GOVERNANCE AND FRAUD 1
Governance and fraud
Theprinciples of corporate governance
The ASX Corporate Governance Council has a framework of corporategovernance principles and recommendations to help organizationsbetter govern themselves. In total, there are ten principles thatguide effective corporate governance. The first principle is thatcompanies have to lay foundations for management and oversight, whichmeans that they have to establish and make known the roles andresponsibilities of the board and administration. The secondprinciple is that the companies have to structure their boards to addvalue. The board, according to this principle, should have aneffective composition, size and commitment to discharge dutyadequately. One of the recommendations is that a majority of theboard should be independent directors, who are not influenced byinternal forces when it comes to corporate decision making. The thirdprinciple holds that companies have to promote ethical andresponsible decision-making. This principle advocates for theestablishment of a code of conduct to maintain the company’sintegrity and accountability of the individuals.
The fourth principle states that companies should safeguard integrityin financial reporting. To do this, they should have an independententity whose function is to preserve the integrity of the companies’financial reports. The fifth principle states that companies aresupposed to make timely and balanced disclosures. It is up to thecompanies to establish well-documented policies, which are in linewith the ASX listing rule disclosure requirements and continue to usethem in every disclosure engagement. The seventh principle says thatcompanies should recognized and manage risk, which is achievablethrough a sound system of risk oversight and management. Finally,companies should remunerate fairly and responsible. The boardestablishes a remuneration committee to overlook this. Theremuneration committee must consist of a majority of independentdirectors, and be chaired independently too.
Relationshipbetween corporate governance and firm performance
In the contemporary corporate world, there is a strong belief amongstmany experts that governance best practices lead to superior firmperformance. Despite the fact that some researchers dispute this(Klapper & Love, 2004 Bhagat & Bolton, 2008), academicresearch has demonstrated that indeed the two are related. Corporategovernance is set of rules that guide a company in decision-makingand action taking. As such, these rules dictate the manner in whichthe companies conduct their business. There are some areas that aredirectly impacted by the deployment of corporate governanceprinciples, which have an influence on the achievement of the firm.Some of these are the ethical management of the employee and buildingan organizational culture that promotes wise decision-making.
On the other hand, according to Fernando (2009), best performingcompanies are those that have consistent leadership. Consistentleadership is itself an outcome of the implementation of theprinciples of corporate governance. Businesses that have stringentcorporate governance structures have a low management turnover, whichis good for company performance. However, there are some argumentsthat hold that there is no relationship between corporate governanceand company performance. For instance, according to a study byKlapper & Love (2004), corporate governance has little or noeffect on stock performance. Instead, some traits that are related tostrong corporate performance, such as a board with a majority ofindependent directors, is associated with lower stocks. Thisphenomenon was mostly observed during the 2008 global financialcrisis.
ASXprinciples adopted and the performance of the companies
According to Djerriwarrh Investment’s (DJW) official companyreport, its board is highly committed to following the ASX corporategovernance principles (DJW, 2010 DJW, 2014). Besides implementingthese principles, the company follows the recommendations to theletter, for the purpose of increasing operations efficiency andnurturing a positive organizational culture. Given the firstprinciple, the company’s board is dedicated to investing inAustralian equities with a long-term focus on other enterprises thatare listed on the ASX. Given this, the company has enhanced incomereturn to investors with two major achievements over the recentyears, which are enhancing the level of dividends and proving anattractive return over the medium to long term. Some responsibledelegations have helped the firm to improve service provision, whichis evaluated by the performance of individual senior executives.
The company has also structured the board to add value. There is aconstant evaluation of the executives by the nomination committee,which helps the board to make informed decisions about appointing newdirectors. The third principle is extensively implemented, which hashelped the committee to maintain high standards of integrity.Additionally, with the audit committee regularly contacting theexternal auditor, the company is fully compliant with the fourthprinciple. However, the company does not fully implement the secondand eighth principles. Despite the fact that the company hasimplemented the second principle in whole, it does not considerappropriate to follow the recommendation that the chairman should bean independent director (DJX, 2010). The firm also reports that it iscompliant with the eight principle, however, does not follow therecommendation that a separate remuneration committee be established.
