Essay On Corporate Governance & Risk Management Practices - Board Of Directors And Participants.

ASX Principles and Recommendations for Corporate Governance

Question:

Discuss About The Participants Including Board Of Directors?

Corporate governance may be defined as the procedure by which a corporation is governed. It is the interaction between all the participants including the board of directors, shareholders and the management of the company in influencing the performance of the company and striking a balance between the societal and individual goals as well as social and economic goals. A common objective of any organization is to establish an effective governance framework that fulfils the needs of the individual circumstances which enhances the organizational performance while acting in compliance with the constitution, policies, procedures and the external laws and regulations applicable to the company[1].

The ASX Corporate Governance Council has introduced Principles and recommendations with respect to corporate governance, which would enable the listed entities on the ASX to boost up the confidence of the investors. The implementations of the recommendations with respect to good corporate governance shall enable the listed entities to fulfill the reasonable expectations of the investors. The basis for these Principles and recommendations is based on the ‘if not, why not’ approach[2]. It implies that if the board of directors of the listed entity that a recommendation made by the Council is not appropriate  and it does not adopt it, it is required to provide an appropriate explanation for not adopting such recommendation that is, ‘if not, why not’ approach. According to Principle 7 of the Corporate Governance, a listed entity is required to establish a risk management framework to identify the risks associated with the business activities carried out by the organization and to mitigate such risks immediately, thus, ensuring the business activities are carried out diligently and appropriately[3].

In the given scenario, the first issue that arises is to determine whether Ardent Leisure recognized and managed the risk that arose from the Dreamworld incident[4]. As mentioned above that principle 7 of the corporate governance recommendations made by the ASX, a corporation is required to identify the risks and mitigate such risks to ensure a good corporate governance practice. In case the Board of listed entitles is unable to recognize the risks and resolve the same, the participants of the company, that is, the shareholders, employees, consumer and the society shall suffer loss and such failure shall also affect the reputation and goodwill of the company as well.

The ASX has recommended that the listed entities should establish one committee that would be responsible for recognizing the risks and mitigate it before it affects the participants of the company and the company altogether. The members of such committee shall include minimum three directors who shall be entitled to carry out their business activities independently without any interference[5]. The recommendations made by ASX with respect to the risk management strategies, also requires the company to review the activities of the risk management committee for ensuring the efficacy of the committee[6]. The board of the listed entities must ensure that the role and structure of the internal audit functions must be disclosed. The company must disclose environmental, social and economical risks and the structure that is adopted by the company for the dealing with such risks.

Failure of Ardent Leisure to Comply with ASX Recommendations

In the given scenario, the company Ardent leisure has suffered losses due to the accident that took place in DremaWorld, which claimed lives of many patrons. The accident took place due to a technical failure in the rides of the Dream world Leisure Park.  It is the responsible of an organization, especially, those which deals with leisure parks to arrange effective safety measures that deal with the any accidents that takes place[7]. However, it is apparent from the case scenario that the company Ardent leisure did not establish any the risk management committee that would recognize risks and mitigate them. Consequently, the company failed to deal with the post accident circumstances and had been subjected to severe criticism.

If the common law principles are applied, the occupier of the premises shall be liable for any harm that takes place within the premises. Similarly, it can be said that Ardent shall be liable for the accident that occurred in the Dream world Park and in the absence of an appropriate risk management framework; the company failed to the deal with the post accident circumstances and mitigate the risks effectively[8]. If the company had risk management framework to recognize and mitigate the risks, it would have been able to address the risks in a more appropriate manner. Therefore, it is evident that the directors of the Ardent leisure failed to recognize the risk and mitigate them.

The second issue requires determining whether the company had infringed principle 7 of the corporate governance and whether ASX is entitled to take disciplinary action against the directors for failing to recognize and manage the risk. Principle 7 of the corporate governance requires the listed entities to recognize the risks associated with the business activities carried out by the organization and mitigate such risks[9]. The company could have established a crisis management team for the purpose of initiating effective measures after the occurrence of the accident in the Dream world theme park.

