1. Choose a company that is currently listed on the Australian Stock Exchange and whose conduct is being considered by the Royal Commission mentioned above. Discuss whether your chosen company adheres to the principles of good corporate governance. Give reasons for your answer, including examples of good or poor corporate governance exhibited by your chosen company.
2. Discuss the possible legal, social, economic and political consequences that may follow where those making decisions on behalf of the company you have chosen above fail to observe good corporate governance principles. In your response you must identify and discuss two theories that drive views on corporate governance (50 marks.
Corporate Governance of Commonwealth Bank of Australia
This report will focus on the corporate governance of the Commonwealth Bank of Australia. The Commonwealth Bank has stated their corporate governance in their annual report where they had mentioned that they have complied with all the principles and recommendation of ASX. Recently an inquiry conducted by the Royal Commission where several banks governance has been found to be in question and in that one of the bank is Commonwealth Bank. Royal Commission has detected various conduct of the Commonwealth Bank doubtful. The director duties towards the organisation and the Law of the Corporations Act that has breached will be discussed in this report. The importance of corporate governance and the principles lay down by the ASX. It is required for a listed company to follow the ASX principles or it can lead to the legal, social, economic and political implications. The two theories of the corporate governance that will show the views on the corporate governance and how the Commonwealth Bank of Australia has failed to comply with these duties.
The corporate governance is the art of directing and controlling the organisation. The commonwealth Bank had also published the corporate governance of their company in their statement. The commonwealth Bank has the goal is to create and maintain the good relation with the customers by improving their economic conditions. The company has also stated there in their statement about the relations with the stakeholders. The company also talks for the good governance inside the corporation by the implementation of the code of conduct in the organisation. The Bank in their statement has stated about the policies need to be made easier simpler to understand for strengthening the governance of the organisation. The bank had made strict Law to mark a stop mark on the bribery and the corruption. The bank had made the law to stop the human trafficking in their supply chain and in their business. For minimising the financial and the non-financial risks, the bank has implemented the risk management policies. The bank AGM is rotated between the capital cities of Australia so that maximum of shareholders can attend the meeting. The bank had made certain policies from which the cooperation between the management and the shareholders that can be improved. This statement gives the outlook of the corporate governance of the bank but according to the report of the Royal Commission, the governance of the bank had been found in the question (Commonwealth Bank of Australia, 2018).
ASX Principles and Compliance
The principles and the recommendation of the ASX are required to be followed by the listed companies. The Commonwealth Bank is the listed company and has to comply with the disclosure obligations of the ASX. The bank has to reveal the information that can affect the Ziffer, D. (2018) market price or affects the bank shares. In the ASX recommendation stated that the management of the company such as directors and the company secretary would be liable if participated in the decision-making (Tricker & Tricker, 2015). The Commonwealth Bank is not allowed to disclose its governance policy without the confirmation of the ASX. It is necessary for the bank to apply all the principles that had recommended by the ASX in their disclosure policy and has to comply with all the principles and the recommendation mention in that report. The principle of ASX suggests that the corporations should lay a solid foundation for the management. The company must work ethically and provide the safeguard policies in the company. The priorities of the security holder must be considered (ASX, 2018).
The Commonwealth Bank in their corporate governance statement has mentioned that they had complied with all the principles and recommendations of the ASX but the bank had shown poor governance according to the report of the Royal Commission (Royal Commission, 2018). The certain acts of the management of the Commonwealth Bank showed the poor governance. The bank had admitted that their planning body had breached the laws of the Corporations Act as they had charged the fees from the clients who had already died for the services that they had not received (Danckert, 2018). The financial advisors of the bank by fraud ways showed profits by making forged signatures and created the unauthorised investment accounts. The bank had also found in another scandal that includes money laundering, inappropriate foreign exchange trading, they behaved blind to terrorism financing, ignored the statutory reporting responsibilities for about three years (Ziffer, 2018). Its subsidiary Bankwest had also come into the spotlight for the unfair loan practices. The Bank due to their bad governance and accepted the truth that their employees had been into the misconduct and for they had millions of penalties to ASIC and provided the compensation to the clients. It has proved from the evidence that had been found by the Royal Commission that the corporate governance of the Commonwealth Bank of Australia does not adhere to the governance they had stated in their statement (Hurchens, 2018).
