Corporate Governance at Commonwealth Bank - Case Study Example

Commonwealth Bank Name: Course: Institution: Date: Commonwealth Bank Introduction The effects of good corporate governance on the performance of public companies have become subject of interest to economists, financiers, behavioral scientists and business operators in different platforms (Brink 2011, p. 60). The main objective of this paper is to conduct an in-depth literature review on different theories related to god corporate governance. The paper will also analyze the Common wealth bank on matters of corporate governance. Literature review Agency theory According to Boubaker et al (2014, p. 12) the agency approach is an economic school of thought which provides an understanding of the relationship between corporate governance and behavior. This school of thought focuses on the incentives that the management receives to perform different responsibilities for the stakeholders (Brink 2011, p. 66). The defining attributes of this theory include the cost of business transactions, the complications involved in conflict between essential company principles and the agency cost the agent and the principal. According to the agency approach the transaction cost is one of the main reasons why organizations exist in the market. This makes companies a series of contacts which when developed are aimed at improving the wellbeing of these companies to improve on their competitive advantage and market share (Chetty et al, 2007, p. 46). This makes it the responsibility of the management to act as a representative of the shareholders when making decisions ion the operations of the company in the highly competitive and dynamic market (Clarke 2004, p. 155). According to Evans et al (2002, p. 34) when the cost of operationalizing the company in the market and enforcing different contracts is relatively higher compared to that of engaging in an authoritative allocation of resources, agency theory asserts that it is necessary to ensure that economic activities are integrated within the financial limits of the company. This is an indication that for a company to experience any form of growth in its ability to engage in different transactions in the market, it must have the capacity of determining the cost of specific transactions in the market and its ability to integrate such transactions to fit in its financial capabilities (Cornelius et al 2003, p. 40). According to the agency approach, agency cost plays an important role in boosting good corporate governance in an organization (Jensen & Meckling 1976, p. 355). The relationship between the principal and the agent makes it’s relatively difficult to develop an argument that the the former will trust the latter to make business decisions at zero cost (Fernando 2009, p. 16). This in the view of the principal explains why there is need to consider different aspects of agency cost cost (Jensen & Meckling 1976, p. 5). To ensure that the agency cost does not exceed the financial capabilities of a company, the principle must play an oversight role by instituting monitoring and evaluations structures to check the decisions that the agent makes. It is factual that the decisions made must always incur some costs. However, it is the responsibility of the principal to set aside financial resources to begin to the agents as incentives to minimize the possibility that they will engage in malpractice (Idowu et al 2014, p. 23). This makes the agency cost, the financial resources spent to run a company, being the principals, the shareholders must ensure that they are the budgets of the company are in line with the mission, goals and objectives of the company. Being the agents, the management has the responsibility of ensuring that they operate with the resources provided by the shareholders. This is by ensuring that the agency cost does not exceed the gains that the company acquires in the form of profits (Rezaee 2008, p.111). One of the challenges of the agency approach is that there is always difficulty in developing perfect contracts that will ensure that all the actions affect the welfare of the agent and that of the principle in a mutually exclusive manner. The challenge often occurs when it is expected that the management will consider the interest of the shareholders while neglecting their interests. This explains why the management bears all the blame wherever there is any failure in the market. Stakeholder approach This theory operates on the assumption that it is the responsibility of the management to always act in the best interest of the shareholders. These include the customers, the shareholders, the society, and the employees (Monks et al 2011, p. 19). The outstanding differences between the agency approach and the stakeholder approach is that while the latter focuses on the relationship between the agent and the principal at the expense of the otter players, the former considers all the other players that make up the organization as an essential part of corporate governance (Niskanen 2007, p. 29). According to the stakeholder approach it is the responsibility of the management to protect the interest of the corporation. This emerges from the understanding that the management must always find a way of balancing the conflicting interests of the stakeholders such that the eventual strategy ensures the realization of mutual benefits (Freeman 2010, p. 70). The conflicting demands arise from the understanding that customers may demand that more financial resources to be used in research and development initiatives while the shareholders may require higher returns on their investment (Finkelstein 2009, p. 55). For the company to realize both demands it must improve on research and developments initiatives to boost the competitive advantage of its products. This will increase customer demand and whiles hence improvements on shareholder returns (Friedman 2006, p. 15). According to Philips (2007, p. 67), the stakeholder theory holds the assumption that it is always important for a company through