Corporate Governance Case Study Samples †MyAssignmenthelp.com

Question: Discuss about the Corporate Governance Case Study. Answer: Introduction Corporate governance refers to the administrative processes and mechanisms that regulate the functioning of corporations. Corporate governance principles refer to certain ethical standards of administration which all companies must adhere to when conducting business (Tricker and Tricker 2015). These standards increase accountability which is of utmost importance to potential investors or any other stakeholders involved. A company or a corporation is a separate legal entity, this means that it can transact business and sue or be sued in its own name (Capaldi, Zu and Gupta 2013). This brings about a peculiar situation where all the major decisions are taken by persons whose liability for those decisions are exempted by virtue of the companys legal identity. This is termed as the corporate veil, which must be lifted in order to impose the liability on the ones actually responsible for the decisions taken. This is legally permissible only in certain conditions and is reliant on thelaw go verning companies in a particular country. The Enron scandal in the United States made corporate governance a global concern, based on the monetary repercussions faced by the global economy due to the fabricated representations made by the company which attracted investors from all over the world (da Silveira, A.D.M., 2013). In Australia incidents like the HIH insurance fraud and the One.tel scandal gave rise to the need for well established and strict corporate governance principles (Leung et al. 2014). This eventually lead to the enactment of the CorporateLaw Economic Reform Program (Audit Reform Corporate Disclosure) Act 2004 which is also called the CLERP 9. This act primarily focuses on corporate disclosures which is a fundamental part of accountability. These are aimed at providing a true and transparent picture of a companys financial position for stakeholders to assess. This would also help avoid a financial crisis based on the manipulated records which eventually lead to t he 2006 global recession. The following paragraphs will analyze a set of circumstances in light of the principles laid down by the Australian Securities Exchange (ASX) Corporate Governance Council (Beekes, Brown and Zhang 2015). Role of the Board: The principle statute dealing with corporations in Australia is the Corporations Act, 2001. CLERP 9 came into force to amend the lengthy statute and incorporate principles of corporate governance into the statutory framework to ensure corporate disclosures (Carey, Monroe and Shailer 2014). ASX Corporate Governance Councils recommendations are not binding however they bring about a clear idea of how a corporations governance structure should ideally be formulated (Young and Thyil 2014). With reference to ASX Corporate Governance Councils principles the given circumstances maybe interpreted as under: Role of the Board of Directors: Principle 1 of the ASX Corporate Governance Councils recommendations deals with management and oversight. It makes recommendations to make clearly distinguishable powers and duties with precise guidelines on delegation (Tao and Hutchinson 2013). These powers and duties should be ideally divided among directors and executive officers but these divisions must be clearly defined. It also recommends a disclosure of the evaluation methods of executive officers. Principle 2 of the ASX Corporate Governance Councils recommendations deals with Value Addition through the structure of the board (Gitman, Juchau and Flanagan 2015). This principle recommends that the structure of a board should have the following characteristics to derive maximum value: Independent directors should comprise of majority of the board. Independent directors would have varied and novel ideas that are free from the biases within the organization. This would bring in more specialized skills as well as more innovative takes on how a particular situation can be dealt with. There should be a separation between the chair and chief executive officer. This means that they should be different individuals as that would reduce arbitrary use of powers within the organizational structure. Mr. Hammer was recruited to the board of directors due to his expertise in the hardware industry. However, a directors duties encompass more responsibilities and to an effective director Mr. Hammer would be required to understand the marketing plan undertaken by the company and additionally he would be required to understand all ethical considerations expected from his job profile. This is necessitated by the recommendations of Principle 3 which deals with ethics and decision making (Chan, Watson and Woodliff 2014). An observation or apprenticeship period where he observed the regular functioning of the company before being appointed would also help him understand his duties better. Moreover basing such an important recruitment on family ties and similar personal backgrounds is highly arbitrary and displays an abuse of due process. Before the recruitment was made Mr. Hammers competency should have been evaluated as that would help both the company and Mr. Hammer asses his level of ut ility to the job at hand. Such an assessment of competence forms part of ASXs recommendations under Principle 1. Corporate governance also necessitates precise and transparent communication between the board and the Chief Executive Officer (Brandas 2013). This would help ensure all delegations made are clearly recorded and help identify the division of responsibilities. Moreover, transparent communication increases accountability as there is no ambiguity when trailing to an earlier decision (Miglani, Ahmed and Henry 2015). The board should consider all ethical factors during the decision making process. This is recommended under Principle 3. When undertaking a business strategy the board must be compelled to take steps that are ethical and not immoral in any way. Various provisions of the Corporations Act, 2000 imply the same as fraudulent or unethical activities by the board may attract legal action where the corporate veil is lifted and the individuals themselves are held personally liable for their involvement in the decision making process. Goodwill is an intangible asset which brings implicitly brings in revenue (Ratiu and Tudor 2013). Thus, maintaining