Corporate Governance of Woolworths Limited and Tokyo Electron Limited - Case Study Example

Table of Contents Table of Contents 1 1.0 Introduction 2 2.0 Corporate governance of Australia 3 2.1 Corporate governance notes disclosure: Woolworths Limited 5 3.0 Corporate governance of Japan 6 3.1 Corporate governance information disclosure: Tokyo Electron Limited 7 4.0 Similarities and differences 7 5.0 Conclusion 8 References 9 Corporate governance 1.0 Introduction Corporate governance concept has become a major concern for most companies in the recent years both locally and internationally. Researches done through the use of international data has proven the fact that firms that are governed in a better manner perform better than those companies that are poorly governed in many key areas (Australian Government Treasury, 2009). Corporate governance relates to exercise of authority within an organization or a corporation. It is a framework comprising of the rules, relationships, processes and systems by which and within which the authority is practiced in a particular corporation. Its scope includes the mechanisms that ensure that the corporations and those in control are accountable for what happens in the corporation (OECD, 2005: 95). It therefore influences the way and the nature of objectives set by the companies, how those objectives are achieved, how the risk affecting the corporation is assessed and monitored and also influences the optimization of the performance of the company. In essence corporate governance structures that are effective stimulate value creation by embracing innovation, entrepreneurship, exploration and development and also provide systems that ensure accountability and control that measure up with the risks that the company face. Practices that ensure effective corporate governance evolve as the circumstances of a given company changes as those practices need to be tailored to meet the circumstances (ASX Corporate Governance Council, 2010: 3). This study uses two different companies as case study to examine the practice of corporate governance under two different legal systems; the common law legal system in Australia and the code law legal system in Japan. 2.0 Corporate governance of Australia Australia has a Common law legal system which has its roots in the English tradition of common law. This system has much more in common with other countries which majorly were under the English colonial rule. With time the law has evolved its own characteristics that are distinct from those of the other countries. The other countries with the same law include; Canada, Malaysia, United States and India among others. Similarly the countries have evolved their legal systems to gain distinct characteristics that differentiate the system from that of the other countries (Kathy and Taylor, 1994: 57). It is within this legal system that corporate governance is exercised by companies incorporated in Australia. Over the recent years, corporate governance in Australia has garnered a lot of concern by different stakeholders and even displaced the need for ISO quality accreditation that was a major concern during 1990s. The reason behind this sharp shift of attention can be attributed to the collapse of large corporations like HIH Insurance in Australia and in the US the collapse of Enron and WorldCom. These collapses were a clear indication of poor practices of governance in the corporations. Furthermore the collapse of the respected corporations elicited demand for legislation by different governments that would guarantee good governance of organizations to avoid recurrence of the same. In Australia it yielded to the legislation of the Corporate Law Economic Reform Program (CLERP) (Linda, 2005: 359). The program was established in 1997 with extreme consultation with the advisory group on business regulatory. Out of this program nine different papers in form of proposals have been released. The third paper was on Directors’ Duties and Corporate Governance (Jean, Mirko and Anil, 2010: 200). There are different principles of corporate governance that are emphasized by the Australian Stock Exchange Corporate Governance Council. These principles are identified as structural principles, behavioral principles and disclosure principles. Companies listed on the stock exchange are pushed to make use of those principles to re-examine their practices of corporate governance if not they provide an explanation as to why they have not adopted the recommendations. Structural principles relate to how board of directors’ composition, roles, committees and the annual general meetings to ensure participation is effective and the auditors are adequately used. It is provided under the principles that a majority of the board members should be independent directors including the chairperson of the board. Majority of the recommendations consists of behavioral recommendations. This encompasses issues to do with charters and codes of conduct, management of risks policies and remuneration policies development. Finally there are disclosure principles whose main aim is to give an outline of how the information on corporate governance should be communicated to the stock market by the corporations. This includes information on share trading, how the executives and the board will be evaluated and details on remuneration. The application of these principles by the listed companies needs to be disclosed in their financial statements reported annually in the notes to financial statements as exemplified by the financial statements of Woolworths Limited (Fleming, 2003: 2005- 2008). 2.1 Corporate governance notes disclosure: Woolworths Limited Listing Rule 4.10 of the Australian Stock Exchange provides guidelines on the disclosure of corporate governance by the listed companies. The entity must indicate in the financial reports a statement showing the main practices of corporate governance that were in place during the specified period forming the basis of the report. In the event that the practices were applied for a short time during the period under consideration, the entity must also indicate this fact in the report. To this effect most corporations include a separate section in the financial report that provide details on the major corporate governance practices carried out during the period by the listed company. Other companies include a section in the directors’ report titled other statutory information to provide this information. The disclosure involve the composition of the board of directors indicating their age, the directors’ qualifications and experience, their position and whether they are non-executives and independent. Compensation arrangements and matters relating to auditing should also be disclosed by the listed company (ASX, 2001: 1, 5-8). Woolworths Company deals in general merchandise, food and specialty retailing. The company runs its business through operations of a chain of stores. The corporate governance statement of the company outlines the approach to governance by the company, compliance with the governance standards as provided by the ASX, the governance framework including the board of directors of the company, their skills, attributes and experience and risk management. The company has reported the corporate governance information in a separate section which is quite elaborate addressing all the activities that the company has put in place to ensure effective corporate governance. The information incorporates the principles outlined by the Australian Securities Exchange (Woolworths Limited, 2010: 48-69). 