its management to redefine the purpose of the firm. This is because of numerous responsibilities that different companies in the current society have to play to realize their missions and objectives (Hirschey et al 2009, p. 66). Successful corporate governance therefore occurs when a company operates on realizing the interest of the stakeholders while at the same tome developing corporate social responsibility initiatives that will maximize on its ability to give back to the society, attract and retain new customers. The stakeholder approach from this understanding provides a description of the reality since it reveals the challenge that the management faces in satisfying plural and competing interests. It is through the goals, expectations and the available alternatives that the decision making process is conducted instead of through incentives that the managers often receive to motivate their actions towards realizing the interest of the company owners (Urlacher 2008, p. 66). One objective of the stakeholder theory is to develop a methodology through which cooperation among stakeholders can be realized with the objective of satisfying the interests of every member of the organization (Du Plessis et al 2005, p. 60). The process of satisfying these interests in the view of the management is only possible in situations where there is adequate understanding and compromise among the stakeholders (Weiss 2014, p. 187). High levels of compromise allows for better lining and scheduling on the best strategy that can be used by the management to realize all the objectives within different time frames. Furthermore, through a collaborative approach, the stakeholder theory envois that it becomes relatively easier for the management to develop an effective way of balancing the interest of all the stakeholders throughout the operations of the company (Zakhem et al 2008, p. 45). This is an attribute that good corporate governance in any context must consider to ensure some success in management. This is because such peaceful coexistence between different individual in the management always serve the interest of a company that is able to establish itself in the competitive market (Du Plessis et al 2005, p. 62). According to Philips (2003, p. 89), the success of the stakeholder theory also lies in the ability of the company through the management to develop organization values that have the strength of communication business goals of the organization as this is integral in maintaining the interest of the stakeholders. It is through corporate values that a company can guarantee good governance its stakeholders. Any interest will therefore be gauged in accordance with the values which are the defining principles of organizational capabilities (Wessels 2000, p. 16). Overview of Principles of Corporate Governance and Best Practice Recommendations by AXS AXS assert that for good corporate governance to be realized it is the responsibility of the company to ensure the existence of a solid foundation for the managers and oversight. This can be realized by formalizing and disclosing the functions of the board and those delegated to the management to minimize role conflicts. It is also essential to structure the board in a way that adds value to a company. This can be realized by ensuring that the board is composed of a majority of independent directors. The promotion of an ethical decision making process is also an essential principle of corporate management (ASX Corporate Governance Council 2010, pp. 9-10). This can be realized through the establishment of a code of conduct to guide the management and the directors in the decision making process. Good corporate governance will also require a company to protect the integrity of financial reporting. This is realizable when the chief fiancé officer through the management reports and the financial transactions to the board for verification and approval (ASX Corporate Governance Council 2010, pp. 11-15). Respecting the rights of the stakeholders and the recognition and management of risks are defining principles of good corporate governance. This is realizable through the constitution of an oversight committee to assess the situation in question. Encouraging performance and the recognition of legitimate interests of the shareholders are definitive of good governance. They can be realized by establishing a code of conduct that provides guidance on compliance with the legal obligations of company stakeholders (ASX Corporate Governance Council 2010, pp. 16- 20). Analysis Overview of Commonwealth Bank The Commonwealth Bank is the leading financial company in Australia that specializes in the provision of integrated financial services which include premium banking, funds management, institutional banking, retail and business banking among other services (https://www.commbank.com.au/about-us/shareholders/corporate-profile/corporate-governance.html). Being one of the listed companies in the Australian Security Exchange, the main financial objective of the company is to ensure that the Total Shareholder Return is highly positioned in among the Australian listed peers in the stock market. The strategic strengths of the company include the brand, diversification of the market mix and scale. The company has a strong domestic presence with the largest customer base within the country (https://www.commbank.com.au/about-us/shareholders/corporate-profile/corporate-governance.html). Assessment of the extent of adoption of the Code Good corporate governance is considered as a defining principle in the operations of the Commonwealth Bank. The company through its board has been consistent in associating good corporate governance practices as part of its management due to the belief that it is essential for the wellbeing of the company (https://www.commbank.com.au/about-us/shareholders/corporate-profile/corporate-governance.html). The company has been able to adopt a comprehensive framework of good corporate governance guidelines that is designed to ensure the existence of proper