goodwill in the market is absolutely essential for a corporation that seeks to obtain a higher market share. Principle 3 prescribes recommendations based on ethical requirements that a company must adhere to with the aim of maintaining goodwill in the market. Principle 3 also recommends that a corporation should ideally only engage in business tran sactions with corporations that represent the same or similar ethical standards in their dealings. Business risk, though calculated, forms the crux of business activities. Transactions are based on contractual obligations and considerations but the performance of these obligations is purely based on good faith. Thus contractual breaches are a part of everyday business activities and maybe identified as the primary risk in business activities. Principle 7 of the ASX Corporate Governance Councils recommendations prescribes steps to ensure effective identification and management of risk. Risk management involves various analytical processes that seek to predict various outcomes of undertaken business risks and minimize the potential losses that a corporation may incur (Brennan and Flynn 2013). The first of these recommendations is the formation and regulation of a risk management committee that oversees all activities related to managing business risk. The committee would ideally have a minimum of 3 members the majority of whom should be independent directors. The policies and regula tory guidelines of the committee should be embodied in a charter and the contents of the charter should be disclosed. Principle 7 further recommends that if the corporation does not form a committee the same fact should be disclosed and they should ideally disclose the various processes undertaken by them to manage risk. This particular disclosure also finds statutory backing in the Corporations Act, 2001. As per the provisions of section 299A a company must include a discussion stating the internal and external risks that could affect the company in the near future in its Directors report (Bae Choi, Lee and Psaros 2013). The second recommendation in Principle 7 deals with the duties of the committee and states that a committee should ideally assess the risk factors affecting the corporation once a year. In addition to assessing the risk the committee is also obligated to make a disclosure based on this annual assessment. Such disclosures present a clear picture of the financial sta tus of the company which prospective investors may use as a guide when deciding to invest in the venture (Minton, Taillard and Williamson 2014). Auditing refers to the process of evaluating the financial records of a corporation with the aim of formulating an accurate and true representation of its financial position (Mennicken and Power 2013). Auditing may be internal and external, though external audits are more reliable (Tinoco and Wilson 2013). Principle 7 recommends that a company should disclose the audit processes it employs especially if its through an internal auditing entity. In addition to this disclosure all environmental, social and economic risks that the corporation may encounter in its daily functioning should be disclosed as material information for its prospective and existing stakeholders. Performance assessment of the board and its implications: The board of directors of a corporation holds the apex administrative position. They are entrusted with the decision making process for the functioning of a corporation. The appointment, remuneration and termination of directors in Australia are governed by the provisions of Part 2D.3 of the Corporations Act, 2001 (Schultz, Tian and Twite 2013). Division 4 of Part 2D.1 of the act defines the powers of directors and a wide range of discretionary powers are conferred upon them based on the position they hold. However, arbitrary use of power should not be ratified or condoned in any situation. The position the board of directors hold is proportional to their obligation to act in the best interests of the company, even if that means not having aligned interests with the management as is the case for independent directors. These independent directors are presumed to bring more tactful strategies to the organizations decision making process. Therefore, due to the immense discretionary powe rs conferred upon the directors and the impeccable standards of professionalism they are expected to adhere to, the board of directors should ideally be regularly evaluated. This evaluation process would assess the productivity brought into the organization by all members of the board and the board as a whole. Corporate governance principles dictate that the board of directors responsibly observe the duties they are entrusted and thus the evaluation process is absolutely necessary. ASX Corporate Governance Councils recommendations prescribe guidelines for the disclosure of such evaluations in Principle 1. Recommendation 1.6 states that a corporation should maintain a periodic evaluation process of the board of directors and disclose periodically if such an evaluation was undertaken and its implication. In the given case at hand, Lotsa Subs Ltd (Lotsa) before expanding to its hardware business (which eventually came to be termed as Local Shed), employed an internal assessment of the performance of the board drawn up by the company secretaries. The consequent report reflected a positive image of the boards performance due to fabricated representations. This eventually lead to the adoption of the business strategy to expand to the hardware industry which had catastrophic results on the board as well as the companys revenue figures. The manipulation of data which resulted in the misleading representations can be directly attributed to the damage incurred by the company in terms of goodwill and revenue (Ferri, Fiorentino and Garzella 2017). Principle 3 makes it an obligation to act ethically and recommends that all corporations maintain a code of conduct for their directors, executive officers and employees and is disclosed to them and prospective stakeholders. This imbibes a sense of e thics and professionalism among all strata of the organizational structure. Principle 4 recommends upholding the integrity of financial reporting. This primarily recommends formation of the audit committee but financial reporting has relatively wider applications than just audit. Financial reporting that is done