ASXand other similar corporate governance bodies are of the idea thatthe Chairman of the Board is an independent director (DJW, 2010). Bydoing this, the chair will play the key role in helping the board tomonitor the management. Since DJX has a non-independent chair, thecompany’s board risks being dominantly influenced by him/her. Thisweakens the board’s oversight of management. Secondly, a separateremunerations committee would help the company in better managing theexecutive’s pay. This can help the business to protect theinterests of the shareholders, besides controlling excesses.
Theboard of directors and administration of IOOF maintains that thecompany’s corporate governance is guided by the eight principlesprovided by the ASX (IFL, 2014). Besides being committed to beingguided these principles, the company has set it a priority to beguided by these principles as it trades as a listed company andentity operating in Australia. By implementing the first principle,the company has been successful in monitoring risk, which haspositively impacted its market per romance. The company’sindependent board chair has also helped it to avoid materialinterference in important board decisions, a factor that has helpedit to perform well in the Australian firms’ listings.
Additionally, historically, IOOF has been among the leaders inresponsible financial reporting, which is influenced by the fullimplementation of the fourth principle. This has helped the company’sshareholders to build confidence in its operations and business,hence increasing their capital investments. The implementation ofthis principle is closely associated with the implementation of thesixth principle, which is respect for the rights of the shareholders.As such, by rightfully keeping the shareholders up-to-date withcurrent organizational annual reports, the shareholder’s confidencein the company’s integrity is built. Additionally, unlike DJX, thecompany has an agreement to work with an independent remunerationcommittee to keep the executive’s salaries in check.
However, the company has not fully implemented the seventh principle,which is recognition and management of risk. In part, the company’sboard handles the oversight of the enterprise’s risk management andcontrol framework. Additionally, the directors have the declarationrequired by the section 295A from the managing director and chieffinancial officer for the purposes of disclosures. However, thecompany has not clearly established policies for the management ofall material business risks. Additionally, there is no cleardisclosure on the summary of these policies. This weakens thecompany’s risk management system. Moreover, regarding the fifthprinciple, despite the fact that the business board encourages activeparticipation of the shareholders in company meetings, little hasbeen documented to show this as an important corporate issue. Bydoing this, the IOOF would have increased its confidence ratingamongst the shareholders.
The board reviews the performance benchmarks of the executives todetermine if the top executives are delivering. The executives haveto deliver a statement of goals and primary objectives for annualreview, which the board uses to determine their performance. Theannual performance reports are often used in reviewing theircontracts, and determining whether they are delivering a required.The board chair and committee are the best equipped to conduct theassessment, especially if the CEO is the one under review. In thiscase, the CEO discusses self-appraisal with the mentioned entities inadvance of the performance evaluation process.
IOOFapplies the eight principle in evaluating the executive’sperformance. The level of their remuneration is set out in thedirector’s report, alongside notes that are given in the annualfinancial report. Additionally, the board engages both internal andexternal consultants to review the executives’ performancebenchmarks. Additionally, the board ensures that the remunerations ofthe executive are performance based, which corresponds to theprevailing market levels, which is also dependable to the principleof fair remuneration. (IFL, 2010). The company’s 2014 report didnot provide information for remuneration of the executive based onthe performance benchmark. However. It did offer a report forperformance benchmarks of the managing director, Mr. Kelaher. .According to the report, the maximum opportunity for STI in 2014 was100% of the base salary. The performance rights of the director wereawarded in 2012, and the company’s director performed a percentileranking of 85.8% at the end of the five-year period beginning 2010and ending 2014 (IFL, 2014).
