Ethics and Governance

Introduction to Corporate Governance Report

The purpose of this report is to study the history and a few important questions related to corporate governance in the country of Australia. Following Australia’s ongoing wave of corporate scandals including CBA money laundering, Banking Royal Commission and other cases of money laundering, it has become important to question the soundness of corporate governance in Australia and accordingly consider reforming it.

The report will begin by offering background knowledge about the culture of corporate governance in Australia along with acknowledging the various ongoing corporate scandals in the country. Various ownership models will be taken into consideration and accordingly will be looked at using the Accountability and Stakeholder perspectives.

Further, the report will offer a few answers to questions related to the corporate governance in Australia and study a few topics related to the same. Further, after offering a small conclusion based on the studies stated above, the report will offer a few recommendations regarding the reform agenda that will make organizations and organizational boards more accountable. The report is going to argue that the board of directors of a particular organization should be held more accountable for the organization’s actions.

Body of CG Report

Background to the report

A corporate scandal is essentially defined as an alleged or proven unethical behaviour by individuals who either act within a corporation or on the behalf of it (ADR 2019). Corporate scandals have been a part of the Australian economy, with new scandals emerging every day. These corporate collapses generally result in either bankruptcy or insolvency of a major business enterprise. There is a recognition that the corporate scandals fail to make Australian companies, directors and executives more accountable or responsible for their actions.

There exist various ownership models like Shareholder owned, Government-owned and Membership owned in the corporate industry of Australia. Before diving into the details of these models, it is important to remember certain important concepts. Firstly, accountability is defined as a practice where an individual or a group of individuals are held responsible for their decisions, performances or actions, and thus have to face the consequences (Palermo 2014). Secondly, a stakeholder is essentially a person or a party that has in interest in a company and can subsequently be affected by the company (ASQ 2019).

It is important to note that the ownership structure of a firm can affect its governance practices. One should also remember that every ownership model and governance structure comes with a set of pros and cons.

Shareholder Owned firms are owned by a group of unrelated shareholders that have an interest in the company and thus have bought a share in it. These are generally experienced individuals, unlike government-owned firms. The Government Owned corporations are the ones that are owned by the state. Usually, the boards of such companies are filled with political representatives with little knowledge of business, thus having a poor governance structure (Kumar and Zattoni 2015). On the other hand, Membership Owned firms are organizations that are owned by family members. Such firms usually have a poor governance structure much like the state-owned firms, yet are interested in the shareholder’s interests. Lastly, there exists co-determination ownership firms where the workers of an organization have a right to vote for representation amongst the board of directors (Kumar and Zattoni 2015).

 

Strengths

Weaknesses

Shareholder Owned

Such firms generally have high accountability amongst all the shareholders and stakeholders.

In this structure of ownership, a conflict in between minority and majority shareholders might be witnessed which might impact the interests of the stakeholders.

Government Owned

Such firms generally value their stakeholders and shareholders irrespective of their qualifications and roles.

Such firms generally have a poor corporate governance structure. On top of that, various political interventions can frustrate the stakeholders and affect their contributions. Accountability in such firms might be complicated due to the involvement of a political factor.

Membership Owned

If the governance structures are well managed, it can be beneficial for the firm. Such firms focus on the longevity of the firm which is a positive trait. Additionally, there is less monitoring of the managerial activity throughout the firm.

Such firms generally have a poor corporate governance structure and low protection is offered to the stakeholders. Additionally, accountability is usually not well established within the firm. Various conflicts amongst the members can also lead to further confusions regarding accountability within the firm.

Codetermination Owned

Such firms are more stable during the financial and economic crisis. Accountability amongst the employees is high in these firms along with well-defined roles and responsibilities. The stakeholders are also held as important members in such firms and are given protection.

Codetermination might undermine the board’s ability to monitor managers effectively and might increase the difficulty of terminating an employee’s employment (Dammann and Eidenmueller 2020).

Important Questions

  1. How can organizations and organizational boards be made more accountable?

Board accountability is essentially the practice of the board of directors of a particular company taking responsibility for the company’s activities and presenting a balanced assessment of the organization’s position (BoardSource 2013). It is a well-known fact that board accountability is a key element of strong corporate governance. An increased accountability for the board members within an organization will not only improve their interests in the functioning of the organization but also make them more sincere, more attentive and more active within the organization.

The first step towards making the board more accountable if by implementing transparency throughout the entire organization, thus making the board aware of all the decisions and activities within the organization (Ostrower 2014). This will not only involve the board in the decisions and activities but also make them accountable for the same. Another step would be a strategic report that is provided by the board at regular intervals. This strategic report will detail the company’s performance along with a fair and balanced review of the positive and negative aspects of the performance of the organization (Ostrower 2014).

The board of directors can also be made more accountable for reviewing and sharing the finances of the organization at regular intervals (BoardSource 2013). Overlooking and carefully analysing the finances of a particular organization falls under the duties of the board, and also makes the board more accountable for all the expenditures, incomes and other accounting information that is seen by the organization.

Another way of making the board members more accountable for their actions and decisions is by prosecuting them in case of any misconduct on their part. This is essential to establish an ethical environment within the organization and set a few norms and standards regarding acceptable behaviour. Penalizing stakeholders, especially board members, for any misconduct on their part can highly make the board members more responsible for their actions.

  1. From accountability and stakeholder perspectives what are the strengths and weaknesses of the extant governance models?