balance in the performance and the conformance. These guidelines have enabled to the company to undertake the prudent risk taking initiatives which are the defining activities of its business in the competitive banking sector. Furthermore, good governance practices of the company are often revised to conform to the Corporate Governance Principle and Recommendations as released by the Corporate Governance Council of ASX (https://www.commbank.com.au/about-us/shareholders/corporate-profile/corporate-governance.html). Comment and analysis Board of directors The section of the members of the board of directors in the company is conducted by the Board of Performance and Renewal Committee which sets the appointment criteria. This is aimed at the creation of a board that has the ability to challenge, stretch and motivate the management to realize a sustainable and outstanding performance. Every new appointee must therefore have the ability to improve on the competitive nature of the company (https://www.commbank.com.au/about-us/shareholders/corporate-profile/corporate-governance.html). Remuneration practices The company’s remuneration practices are defined by the remuneration committee charter whose sole responsibility is to develop the company’s remuneration policy. This charter recommends to the board of directors the best remuneration framework that is capable of financing all aspects of the organization. This is inclusive of the risks and internal control personnel whose remuneration must always be based o performance of individuals employed by the organization (https://www.commbank.com.au/about-us/shareholders/corporate-profile/corporate-governance.html ). Conclusion The essence of good corporate governance emanates from the understanding that it is only through the provision of effective and efficient governance structures that companies can be able to realize their goals and objectives. the board of directors in any company, the management and the employees have the responsibility of ensuring that all the definitive operation in their companies are in agreement with the missions and the objectives of the said companies. The outstanding differences between the agency approach and the stakeholder approach is that while the latter focuses on the relationship between the agent and the principal at the expense of the otter players, the former considers all the other players that make up the organization as an essential part of corporate governance. The Commonwealth Bank has been able to adopt a comprehensive framework of good corporate governance guidelines that is designed to ensure the existence of proper balance in the performance and the conformance. References ASX Corporate Governance Council. 2010. Practices of Good Corporate Governance and Best Practice Recommendations. http://www.asx.com.au/documents/asx-compliance/principles-and-recommendations-march-2010.pdf Boubaker, Sabri, and Duc Khuong Nguyen. 2014. Corporate governance in emerging markets: theories, practices and cases. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=753001. Brink, Alexander. 2011. Corporate governance and business ethics. Dordrecht: Springer Verlag. Chetty, Raj, and Emmanuel Saez. 2007. An agency theory of dividend taxation. Cambridge, Mass: National Bureau of Economic Research. Clarke, T. 2004. Cycles of Crisis and Regulation: The Enduring Agency and Stewardship Problems of Corporate Governance. Corporate Governance: An International Review, 12 (2), 153-61. Cornelius, Peter K., and Bruce Kogut. 2003. Corporate Governance and Capital Flows in a Global Economy. Oxford: Oxford University Press, USA. http://public.eblib.com/choice/publicfullrecord.aspx?p=422828. Du Plessis, Jean J., James McConvill, and Mirko Bagaric. 2005. Principles of contemporary corporate governance. Cambridge [u.a.]: Cambridge Univ. Press. Evans, James R., and James R. Evans. 2008. Quality and performance excellence: management, organization, and strategy. Mason, OH: Thomson Business and Economics. Fernando, A. C. 2009. Corporate governance: principles, policies and practices. New Delhi: Pearson Education. Finkelstein, Sydney, Donald C. Hambrick, and Albert A. Cannella. 2009. Strategic leadership: theory and research on executives, top management teams, and boards. New York: Oxford University Press. Freeman, R. Edward. 2010. Stakeholder theory. Cambridge University Press. http://www.myilibrary.com?id=253644. Friedman, Andrew L., and Samantha Miles. 2006. Stakeholders theory and practice. Oxford: Oxford University Press. http://site.ebrary.com/id/10271574. Hirschey, Mark, Kose John, and Anil K. Makhija. 2009. Corporate governance and firm performance. Bingley [etc.]: Emerald/JAI. Idowu, Samuel O., and Kiymet Tunca Caliyurt. 2014. Corporate governance: an international perspective. http://dx.doi.org/10.1007/978-3-642-45167-6. Jensen, M., &Meckling, W. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics , 3, 305-60. Monks, Robert A. G., and Nell Minow. 2011. Corporate governance. Chichester: Wiley. Niskanen, William A. 2007. After Enron Lessons for Public Policy. Rowman & Littlefield Pub Inc. Phillips, Robert. 2003. Stakeholder theory and organizational ethics. San Francisco, Calif: Berrett-Koehler. Phillips, Robert A. 2007. Stakeholder Theory Impacts and Prospects. Cheltenham: Edward Elgar Pub. http://public.eblib.com/choice/publicfullrecord.aspx?p=730829. Rapoport, Nancy B. 2004. Enron: corporate fiascos and their implications. New York: Foundation Press. Rezaee, Zabihollah. 2008. Corporate governance and ethics. Hoboken, N.J.: Wiley. Urlacher, Pauline V. 2008. New issues in corporate governance. New York: Nova Science Publishers. Weiss, Joseph W. 2014. Business ethics: a stakeholder and issues management approach. http://www.books24x7.com/marc.asp?bookid=62385. Wessels, David W. 2000. Organizational structure, agency theory, and capital allocation. Zakhem, Abe J., Daniel E. Palmer, and Mary Lyn Stoll. 2008. Stakeholder theory: essential readings in ethical leadership and management. Amherst, N.Y.: Prometheus Books. Read More