The principal 7 also required the company to disclose social, environment and economical risks but the company failed to comply with this provision, which questioned the accountability of the company. If the company had made such disclosures, it could have enabled the company to mitigate the risks and effectively deal with the post accident circumstances in the Dream World theme park. Hence, it is established that the company had failed to comply with the provisions stipulated by the ASX with respect to the corporate governance[10].

Disciplinary Action Against Directors by ASX

The consequences suffered by the company includes the decline in the high level competitiveness and portrayed the poor performance of the company due to the infringement of the company of the provisions relating to risk management stipulated by the Principal 7 of the Corporate governance recommended by ASX[11]. The failure of the company to establish a risk management framework within the corporation, have led the company to suffer financial loss as well as reputational loss due to the accident that took place in the Dream World and this conduct of the company denotes that the company had failed to act in the best interest of the company.

The absence of a risks management framework criticizes the accountability of the boards and discourages the investors to invest in the company. The ASX is authorized to initiate enforcement actions. The ASX has recommended the ‘if not, why not’ approach that should be practiced by the listed entities as it would enable the organization to give proper reasons for not adopting any recommendation made by the ASX[12]. As per the assets appeals and enforcement rule book, any corporation that violates the stipulated provisions of the Austra Care regulations and the operating rules that is applicable to all the corporations shall be subjected to a penalty of $250000 and a penalty of $100000 for committing a breach. Hence, in the given circumstances, Ardent leisure Pty Ltd is entitled to the civil penalties and the directors are entitled to be disqualified.

The third issue arising out of the Dream world incident is relating to the breach of directorial duties under section 180 of the Corporations Act 2001 (Cth) and whether the harm suffered by the company is sufficient. According to section 180 of the CA 2001 (Cth), a director of an organization is obligated to discharge its duties with due care and diligence and ensure that the acts or omissions of the directors must be in the best interests of the company. The level of care and diligence to be exercised by the directors of a company must be such that any prudent person in the position of the director shall exercise same level of care and diligence while performing its obligations. In case of an infringement of section 180 of the Corporation Act 2001 (Cth), the directors shall be imposed with civil penalties under section 1317 of the Act. The directors must make decisions in good faith and for a proper purpose[13].

Breach of Directorial Duties under Corporations Act 2001 (Cth)

In Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023, and in ASIC v Mariner Corp (2015) 327 ALR 95 at [444], the court held that the company has committed a violation of section 180 of the CA 2001 as their actions were inconsistent and not in the best interest of the company. No reasonable person would have acted in the same manner under similar circumstances. According to the principles of corporate governance and recommendation made by the ASX, the board of listed entities is required to the act with due care and diligence while performing their obligations. However, Ardent failed to comply with the provision, as it did not exercise due care and diligence post the Dream World accident. Further, any reasonable person in the same position would not have acted in the same manner; hence, the directors are liable to civil penalties under section 1317 apart from the financial and reputational loss suffered by the company.

The fourth issue arising out of the given scenario is to determine whether the company conducted a review and attempted to improve the effectiveness of the risk management framework of the company. After the Dream World incident, several reports have revealed that since the goal of the company was to become a global leader in the field of Entertainment, it had focused in the procedures that would enable the company to achieve that goal. As a result, the company had failed to focus of the corporate governance principles that required the company to ensure that apart from the realization of individual goals, it must strive to fulfill the social, economic and the goals of the participants of the company.

The company failed to comply with the principles and recommendations made by the ASX with respect to the establishment of risks management committee to recognize the risks and mitigate the risks. In the absence of a risk management framework, the company failed to deal with the post accident circumstances[14]. Although the company provided condolences to the family of the deceased the and expressed its disappointment, it persisted to give explanations about how the age old policies of the company have served it right since its inception and have led the company to become one of the leading companies in the field of global entertainment.

After the incident in the Dream World, the shares of the Ardent Leisure had fallen steeply, the company had suffered financial loss of 49.4 million, and the ride that led to the accident was stopped. The Dream World park was closed for 45 days and the company also confessed that it had failed to implement effective safety measures owing to the absence of a risks management framework within the corporation. The company confessed that it failed to take reasonable steps within 48 hours after the incident had taken place[15]. Due to severe criticisms with respect to the failure of the company to initiate reasonable steps for ensuring the safety of the patrons, the CEO of the company resigned and the company continues to give explanations why they have failed to initiate reasonable steps.