Figure1: IOOF 2014 remuneration report based on annualized amount
DJW maintains that it does not pay any remuneration based onperformance. Mr. Barker was made the company’s managing director,which entitles him payment directly to the Australian InvestmentCompany Services (DJW, 2010). He also receives an ‘at risk’component that is based on his performance, same as other executives.According to the company, the performance criteria includesquantitative and qualitative assessments. Instead of beingremunerated based on performance benchmarks, the company’sdirectors sign a director’s deed that approved by the shareholders.The tables below show the director’s remuneration reports for thefive-year period.
Figure2: DJW Directors` remuneration in 2010.
The above report is the director’s remuneration for 2010. Accordingto the director’s deed, the directors no longer receivesuperannuation guarantee contributions upon reaching 70 years. Belowis the table for the company directors’ remunerations at the end ofthe five-year period.
Figure3: Directors remuneration at the end of the five-year period.
Disclosureof the remuneration of the companies’ executives was an appropriatemove. First, this is in compliance with the Companies’ Act, whichholds that companies should provide full remuneration of theexecutives and non-executives (Fernando, 2009). While doing this, thecompanies should make not only public the total remuneration paid tothese members, but also a clear explanation and justification of thepayments. This helps to promote organizational integrity when itcomes to fair pay, ensuring that no executives are underpaid thatthose excesses are avoided. Additionally, the move by the companiesto make the remunerations public promotes transparency, which isessential to improving the firm-shareholder relationship. However,Fernando (2009) argues against the issue of shareholder approval,stating the foundations of the remuneration policy (Fernando, 2009).Regardless, for the purpose of shareholder support, a publication ofthe executive remuneration is encouraged.
Linkagebetween pay and performance
Thereis no sufficient linkage between remuneration and performance in thetwo companies. Both reports have only stated the remuneration perksgiven to the executives, without clearly explaining the impact of theperformance benchmarks that have been set. There are also vagueexplanations as to the amounts influenced by certain levels ofperformance, with both companies only giving light hints on theamounts accrued over the period of the five years. According toFernando (2009), there has to be an empirical relationship betweenthe remuneration for the most paid and least paid executives, whichis guided by the company’s performance benchmarks. This lacks inthe reports forwarded by the two companies.
Comparisonof principles of good governance for NFPs for ASX listed companies
Bothsets of principles are designed to promote and facilitate goodgovernance. At the same time, they both do not stand as a substituteto the relevant laws, as they mostly act as recommendations for bestpractice. Both principles also acknowledge diversity in the industryhence, do not postulate a “one size fits all” kind of approach.Given this, they are flexible and corporate friendly.
However,in nature, despite the similarities, the principles of goodgovernance for NFPs are not an attempt to formulate rules fordictating what is good for corporate governance. The ASX principlesdo this, especially by providing practice-based recommendations.While most of the companies listed on the ASX have complied withmost, if not all, of the principles, in general, some find it hard tofollow every recommendation. For instance, DJW, besides complyingwith the principles, does not set an independent remunerationscommittee. On the other hand, the principles of good governanceprovided for NFPs are easier to comply fully with.
The main difference between the principles, according to independentevaluation, is that the principles for NFPs are designed to help thedirectors and boards in conversations on good governance, while theprinciples by the ASX are intended to help the corporations regulateauthority, control and integrity. Additionally, while the ASXcorporate governance Council’s recommendations are designed to actas a reference point the principles for NFPs are for practicalapproach in improving governance.
Bhagat, S., & Bolton, B. (2008). Corporate governance and firmperformance. Journal of corporate finance, 14(3), 257-273.
DJW, (2010). 2010 Annual review: Enhancing income. DjerriwarrhInvestments Annual Report 2010.
DJW, (2014). Annual report. . IOOF Annual Report 2014.
Fernando, A. C. (2009). Corporategovernance: Principles, policies and practices.New Delhi: Pearson Education.
IFL, (2010). Annual report. IOOF Annual Report 2010.
IFL, (2014). Managing director’s commentary. IOOF AnnualReport 2014.
Klapper, L. F., & Love, I.(2004). Corporate governance, investor protection, and performance inemerging markets. Journalof corporate Finance, 10(5),703-728.