3.0 Corporate governance of Japan Japan unlike Australia, uses a code civil law legal system. This is similar to other countries like France and Germany. In these countries corporate governance is seen as a broad concept that is concerned with a wide scope of stakeholders. The stakeholders include; shareholders, suppliers, employees and customers among others. It is this kind of view that is stressed in the countries when approaching corporate governance. Therefore directors of companies are generally expected to pursue not only the interests of the shareholders but also the interests of the other stakeholders. Corporate governance disclosures by the companies listed on the Tokyo Stock Exchange include several aspects as outlined by the exchange (Allen and Zhao, 2007: 2). The listed companies are required to disclose material information relating to the board of directors of the company. This includes the policy for remuneration of the directors and key executives of the company. This is very important for the establishment of the link between the performance of the company and remuneration of the executives. The companies have the discretion of disclosing either the total remuneration of the directors and other executives or the remuneration for each of them or both. Compliance to this is mandated by the Companies Act which provides guidelines on what should be included in the business reports issued by the board of the company. This report should be presented to shareholders during their annual general meetings. Financial information including the corporate governance disclosure by the listed companies is required twice a year. Corporate governance structure of the companies is also required to be disclosed by the companies in their financial reports on their securities. The information is disclosed as a separate section of the report (OECD, (2011: 62). 3.1 Corporate governance information disclosure: Tokyo Electron Limited Tokyo Electron Limited which is one of the listed companies on the Tokyo Stock Exchange discloses its corporate governance information in the financial report as a separate section before the financial information of the company. In the section information on the basic principles of corporate governance applied by the company are disclosed. In addition there is the corporate governance framework of the company, the board of directors and the board of statutory auditors. The remuneration for the directors and other executive officers including the statutory auditors is also disclosed. Internal control and risk management system is also disclosed in the section. In the section there is an express statement for compliance with the disclosure requirements in relation to the corporate governance. Finally the section outlines the major components of corporate governance in the company which include; the nomination committee, compensation committee, outside auditors and external directors among others (Tokyo Electron, 2010: 18-23). 4.0 Similarities and differences Corporate governance practices in the two companies representing the two legal systems exhibit a lot of similarities. In both cases listed companies are required by either the exchange or as a statutory requirement to disclose all the practices of the company that relate to corporate governance. In both the systems, the concept of corporate governance has received considerable attention in the recent past years. Corporate governance practices in both the companies is represented by how the company constitutes its board of directors, the remuneration policy for the directors, risk management activities by the company and of great emphasis the corporate governance framework of the company. In both cases the companies have disclosed information relating to corporate governance in a separate section in their reports. However the two countries show some differences in how they deal with corporate governance. In Australia and other countries which are under the common law legal system like the United States, corporate governance majorly aims at looking after the interests of the shareholders. Therefore the corporate governance practices practiced by the companies in the company are directed to wards maximizing the shareholder value in the firm. In Japan and the civil law legal system countries like Germany and France, corporate governance is viewed in a broader sense to encompass different stakeholders like the customers, employees, shareholders, suppliers and others. In Japan compliance to the corporate governance principles is mandatory while in Australia it is not since a listed company can choose not to adhere so long as it provides an explanation as to why the company has not adopted the principles. 5.0 Conclusion Corporate governance is a common phrase in many business reports in the present time. The concept has evolved over the years. The impetus for the evolution and the keen attention to the concept stems from the collapse of world’s major corporations like Enron and WorldCom in the US and HIH Insurance in Australia. The need for good governance of corporations became fundamental as the collapse indicated poor governance. However due to the differences in the legal systems of different countries, the scope of the concept varies from one country to country. Those countries with the civil law legal system view the concept from a wider perspective while the counterparts from the common law legal system view it as an activity to increase the shareholders value in the company. When presenting the annual financial reports of the companies in both the systems, corporate governance information is also required. All the activities that the company has put in place that relate to corporate governance should be disclosed in the reports including the corporate governance framework of the company. References Allen F. & Zhao M., (2007), The Corporate Governance Model of Japan: Shareholders Re Not Rulers, Available [Online] ASX Corporate Governance Council, (2010), Corporate Governance Principles and Recommendations with 2010 Amendments, 2nd Edition. ASX, (2001), Disclosure of Corporate Governance Practices: Listing Rule 4.10, Australian Securities Exchange. Australian Government Treasury, (2009), 2009-02: Corporate Governance and Financial Performance in an Australian Context, Available [online] Fleming G., (2003), Corporate Governance in Australia, Available [Online] < http://epress.anu.edu.au/agenda/010/03/10-3-A-1.pdf> Jean J., Mirko B. & Anil H., (2010), Principles of Contemporary Corporate Governance, 2nd Edition, Cambridge University Press, Cambridge. Kathy L. & Taylor L., (1994), Interpreters and the Legal System, The Federation Press Pty Ltd, Sydney. Linda S., (2004), Due Diligence and Corporate Governance, Reed Elsevier, United Kingdom. OECD, (1998), OECD Economic Surveys 1997-1998: Australia, Organization for Economic Co-operation and Development. OECD, (2011), Board Directors: Incentives and Governing Risks, Corporate Governance, OECD Publishing. Tokyo Electron Limited, (2010), Annual Report 2010. Woolworths Limited, (2010), Annual Report 2010. Read More