With rising obesity levels around the world and a greater focus on health, there has been increased participation in the fitness industry. In Australia the fitness industry produced revenue of around a billion Australian dollars annually, with close to 3 000 fitness centres (McMalcolm 2013). In Japan the health club industry accounted for revenue of 6.8 billion Australian dollars in 2015 (Statista Inc.). Australia and Japan led the Asian-Pacific region for revenue in this area in 2015 (Statista Inc.). However at the beginning of the second decade of the 21st Century, growth in revenue in the industry in Australia slowed because of market saturation (McMalcolm 2013).
Now the owners sought to retain specialist advisers on the requirements for compliance with the third Edition, ASX Corporate Governance Principles and Recommendations 2014, once their company is listed on the ASX. They want to learn about compliance and disclosure requirements relating to their first annual report once listed, and other key ways in which the corporate governance regulatory environment could affect them as a listed company. They wondered whether the corporate governance compliance requirements in Australia will detract from the benefits of listing on the ASX, and were concerned about any specific risks
that the future company may face.
You have been retained by SelectFit as a specialist Corporate Governance Advisor. Your brief is to present a written paper on corporate governance practice to SelectFit at its next company meeting. You are required to:
Corporate governance is the system by which boards of directors control and direct companies. Shareholders who expect them to file reports on their governance job appoint the board. Directors are responsible for devising company goals, supervising the management team and provision of leadership required for the achievement of the goals set. From studies carried out, it is clear that companies that are well governed perform better in commercial terms.
1. Ways Of Maintaining And Establishing Good Corporate Governance
Realize that good governance is not all about compliance
Boards should balance regulation and legislation with compliance aspects, (Charan, 2011). Directors in a board should realize that their main work is the formation of policies and strategies that propel performance of the organization. A good relationship between the management and the board should be maintained by ensuring that each director knows what roles they are expected to play.
Spell out the board’s function in strategy
To avoid a clash with management, boards should clearly define their degree in the contribution to the strategy of a company. It is important to clarify which roles are appropriate for management and which ones are appropriate for the directors to undertake, (Christensen, 2010). Boards may be tasked with approval at times and development at other times.
Oversee organizational accomplishment
This is a major role of the board as it ensures that there is consistency in making of decisions in relation to the expectations of the owners. There should be easily understood ways of measuring success and recognize major performance drivers in the organization. As a way of maintaining good corporate governance, the board should see to it that all matters received from reports are reported as required.
Be aware that the board of directors employs the CEO
Directors are tasked with vetting, appointing, reviewing and replacing the CEO where necessary. The board's role in the formulation of policies and strategies and the management's function in accomplishing objectives of the organization are highly dependent on the board/CEO relationship that is the link between the two bodies. The chairperson of the board plays a big part in formulating a good relationship between the board and the CEO. He should be a person with good interpersonal skills so as to ensure the two bodies work in harmony.
Realize that the board is responsible for risk governance
Risk management is important to both small and large organizations, (Wu, 2009). Proper management of risks provides employees, shareholders, customers and the society a sense of contentment that a company is being managed well, (Claessens, 2006). It becomes very easy for an organization to crumble if it does not proper risk management strategies. These strategies should be executable.
Provision of all information needed by directors
Information on presentations, site visits, and briefings should be provided to directors when the need arises. Availability of relevant information ensures that better decisions are made. Although directors may have varying informational requirements based on their experience, expertise, knowledge and skills, they should all have access to any information they need. At times, a professional advice policy that is fully independent is recommended.
Establishment of a Governance infrastructure
The board should make policies governing behaviors in the organization, as it is their work to ensure employees act in ways acceptable to the organization’s publics. It is expected to clearly define specific responsibilities and delegations of the board and management. Procedures and processes should be clearly spelled out to ensure proper access to information and flow of communication. This goes a long way in preventing dissatisfaction among directors. Board meeting processes and agendas should be clearly defined, as well as well as the board’s committee structure.
Appoint a proficient chairperson
Board's chairperson should demonstrate strong leadership qualities through relating well with the CEO and controlling decision-making processes. Studies have shown that the culture and trust of an organization important than regulations and the structure of the board, (Van den Berghe, 2004).
Form a skills-based board
It is vital that a board has good knowledge of the pool of skills it requires and those skills already at its disposal. It should have a balance between directors who are experts in various fields and directors who are experienced and knowledgeable in the company. Directors' behavioral abilities in various contexts should also be considered, as this will determine how they relate to each other, with the management and with important stakeholders.
Performance evaluation of the board
Boards must analyze their weak and strong areas for them to offer proper governance. In areas where there are weaknesses, improvement should be made. Improvements may be on areas like motivation, qualifications, board processes and skills of directors. Recommendations made from the evaluation are to be implemented and monitored.
2. Advantages/Benefits of Good Corporate Governance
It’s not by chance that corporate governance is increasingly being practiced across the globe. There are various benefits that companies and their stakeholders reap from corporate governance, (Thomsen, 2008). Below are some of the advantages SelectFit may get as a listed entity having good corporate governance:
Good corporate governance of an organization achieves the trust of the society who are its customers thereby ensuring success. If the community trusts your organization, it means that they will fully trust the quality of the products or services you offer.