Breaches of Director Duties by the Management
The duties were required to perform by the management such as directors, financial advisors and the company secretary of the bank has not performed and violated the director duties of the Corporation Act. The Commonwealth Bank of Australia had accepted the management of the company had breached the laws of the Corporations Act. The duties under section 180, 181, 182 & 183 had been a breach that says the directors or the officer hold the position equivalent to the position of the director. They are required to do his work with care and diligence that what the employees of the Commonwealth Bank of Australia had failed to comply with these laws, employees not shown care and diligence towards the organisation and results in the scandals. The directors must work for the organisation and not for the personal motive and work with honesty, as this law was completely breached by the management of the company. Thus, it can be said that the director duties had been breached by the directors of the corporation.
Commonwealth Bank of Australia is required to understand the importance of governance principles and to implement those principles in the organisation for the better governance. The corporate governance principles that are recommended by the ASX have necessary to be followed by the organisation. The principles of the ASX are necessary for every listed company like Commonwealth Bank to implement in their company. These principles laid down the foundation of the good governance in the organisation. The good governance means that if the company is working efficiently and the process of the organisation is transparent and good disclosure policies (Berger, Imbierowicz & Rauch, 2016). It helps the regulators, shareholders and the customers to know the accurate information about the management process. It will make the good cooperation between the management and the shareholders, investors and the customer. Thus to avoid legal, social, economic and the political implications it is required for the bank to have a good governance and must comply with the principles of the ASX. These implications are as followed:-
- Legal Implication: The listed company such as Commonwealth Bank of Australia has to follow the principles that they had stated the principles and the recommendations of the ASX. There are civil and criminal penalty had been imposed on the company if they failed to comply with the principles. The management of the company found to be breached the laws of the Corporation Act than then the civil and criminal penalties will be imposed. The bank can receive the infringement notice from the ASIC for its conduct. Therefore, it is necessary for the organisation and the management that the decision should be taken in a proper and ethical manner to protect from the legal implication on the organisation.
- Economic Implication: The fraud practices by the bank for which the bank had paid millions of penalties that causes the financial loss for the Commonwealth Bank of Australia. Thus, it can be concluded that if the organisation failed to follow the good governance within the organisation that must follow the principles of the ASX. It is necessary for the organisation to think before taking any decision on their economic outcome(Gulf News, 2018).
- Social Implication: It is required for the bank to make a trust among its customers, as it should be the main motive for any organisation. If the scandals that have revealed in the Royal Commission the company will lose the trust of its customers. It will lead to the downfall of the reputation of the bank in the society. The company goodwill is the company’s biggest assets and for maintains that assets than there are required to maintain a good governance in the company (Rodriguez, 2016).
- Political Implication: The companies are required to provide good governance to avoid any political implication. The political pressure can be rise due to the bad governance in the company as some strict laws or some amendment can be made by the government that can affect the business (Aulich, Jones, & Head, 2018).
There are some theories of corporate governance that suggest the views of the organisation for implementing the good governance. The Commonwealth bank should require complying with these theories for the good governance.
This theory states that the main responsibility of the business is to make profits. This theory also states the relationship between the shareholders and the management. The management is hired is to fulfil the interest of the shareholder. The management is the agent and the shareholders are the principal in accordance with this theory. The management has the legal and moral duty to serve their interest. This theory has the basic rule that make money as much as possible and both these rules are embodied in the society as by the law and the ethical custom. The management of Commonwealth Bank of Australia had failed to apply this theory, as they had not worked in the shareholders’ interest. The management of the company has done certain frauds for their self-interest. This theory aims is to develop cooperation between the shareholder and the management. However, this theory only focuses on the interest of the shareholder that is followed by very few organisations because the modern business focuses on the interest of other such as stakeholder also into the consideration (Sapra, Subramanian & Subramanian, 2014).
