Corporate Governance: Federation Centres & Cochlear Ltd - Assignment Example

CORPORATE GOVERNANCE FRAMEWORKS ANALYSIS: FEDERATION CENTRES & COCHLEAR LTD By Student’s Name Code + Course Name Professor’s Name University Cite, State Date Question 1: Principles of Corporate Governance Principle 1: Lay solid foundations for Management and Oversight. For this principle, companies are expected to determine and disclose both the roles and responsibilities of board and the management team (Australian Securities Exchange, 2010). Entities should also disclose the processess used in the evaluation of performance of senior management and also, a provision of the directors’ letters in case of appointment. Federation Centres has adopted this principle and has thus, set out the different roles, responsibilities and delegation attributed to the board members. In essence, the Board is responsible for planning and overseeing all of the operations of the entire Group for the benefit of all security-holders (Federation Centre, 2014). It is also accountable to all security-holders in regards to its performance. Subsequently, it monitors the performance levels of Group, EC and all senior managements. The CEO and Executive Committee are tasked with the responsibility of conducting daily operations and administration of the Group (Federation Centre, 2014). Director education and independent professional advice also forms part of the sub-principles. On the other hand, Cochlear Ltd does not specifically provide clear and concise explanations on whether they have adopted the principle. However, the roles of the Board and Human Resource Committee have been fairly laid out (Cochlear, 2014). For instance, the Board is tasked with the task of formulating remuneration strategies and policies and, also establishment of the HRC. Principle 2: Structure the Board to Add Value. The principle requires listed companies to develop an effective board in relation to its composition size and commitment in order to allow for them freedom to exercise their duties and roles efficiently (Australian Securities Exchange, 2010). Federation Centres has made efforts to include lots of independent directors to be part of its board as well as widening its composition to three committees: Audit& Risk, Nomination and Remuneration and HR Committees (Federation Centre, 2014). At no single point in time is the CEO made a chair of any of the committees. Cochlear Ltd has also ensured to develop a nomination committee amongst others like Audit, HRC and Medical Science Committees. The company’s CEO is only a member to two committees but not a chair of any of them (Cochlear, 2014). Unlike Federation Centres, Cochlear Ltd have few independent directors in its board. Principle 3: Promote Ethical and Responsible Decision-Making. The principle requires entities to exercise ethical and responsible decision making process by way of developing codes of conduct, diversity policies that will affect gender board compositions, women employees and senior executives (Australian Securities Exchange, 2010). Federation Centres has ensured to develop and clearly disclose a diversity and inclusion policy, which is meant to attain a diverse and an all-inclusive workplace that also depicts different ethnic communities (Federation Centre, 2014). Diversity policy has also been formulated for the purpose of attaining differences in culture, thoughts, background and experiences of different personnel (Federation Centre, 2014). Subsequently, it has clearly indicated the gender diversity objectives where gender balance in boards, management and senior executives is reflected. Other important efforts made by this organisation include the formulation such policies as conflicts of interests and related party transactions, securities policies and investor communications to facilitate smooth operations (Federation Centre, 2014). For Cochlear Ltd, this principle is not fairly set out only that that the role of ensuring diversity policies has been delegated to the Human Resource Committee. Principle 4: Safeguard integrity in financial reporting. The principle requires all companies to ensure independence and integrity of financial reporting by way of establishing a chartered audit committee with lots of independent directors (Australian Securities Exchange, 2010). Federation Centres has an Audit and Risk Committee with four members all who are independent non-executives directors while its chair is not the chair of the overall board (Federation Centre, 2014). It ensures the appointment and replacement of external auditors. Consequently, Cochlear Ltd has four members within its Audit Committee most of them are independent directors (Cochlear, 2014). Principle 5: Make timely and balanced disclosure. Under this principle, companies are expected to make a timely and balanced revelation of all its material matters by developing written policies attributed to conforming to ASX Listing Rules (Australian Securities Exchange, 2010). In relation to this principle, Federation Centres has ensured to provide a financial reporting structure that discloses material matters on a six months basis as we as employee quality and integrity policies meant to review their formal performances (Federation Centre, 2014). Cochlear Ltd however; does not ascertain adherence to this principle at all. Principle 6: Respect the rights of shareholders. The principle expects companies to respect rights enjoyed by shareholders by formulation of communications policies and use of electronic communications platforms (Australian Securities Exchange, 2010). Federation Centre has adopted an Investor Communications Policy to make sure that they receive information all meetings and handle all of their enquiries on a daily basis (Federation Centre, 2014). Electronic platforms are used in sending annual reports and also, informing investors on future AGMs. Cochlear Ltd however; does not disclose adherence to this principle. Principe 7: Recognise and manage risk. Under this principle, companies are expected to formulate an effective system or risk oversight (Australian Securities Exchange, 2010). Federation Ltd has ensured to establish a risk management and internal control mechanism that is tasked with risk oversight. Cochlear Ltd does not adhere to this principle in its undertakings. Principle 8: Remunerate fairly and responsibly. The principle requires companies to adopt fair and reasonable remuneration (Australian Securities Exchange, 2010). Both Federation Centres and Cochlear Ltd have ensured to adopt this principle in their undertakings given that they both have remuneration committees and policies of evaluating performances. The link between corporate governance and performance is directly related. A company that engages in intensive corporate governance and set outs distinctive policies to oversee the activities of management, senior executives and board has always enjoyed greater performance levels. This is depicted by fewer conflicts of interests amongst different