Review and Improvement of the Effectiveness of Risk Management Framework of the Company

However, the company has initiated review processes for ensuring safety regarding the operation of the rides. The ride that caused the accident was permanently closed and the company has been engaged in developing policies in association with the private sector and is establishing a crisis management committee[16]. The organization is also developing an outcome process within the organization which were ignored by the company and if these measures were applied prior, the company would have been able to deal with the circumstances after the accident in the Dream World had taken place or could have averted the occurrence of the incident altogether. The company persisted to stress upon the fact that the policies of the organization are adequate as it has enable the organization to effectively deal with the risks till present and that it has made the company achieve its goals of becoming a global leader in the Entertainment market.

Reference List

ABC (2017) <https://www.abc.net.au/news/2017-04-26/ardent-leisure-ceo-to-stand-down.../8472304>.

Booth, Simon A. Crisis management strategy: Competition and change in modern enterprises. Routledge, 2015.

Corporation act 2001 (cth) section 180

Council, ASX Corporate Governance, and A. S. Exchange. "Corporate governance principles and recommendations . ASX Corporate Governance Council." (2014).

Davenport, Shayne, and David Parker. Business and law in Australia. Law book Co, 2012.

Fitzpatrick, Jeff, et al. Business and corporations law. LexisNexis Butterworths, 2011.

Graw, Stephen, et al. Understanding business law. 2016.

Jones, Greg, Claire Beattie, and Afzalur Rashid. "Editorial Special Issue on Corporate Governance." Australasian Accounting, Business and Finance Journal 11.1 (2017): 1-2.

Larcker, David, and Brian Tayan. Corporate governance matters: A closer look at organizational choices and their consequences. Pearson Education, 2015.

Mann, Catherine Renshaw, et al. "From the dean." (2016).

Pritchard, Carl L., and PMI-RMP PMP. Risk management: concepts and guidance. CRC Press, 2014.

The Guardian. (2017) <https://www.theguardian.com › World › Australia › Dreamworld>.

Tricker, RI Bob, and Robert Ian Tricker. Corporate governance: Principles, policies, and practices. Oxford University Press, USA, 2015.

Whiting, Rosalind H., and Georgia Y. Birch. "Corporate governance and intellectual capital disclosure." Corporate Ownership and Control 13 (2016): 250-260.

[1] Booth, Simon A. Crisis management strategy: Competition and change in modern enterprises. Routledge, 2015.

[2] ABC (2017) <https://www.abc.net.au/news/2017-04-26/ardent-leisure-ceo-to-stand-down.../8472304>.

[3] Council, ASX Corporate Governance, and A. S. Exchange. "Corporate governance principles and recommendations . ASX Corporate Governance Council." (2014).

[4] The Guardian. (2017) <https://www.theguardian.com › World › Australia › Dreamworld>.

[5] Mann, Catherine Renshaw, et al. "From the dean." (2016).

[6] Fitzpatrick, Jeff, et al. Business and corporations law. LexisNexis Butterworths, 2011.

[7] Tricker, RI Bob, and Robert Ian Tricker. Corporate governance: Principles, policies, and practices. Oxford University Press, USA, 2015.

[8] Mann, Catherine Renshaw, et al. "From the dean." (2016).

[9] Jones, Greg, Claire Beattie, and Afzalur Rashid. "Editorial Special Issue on Corporate Governance." Australasian Accounting, Business and Finance Journal 11.1 (2017): 1-2.

[10] ABC (2017) <https://www.abc.net.au/news/2017-04-26/ardent-leisure-ceo-to-stand-down.../8472304>.

[11] Booth, Simon A. Crisis management strategy: Competition and change in modern enterprises. Routledge, 2015.

[12] Graw, Stephen, et al. Understanding business law. 2016.

[13] Corporation act 2001 (cth) section 180.

[14] Davenport, Shayne, and David Parker. Business and law in Australia. Law book Co, 2012.

[15] The Guardian. (2017) <https://www.theguardian.com › World › Australia › Dreamworld>.

[16] Whiting, Rosalind H., and Georgia Y. Birch. "Corporate governance and intellectual capital disclosure." Corporate Ownership and Control 13 (2016): 250-260.