study of this approach focuses on board composition and effect of power and wealth in the society. Problems related to lack of information for directors and concentrating the directorship in the hands of privileged people is recognised as a major challenge to social progress and equity. The social contract theory explains holistic view of various government issues. As the business environment is rapidly growing, the organisation suffer from challenges and environment dynamics. Giving rise to immoral corporate conduct, amoral theories such as agency theory, political theory is insufficient and inadequate to explain and elaborate the use of corporate governance.  

Theoretical Perspectives on Social Licence

Stewardship theory 

Stewardship theory is related to the roots of psychology and sociology. A steward theory focuses on protecting and maximising shareholders wealth through strong financial returns. By doing so, steward`s utility roles are maximised. As far as relevancy is concerned with the given article, this theory focuses on role of top management integrating the personal goals with the organisational goals (Zhang et al., 2018).

According to the given article, the top management should attempt to adopt social license and ASX principles, which they are opposing and argues that it becomes difficult to regulate their business operation when ASX principles and corporate governance rules are placed with business. As the top management is held responsible for any outcome from their organisation. It is not necessary that the directors and senior managers have full information of the activities. They also represent the good reputation and performance of the organisation in front of people. Adopting social license for any business operation would create a positive image in the eyes of the public regarding and declaring that the organisation follows the compliance requirement up to the mark and very well. It also suggests the unifying role of CEO and reduce the agency costs because they want to establish greater role as steward in the organisation (Bernstein, Buse, and Bilimoria, 2016).  

Stakeholder Theory

Stakeholder theory is defined as individual or group who affects the achievements, goals, and missions of the organisation. Stakeholders theory suggest that manager have an established a network relationship between manager, supplier, business partner, and employee. This theory argues that relation between these stakeholders is far more important as compared to the only relation between internal organisational stakeholders such as owner, employee, and manager. Moreover, given article is concerned about establishing a protective rules and procedures for the stakeholders. Especially for the stakeholders, so that the interest of the stakeholders can be protected against the harmful manufacturing of products that would have adverse effect either on environment or people`s health.  

Apart from the fundamental theories of corporate governance such as stakeholder theory, stewardship theory, social contract theory, and legitimate theory. There are various ethical theories that are very closely related to corporate governance. These ethical theories include virtue ethics theory, discourse ethics theory, and business ethics theory (David, Stewart, and Redmayne, 2017).

The reason behind addressing ethical theories as a part of theories of corporate governance is due to power and influence of business in the society. Business shutdown and collapse has greater impact on society and fire or natural disaster damages or negative impact on business activities. The emergence of these corporate theories address the cause and effect relationship of various variables. Inclusive corporate governance includes a process that gives an oriented way of controlling business in regards to financial performance. Corporate governance embedded in the organisational framework underlines the value guiding organisations into proper behaviour. The corporate governance is interpreted as a system of integrating cultural values and economic drive to achieve wealth maximisation. The main motive of including corporate governance in the system of organisation is to attain a sustainable growth of business.

The holistic view of inclusive corporate governance bridges the gap of compliance is being fulfilled and achieving beyond financial performance. The present business operations need to understand the dynamic and challenging environment. The moral obligation is concerned to fair agreement that relates to implicit contracting with social institution and corporation. The existence of organisations is not just for the sake of shareholders, it influences the society.  

References:

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