Market Centric Governance model: Such corporations are generally characterized by a diffusion of equity ownership across multiple shareholders (Bhasa 2003). It is generally witnessed that various professional managers are hired to run the corporation instead of the various shareholders. Here, the shareholder risk is significantly reduced along with an easy accumulation of capital (Bhasa 2003). Strong market of corporate control, managerial labour and excessive executive compensation are the various characteristics of this model. Accountability within the managers is slightly low and there is a constant effort from their end to maximize their benefits.

Relationship-based Governance Model: The shareholders of corporations with this model of governance are driven by a long-term commitment and are responsible for monitoring the managerial actions, thus avoiding the agency costs (Bhasa 2003). Banks generally dominate the ownership shares and are generally involved in the operations of the firm using monitoring. Such a dominance established by the banks undermines the authority of the managers. Unlike the market-centric model, however, there is no separation between ownership and control in such firms.

Transition Governance Model: These firms are characterised by weak institutional investors, lack of financial discipline and poor investor protection mechanisms (Bhasa 2003). These are generally state-owned enterprises that slowly convert into private organizations whose progress has been marred due to the artificial diffusion of ownership and excessive state intervention despite their efforts to strengthen their capital markets (Bhasa 2003).

Emerging Governance Model: Firms with an emerging governance model are characterized by a successful transition from state-held sectors to widely-held firm and vibrant capital markets (Bhasa 2003). Generally, businesses following this model consists of family members that retain a significant amount of control and ownership over the corporation. Such corporations, though successful, witness various conflicts amongst the family members and the minority shareholders which not only disturbs the performance of the stakeholders but also causes dysfunction regarding the accountability within the firms.

Conclusion on Corporate Governance Report

It can thus be concluded that the ownership model of a particular corporation can determine the corporate governance structure of the corporation. Different ownership models come with various pros and cons attached to themselves. While some models like the shareholder model have high accountability, other models like the governance model has a high regard for stakeholders within the corporation.

At the same time, it is clear that there is a need for corporations and boards to Australia to be more accountable for their actions and decisions within a corporation. Increased accountability for such persons will not only improve their interests in the functioning of the organization but also make them more sincere, more attentive and more active within the organization. It will also push the board to fulfil their duties respectfully and be faithful to their roles within the organization. There are various ways by which the board members can be made more accountable for their actions. Some of these ways include monthly reviews, transparency within the organization and financial reports made available by the board members.

It is also important for an organization to study the different governance models and evaluate them accordingly. There are currently four governance models namely market-centric, relationship-based, transition and emerging governance models, where each of them contains certain strengths and weaknesses.

Recommendations on Corporate Governance Report

There is an extensive need to increase the accountability of the board of directors within the firms of Australia. A few recommendations as to how the accountability can be improved are as follows:

  • One way to successfully make the board members more accountable for their actions is by clearly defining their roles and responsibilities within the organization. This will not only give them a sense of responsibility but will make them responsible for overlooking all the decisions about a department or division, thus increasing the amount of interest they take in the actions and decisions regarding that particular department/division. This will also enable the other board members to successfully determine which board member was responsible for any malpractice or inefficiency.
  • Board members can also be made more accountable for their actions and decisions by recording every director’s vote on key corporate resolutions in proxy statements to have a record of all the directors who voted for or against a particular action taken by the company (Montgomery and Kaufman 2003). This will not only make the directors more aware of what vote they are casting but also make them partially or completely responsible for a particular action.
  • Lastly, the board members can also be made more accountable for their actions if they are required to submit a quarterly or half-yearly report of all the actions, decisions, positive and negative implications and changes that have been witnessed in their areas of interest within the organization. This will push the directors into taking more interests in the working of the organization and thus becoming a part of the daily functions.

References for Corporate Governance

ADR. 2019. The 10 Worst Corporate Accounting Scandals of All Time. [Online]. Available at https://www.accounting-degree.org/scandals/ [Accessed on 21/10/2020]

ASQ. 2019. What are Stakeholders? Stakeholder Definition. [Online]. Available at https://asq.org/quality-resources/stakeholders [Accessed on 21/10/2020]

BoardSource. 2013. Five Things Your Board Can Do to Lead with Accountability and Transparency. [Online]. Available at https://trust.guidestar.org/blog/five-things-your-board-can-do-to-lead-with-accountability-and-transparency [Accessed on 21/10/2020]

Dammann, J., and Eidenmueller, H. 2020. Codetermination: A Poor Fit for U.S. Corporations. [Online]. Available at https://corpgov.law.harvard.edu/2020/04/28/codetermination-a-poor-fit-for-u-s-corporations/ [Accessed on 21/10/2020]

Kumar, P., and Zattoni, A. 2015. Ownership Structure, Corporate Governance and Firm Performance. Corporate Governance: An International Review, 23 (6), pp. 469-471.

Montgomery, C., and Kaufman, R. 2003. The Board’s Missing Link. [Online]. Available at https://hbr.org/2003/03/the-boards-missing-link [Accessed on 21/10/2020]

Ostrower, F. 2014. Boards as an Accountability Mechanism. University of Texas at Austin, pp. 1–24.

Palermo, T. 2014. Accountability and Expertise in Public Sector Risk Management: A Case Study. Financial Accountability & Management, 30 (3), pp. 322–341.

Praveen Bhasa, M. 2003. Understanding the corporate governance quadrilateral. Corporate Governance: The International Journal of Business in Society, 4 (4), pp. 7–15.

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