stakeholders as well as conformity to set out functions and roles and responsibilities attributed to different personnel. The potential ink between the ASX principles as adopted by Cochlear Ltd and Federation Centres portrays poor historical performances. Considering that these companies did not conform to this principles and guidelines in their past operations, might mean that they failed to record positive performances due to lots of conflicts of interests between different stakeholders. Pointing out the importance of fair remuneration of CEOs and other senior management has contributed to aligning objectives of organisations with shareholders’ goals of wealth maximisation. Question 2 i) Performance Benchmarks for Executives Federation Centres Company The performance benchmarks for the short-term salary, which is depicted as performance reward payment-short-term (PRPS) adopts broad elements that include; the executive should be able to attain a target in relation to the underlying earnings per security as allowed within the board-approved budgets (Federation Centre, 2014). Other benchmarks are attaining board-approved budgets for all ROE targets, management expense ratios, management of strategic alliances and a successful completion of transaction-based activities as well as joint ventures and capita/debt optimisation (Federation Centre, 2014). The company allows executives long-term salary that is depicted as performance and reward payment-long term. Currently, this salary is allowed to executives in relation to whether or not they have attained a 40 per cent accomplishment of a given total security-holder return and also, a subsequent 60 per cent is linked to the achievement of an underlying EPS and overall Group ROE growth rates. However, in the past, the salary was tied to 50 per cent of TSR as well as 50 per cent EPS growth (Federation Centre, 2014). In fact, while now the payments are allocated at their face values, previously, the company exercised a fair/accounting value approach for measuring this salary component (Federation Centre, 2014). Cochlear Limited For a five-year period, Cochlear Limited has indicated that it has continued to offer both long and short-term incentives programs to its executives. The remuneration framework has been aimed at providing executives with fair and reasonable pay for long-term sustainability growth of the company in international markets as well as for purposes of developing shareholder value within the shortest time possible (Cochlear, 2014). Cash and equity, which forms part of the short-term incentives program, are paid on an immediate or deferred term and are benchmarked in relation to the revenues and earnings before interest and taxes performances as well as results for the already covered financial performance year (Cochlear, 2014). On the other hand, long-term incentive is allowed to executive KMP in the form of both options and performance rights. The payment is measured against such benchmark as compound annual growth in earnings per share of the firm as well as the underlying relative total security-holder returns performances (Cochlear, 2014). It is noted that the earnings per share and relative total security-holder returns are basic accepted proxies for the establishment of shareholder’s wealth and value hence the Board is mandated with the task of conducting annual reviews in order to ensure that they align with shareholders’ immediate interests (Cochlear, 2014). Yes. The disclosure of executive remuneration was indeed clear and necessary in both Federation Centres and Cochlear Limited. In fact, these two companies have ensured that all necessary performance measures and allocation methods are compared appropriately in the five year period. In cases where each of these benchmarks has required reviews, the remuneration committee for these two companies have made sure to reflect it in their communication platform. Yes. Remuneration for executives has been successfully linked with performances. Both short and long-term salaries have been linked to performances in such items as earnings per share as well as total security-holder returns. It means that executives will have to engage in intensive operations to attain these results. Markedly, Federation Centres has gone a notch higher to specify other notable performance measures like ROE targets, management expense ratios, management of strategic alliances and a successful completion of transaction-based activities as well as joint ventures and capita/debt optimisation, in case executives are to enjoy PRPS. Question 3 The principles and guidance of NFPs have been developed to enhance numerous conversations and are attributed to activities that they undertake as a way of attaining good governance structures (Australian Institute of Company Directors, 2013). Unlike the principles and guidance of all Australian profit-making companies, non-for-profit organisations adoption of these principles are not an effort to create rules and regulations on what should be considered good governance practices or rather recommend related behaviours and specific actions to be taken (Australian Institute of Company Directors, 2013). These two levels of principles and guidance are comparable at some point. For instance, they both advocate for stipulating the exact roles and responsibilities of all directors and boards. They also advocate for formulation of a risk-recognition and management strategies in order to oversee aspects of internal controls and risk oversight as a whole. However, NFPs corporate governance principles emphasises on aspects of culture and ethics, organisational buildings and engagements and they are not obligated to ascertain whether they have conformed to these principles or not. There is a difference in the two sets of principles because of the uniqueness of operations of NFPS and profit-making organisations. In fact, NFPs objectives are completely different from that of profit making organisations such that they are only focused on building and supporting societies (Australian Institute of Company Directors, 2013). The fundamental shareholders for these two levels of operations are also different and have different needs for financial information reported. For instance, profit-making organisations are expected to uphold efficient corporate governance for purposes of maximising shareholder’s wealth while NFPs operate for the good of all people. References List Australian Institute of Company Directors. 2013. Good governance principles and guidance for not-for-profit organisations. Accessed on March 28, 2015 from www.companydirectors.com.au Australian Securities Exchange. 2010. Corporate governance principles and recommendations with 2010 amendments. Print. Cochlear. 2014. Annual reports. Retrieved on March 28, 2015 from http://www.cochlear.com/wps/wcm/connect/intl/about/investor/annual-reports Federation Centre. 2014. Annual reports. Retrieved on March 28, 2015 from http://www.federationcentres.com.au/invest/financial-information Read More