Principles of Corporate Governance to Large Private Companies - Coursework Example

Student Name: Tutor: Title: Governance and Fraud Assignment Course: 1. The value of eight principles of corporate governance to large private companies It is mandatory and a requirement for listed public companies within Australia to demonstrate with clarity that they adhere to eight Principles of Corporate Governance as stipulated by ASX Corporate Governance Council. On the other hand, this directive does not apply to large private companies hence they are at liberty to disregard the eight principles (Clarke, 2007). However, large private companies would immensely benefit if they religiously adopted the eight principles of governance as recommended by ASX Corporate Council listed public companies. Large private companies would add value to their existence through adopting the eight principles of corporate governance. A keen look at the recommended principles of corporate governance reveals that large private companies would have also benefited to a great extend if they instituted the principles in their operation. Each of the principles guides how various matters within the company can be resolved or approached to avoid confusion and conflicts. There is a clear demarcation of roles and responsibilities of the Board of Directors and the management in order to avoid overstepping of each entity into the other’s territory (Aglietta & Rebérioux, 2005). In order to understand the value that the eight principles of governance add to a company, it is important to review each principle discuss its importance if it were to be applied to large private companies. The first principle requires the Funds to come up with and disclose the various responsibilities and roles of both the management and the Board. Disclosing the division of responsibility would help those entities or people affected by corporate decisions to clearly comprehend the respective contributions and accountabilities of the board as well as senior executives. The affected people would know who to approach in case of a complaint or any claim (Denis & McConnell, 2003). Stewardship theory advocates that managers when left on their own will act as responsible stewards of the assets they control, but the first principle ensures that their roles are clearly defined so that they can be held accountable. Review of responsibilities is important to ensure that the division of functions is appropriate to company’s needs. Private companies can befit from observing this principle and avoid unnecessary conflicts. The directors are able to understand the corporate expectations bestowed upon them. The second principle compels the Funds to make sure there is a board of effective composition, size and adequately committed to carry out its duties and responsibilities. The agency theory revolves around resolving the problems that come up due to agency relationships. The interest of the board and management should not override the company’s business interest. The differences between shareholders, the board and executive management has to resolve different tolerances for risk. An effective board has to facilitate the discharging of duties proposed by law on the directors and adds value in a manner that is suitable to the circumstances of a company. Induction procedures have to be established to ensure new directors take part fully and actively in the board decision-making exercise as soon as possible (Tricker, 2009). This second principle would be important to private companies since a transparent and formal procedure for selection, appointment, as well as re-appointment of directors to the board assist in promoting investor understanding and confidence in the entire process. The third principle encourages the Board to actively promote responsible and ethical decision-making. When it comes to decision-making, companies should not only adhere to adhere to legal requirements, but should also factor in the various expectations of different stakeholders including employees, shareholders, creditors, customers, suppliers and the community from where the company operates from. Sound corporate governance needs people with integrity. This principle promotes Stakeholder Theory. The theory is a framework of business ethics and organizational management that addresses ethical and moral values in the management of the company. There are no regulations for personal integrity (Aglietta & Rebérioux, 2005). By applying this principle, large private companies would foster investor confidence leading to more investment in the company. The fourth principle encourages the Funds to have in place a structure that independently verifies and safeguards the integrity of financial reporting of the company. Companies are encouraged to establish a clear structure of authorization and review that ensures factual and truthful presentation of financial position of the company (Masdoor, 2011). The board must have an audit committee to ensure the standards of reporting are observed. The presence of an independent audit committee is internationally recognized as an important element of good corporate governance. The fifth Principle compels the Funds to encourage balanced and timely disclosure of all material aspects regarding Funds. Companies have to come up with mechanisms that are designed to make sure there is compliance to the ASX Listing Rule requirements. The concerns by shareholders concerning executive payments are intensified due to lack of information with regard to core entitlements when they are resolved (Shailer, 2004). Such concerns would be eliminated if large private companies would adhere to this principle. The sixth Principle encourages the Funds to respect the rights of members and