devoid of any form of manipulation represents a clear picture of a companys viable financial position. If in the current scenario the company secretaries had complied with these recommendations and prepared a report that made true and accurate representations the flaws in the expansion strategy could be identified from its very inception. Identification of these viable flaws would have ideally prevented the company from moving forward with the expansion and the Local Shed debacle could have been avoided completely. Lotsa, as opposed to their initial idea of employing an internal board performance assessment, could have gone for an external evaluation ideally carried out by a third party who is not a stakeholder in the company. This would give them an unbiased report of the performance of the board and the lack of competency, especially Mr. Hammers, would be identified much earlier. Additionally, instead of opting for a performance analysis before adopting a strategy, a periodic system of evaluation of the board should have been implemented. It must also be noted that the recruitment procedure employed for Mr. Hammers board membership was discretionary and did not follow due procedures prescribed under the Corporations Act, 2001. This arbitrary use of power was also against corporate governance principles. If the company ensured that such arbitrary appointments could not be made, especially to the apex position, then the Local Shed expansion would not have been undertaken. Investors influence on companies decisions and Recommendation for Lotsas engagement with institutional investors Raising capital is the first step to the incorporation of a body corporate. The promoters of a company are generally the first board of directors and it is their responsibility to raise capital which at that stage maybe termed as seat-funding (Park and Steensma 2013). This refers to raising just enough capital to incorporate the going concern to function till it starts generating revenue. Whether it is for seat funding or for additional capital, investors are what make the body corporate. Investors can be engaged through debt or equity (debentures and shares respectively) and by investing in equity investors practically gain ownership rights in the venture. This means all shareholders are part owners of the venture. Thus at all shareholders meetings, the shareholders have a right to vote on the issues which form a part of the agenda for that meeting. According to ASX Corporate Governance Councils recommendations, shareholders hold supreme rights as the board of directors acts as thei r agent and a link between the investors and the management. They are entitled to all forms of disclosures that are material in determining the financial viability of the venture of one of its undertakings. They are also entitled to complete access to the books of the corporation and two-way communication with the various wings of the organization. Principle 6 of ASX Corporate Governance Councils recommendations deals with holders of security and their rights. This principle has four recommendations each aiming at ensuring lucid and transparent flow of information between the administration and the owners. Recommendation 6.1 prescribes the use of an official company website. In the present global business scenario a companys website is the primary source of information on the company and is considered to be the most reliable source of information. The most vital piece of information that should be included in the website is the companys governance policy. The recommendation prescrib es the formation of a corporate governance heading in the official website that lists all possible information on the companys corporate governance policies. It should also include information on all directors and the company charter (or any such document that would provide for similar information). Recommendation 6.2 states that each corporation should design and implement programs to enhance investor relations. This recommendation makes it evident that the company is obligated to keep investors informed of all material changes and relevant notices that are circulated within the internal framework of the company. Investors are the key to expansion and it is the corporations duty to protect and prudently utilize the funds made available to it. Thus investors exert immense influence on the decisions of the board being the practical owners of the venture. They additionally are instrumental in appointment of the board and hence enjoy a superior position than the board of directors. How ever, decisions relating to the everyday functioning of the company lie in the hands of the board of directors. Recommendation 6.4 prescribes free flow of information to the investors and states that there should be an electronic platform to ensure the same. The term institutional investors refers to financial institutions that invest in ventures, mainly commercial banks (McCahery, Sautner and Starks 2016). Institutional investors are usually large scale investors and thus are an essential for ventures that require large capitals (Edelen, Ince and Kadlec 2016). Lotsa is quintessentially an expanding venture and thus requires institutional investors. In order to engage institutional investors they must set implement various changes to their administration system. Firstly, it should ideally prescribe for all the disclosures mentioned in the corporate governance principles (Salterio, Conrod and Schmidt 2013). Secondly, in order to win back the lost market share and goodwill it should i deally implement a system for the evaluation of the board through an external agent as it would increase credibility of the report. This would attract institutional investors as they would be getting an accurate view of the companys economic position. The third and final step that Losta needs to implement is expansion into markets where it already enjoys majority or substantial market share. The experiment to expand to the hardware industry that already has well established competitors holding maximum market share can only be termed as a fiasco. This is conspicuous evidence of their inability to expand to new markets. Expansion in the consumer goods industry would be helpful in gaining back the lost goodwill and will attract institutional investors as it would appear to be a safer investment. 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