The exposure of ethical guidelines to employees through proper corporate governance ensures the resources of the company are used well. Such employees won't misuse the property of the company they work for. For example, employees who are given cars by an organization will take care of the cars as if it was theirs. This would save the firm a lot of money that would have otherwise been used for repairs or replacement.
Recognition and Reputation
Organizations that observe good corporate governance gain the trust of their publics, that is, customers, investors and the community, (Keasey, 2007). Such a company is recognized to be transparent and fair. A company can choose to market itself through the provision and production of quality services and goods with the aim of satisfied clients spreading the word to the people they relate with.
Curb corruption and mismanagement
Individuals who intend to exploit their power in companies that practice corporate governance are usually unsuccessful due to the high levels of transparency in these firms. In an organization practicing good corporate governance, there are very few individuals who would want to use the position they have to benefit themselves. These individuals find it hard to be corrupt in their dealings as they lack accomplices to engage their underhand actions with. This is a very big benefit to the company since new employees will always adopt a culture of integrity.
Disadvantages/Benefits of Corporate Governance
There are certain disadvantages of corporate governance. They include:
Misrepresentation of facts
Organization officials may at times misrepresent financial information to alter the value of company shares in the market or to avoid paying taxes.
Separation of Management and Ownership
Managers create ‘agency problems' when they struggle to achieve objectives, not in line with organizational goals (John, 2008). This at times creates strife between the board of directors and the management.
This occurs when company officials have access to confidential company information use it for their gain and sell shares to an individual who doesn't have the knowledge of that information (Dine, 2007). Such practices may be very detrimental to a company and may even lead to its downfall.
Benefits And Importance Of Adhering To The ASX Principles And Recommendations
3. Ethical and responsible decision-making by officials
According to the ASX principles and recommendations, companies are expected to champion ethical actively and decision-making through: (Council, 2007).
a. Establishing and disclosing codes of conduct
b. Disclosing the goals in each report for achieving gender diversity.
If HIH Insurance could have adopted the ASX principles and recommendations, there couldn’t have been any unethical and poor decisions made such as the acquisition of Fixed-asset investment (FAI) and venturing into the United Kingdom (UK) and United States (US) (Westfield, 2003). This only bore the company nothing but losses.
Solid foundations for management and oversight
As recommended by the ASX principles and recommendation firms should:
- Spell out the roles of the board of directors and those of the senior executives
- Disclose performance evaluation process of company executives
According to (Damiani, n.d.) HIH failed to conduct a performance evaluation of senior management only to come and realize later that some senior official may have violated corporation laws. The actions of this personnel contributed to the crash of HIH insurance.
Proper management and recognition of risks
ASX recommends that:
- Companies should come up with policies for the recognition and management of risks and disclose the summary
- The board asks the management to design and manage risk management systems.
HIH’s poor risk management frameworks led to substantial losses in its US operations.
4. Integrity in financial reporting
A company that adheres to the ASX principles and recommendations has an independent structure to double-check the integrity of its financial reporting. It follows the following recommendations:
The presence of an audit committee that has at least three members is chaired independently and consists of non-executive directors who are independent.
Internal auditors of HIH excessively focused on the accounts and not the management of risks. At some points, auditors were also misled by HIH. They, therefore, failed to realize that the company was crumbling bit by bit.
Charan, R., 2011. Boards that Deliver: Advancing corporate governance from compliance to competitive advantage. John Wiley & Sons.
Christensen, a.J.S., 2010. Corporate governance and company performance in Australia. Australian Accounting Review, 20(4), pp.372-86.
Claessens, S., 2006. Corporate governance and development. The World Bank Research Observer, 21(1), pp.91-122.
Council, A.C.G., 2007. Corporate governance principles and recommendations.
Damiani, C..B.N.a.F.M., n.d. [Online] Available at: https://treasury.gov.au/~/media/Treasury/Publications%20and%20Media/Publications/2015/R oundup%2001/Downloads/PDF/Roundup_01-2015_article3_HIH.ashx.
Dine, J., 2007. Insider trading: the why? And how? EUROPEAN FINANCIAL SERVICES LAW, 4, pp.75-80.
John, K.a.S.L.W., 2008. Corporate governance and board effectiveness. Journal of Banking & Finance, 22(4), pp.371-403.
Keasey, K.a.W.M., 2007. Introduction: The corporate governance problem-competing diagnoses and solutions. Corporate Governance: Economic and financial issues, pp.1-17.
Thomsen, S., 2008. An introduction to corporate governance. djøf/jurist-og økonomforbundet.
Van den Berghe, L.A.a.L., 2004. Evaluating boards of directors: what constitutes a good corporate coard? Corporate Governance: an International review, 12(4), pp.461-78.
Westfield, M., 2003. HIH. Inside the Story of Australia's Biggest Corporate Collapse.
Wu, D.D.a.O.D.L., 2009. Enterprise risk management: Small business scorecard. Production Planning and Control, 20(4), pp.362-69.