ensure the exercise of those rights is facilitated. Companies have to ensure there is effective communication with shareholders and encourage participation during general meetings. The revealing the policy of the company with regard to shareholder communication will assist investors in understanding the means of accessing relevant information about the firm, as well as its corporate proposals (Lee & Shailer, 2008). This principle would encourage communication in private companies. The seventh principle is about recognition and management of risk. This principle encourages the Funds to come up with a sound system of risk oversight and management, as well as internal control. The integrity of the financial reporting of a company relies on the existence of a clear system of risk oversight and management, as well as internal control. Private companies would eliminate an element of surprise and uncertainty if there are proper internal controls for risk management. The eight principle touches on fairness and responsibility of remuneration. The Funds have to make sure that the composition and level of remuneration is reasonable and sufficient and its link to performance is clearly defined. A company has to balance its objective of attracting and retaining directors and senior executive vis-à-vis its interest of not paying excessive remuneration (Clarke, 2007). A remuneration committee has to put in place to achieve this target. The private company would benefit by ensuring it does not use a substantial part of its capital in paying bloated salaries of senior executives. Consequently, it is accurate to say that the eight principles of corporate governance with held large private companies by adding value. 2. The short term and long term salary and performance benchmarks The companies being considered in the case are Westfield Retail Trust Company and Flight Center Travel Group Ltd (FLT). The two companies have adequately disclosed in the manner in which remuneration is determined and how benchmarks ensure there is no excessive compensation disregarding performance. The performance benchmarks and The remuneration framework of FLT balances the interest of the participants with those of the company and its shareholders through providing and the rest employees with security of fixed base pay and the chance to earn additional income when the company exceeds or achieves pre-determined targets, as well as shareholders value (Shailer, 2004). Executive remuneration consists of base pay that is fixed and short-term incentives paid monthly but measurable achievement against set targets. The company does not guarantee that its executives will earn the full incentive component of targeted remuneration hence, the annual package executives will earn. FLT has Business Ownership Scheme (BOS) that invites eligible executives to invest in unsecured notes as an incentive to enhance performance in the long-term and short term. According to BOS prospectus, the Board has the power to review and amend a BOS note if the individual return goes beyond 35% of the face value of BOS note within a 12 month period. Superannuation contributions are paid to a specified contribution superannuation fund. There are control measures to ensure that directors and senior management are compensated but not beyond what the company can afford. Westfield charter for the remuneration committee approved by the Board directs the Trust to adopt procedures and policies that responsibly and fairly reward senior management with regard to overall performance of the Trust, the external compensation environment, and the performance of the senior manager. There are several remuneration benchmarks that ensure remuneration is awarded according to performance. In the year 2013 the Board put in place several changes to the remuneration arrangement of senior management and the Managing Directors, offering higher alignment with returns to security holders. Remuneration at Westfield consist of base salary that is fixed and long term and short term incentives that are both variable. The short-term incentives are awarded according to individual performance with regard to personal development objectives and corporate and financial targets set at the beginning of the year. Since financial and corporate targets are measured against the set targets at the beginning of the year, Westfield ensures that remuneration and performance are linked. There is a remuneration committee in place (Masdoor, 2011). The remuneration committee considers advice given by the independent remuneration advisors on the remuneration for key management personnel. The personal and business development objectives for the Managing Director for the next period of twelve months are recommended by the Remuneration Committee but seek approval of the Board. References Aglietta, M., & Rebérioux, A 2005, Corporate Governance Adrift: A Critique of Shareholder Value, Cheltenham, UK, and Northampton, MA, USA: Edward Elgar. Clarke, T 2007, International Corporate Governance, London and New York: Routledge Denis, D.K. & McConnell, J.J 2003, International Corporate Governance, Journal of Financial and Quantitative Analysis, 38 (1): 1–36. Masdoor, K A 2011, Ethical Theories of Corporate Governance, International Journal of Governance, 1 (2): 484–492. Lee, J & Shailer, G 2008, The Effect of Board-Related Reforms on Investors’ Confidence. Australian Accounting Review, 18(45): 123-134. Pagano, M & Paolo F V 2005, The Political Economy of Corporate Governance, American Economic Review, 95(4), pp. 1005–1030. Shailer, G 2004, An Introduction to Corporate Governance in Australia, Pearson Education Australia, Sydney. Tricker, A 2009, Essentials for Board Directors: An A–Z Guide, Bloomberg Press, New York. Read More