Importance of Implementing Good Governance Principles
This theory states the basic aim to all over the development of the organisation by giving good results. It gives focuses in protecting the interest of stewards and in maximising the wealth of the shareholders. This is not related to the agency theory because in that theory individualism was followed but this theory talks about the goals of the organisation. In this theory, stewards are the executives and the managers of the organisation as they work for the shareholders and for achieving the goals of the organisation. Commonwealth Bank of Australia had failed to comply with this theory as due to the poor governance and poor ethics in the company. In the Royal Commission, report it was stated that in the organisation there was the poor ethical environment. It can say that the management values were not conducted in the organisation in accordance with this theory and therefore the employees of the organisation have performed poorly. The companies can learn from this scandal and for good governance, they can apply both agency and stewardship theory in the organisation. These two theories if combined than can give better results for the corporation (Sapra, Subramanian & Subramanian, 2014).
It can be concluded from the above two question that the corporate governance has its own importance. The Commonwealth Bank of Australia has failed to comply with the principles recommended by the ASX. The bank conduct into the Royal Commission proved that their corporate governance was not adhering as they had published in the yearly statement. It has proved from the evidence that the directors of the company had breached the laws of the Corporations Act. It can be concluded from the case that if the companies failed to apply the principle of the ASX that it can lead to legal, economic, social and the political implications. There is required for the companies to work with in accordance with the two theories of the corporate governance that had described at the end of the report as what Commonwealth Bank of Australia had failed to apply.
ASX. (2018). ASX corporate governance. Retrieved from: https://www.asx.com.au/about/corporate-governance.htm
Aulich, C., Jones, S., & Head, B. (2018). DIVESTMENT OF COMMONWEALTH PUBLIC ENTERPRISES IN AUSTRALIA: THE CUPBOARD IS BARE 1. Annals of Public and Cooperative Economics, 89(3), 475-490.
Berger, A. N., Imbierowicz, B., & Rauch, C. (2016). The roles of corporate governance in bank failures during the recent financial crisis. Journal of Money, Credit and Banking, 48(4), 729-770.
Commonwealth Bank of Australia. (2018). Continuous Disclosure Policy. Retrieved from: <https://www.commbank.com.au/about-us/shareholders/corporate-profile/corporate-governance.html>
Corporations Act, 2001 (Cth)
Danckert, S. (2018). CBA admits breaching the law in response to royal commission findings. Retrieved from: <https://www.smh.com.au/business/banking-and-finance/cba-admits-breaching-the-law-in-response-to-royal-commission-findings-20180510-p4zelg.html>
Gulf News. (2018). Corporate governance and economic growth https://gulfnews.com/business/economy/corporate-governance-and-economic-growth-1.441767
Hurchens, G. (2018). Banking royal commission: all you need to know – so far https://www.theguardian.com/australia-news/2018/apr/20/banking-royal-commission-all-you-need-to-know-so-far
Royal Commission. (2018). Into misconduct in the banking, superannuation and financial services industry. Retreived from: https://financialservices.royalcommission.gov.au/Pages/default.aspx
Sapra, H., Subramanian, A., & Subramanian, K. V. (2014). Corporate governance and innovation: Theory and evidence. Journal of Financial and Quantitative Analysis, 49(4), 957-1003.
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The journal of finance, 52(2), 737-783.
Ziffer, D. (2018). Banking royal commission exposes conflict between banks and small business. Retrieved from: https://www.abc.net.au/news/2018-06-03/conflict-between-small-businesses-and-banks-exposed/9826360>
Rodriguez, M. (2016). "Social responsibility and financial performance: The role of good corporate governance." BRQ Business Research Quarterly 19.2 : 137-151.
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