Corporate governance refers to a system of rules and practices that indicate the processes that are followed in controlling operations of a company. It involves the balancing of the interests of all significant stakeholders to an organization. The stakeholders include the employees, shareholders customers, the environment and the society at large (ASX 2017, p.2).In organizations, the directors are the primary direct stakeholders who influence corporate governance in organizations. The board of directors is comprised of internal stakeholders and the external stakeholders. Bad corporate governance puts at stake an organization’s integrity and reliability among stakeholders. Good corporate governance normally creates a transparent set of controls and rules that the organization has to follow. The key focus of this study is corporate governanceas well as the role of the Australian Stock Exchange in regards to corporate governance principles to listed companies in the Australian Stock Exchange Market.
Importance of corporate governance
There are a number of merits associated with effective corporate governance. Corporate governance ensures that the rights of all significant stakeholders are observed. As a result, the entity does not encounter complains from these stakeholders. At the same time, effective corporate governance in organizations aids in alleviating agency problems. The board o directors ensure that an operation of the managers are not geared towards self-centered interests but is geared towards the maximization of the shareholder’s wealth (Ueng 2015). Companies with sound corporate governance often attract many investors as they are guaranteed that their resources will be utilized in an optimal manner. At the same time, it results to increase in the number of customers who purchase the organization goods and services. Many modern consumers are demanding products from socially responsible organizations. Finally, good corporate governance and internal control reduce chances of loss of money in an organization (ASX 2017, p.3).
Corporate governance principles
ASX has eight corporate governance principles. In the first principle, the regulatory body requires that listed companies should lay solid foundations in its management and oversight process. Companies are expected to establish functions that are reserved to the board and those that are delegated to the senior executives in the organization. They are expected to indicate their process for assessing the level of performance of top executives. For example, when executive remuneration and performance is not monitored, they may end up focusing on their personal gains to the detriment ofshareholders (ASX 2017, p.2).
Secondly, it requires that accounting entities that are listed in the Australian stock exchange market structure their board of directors in a process which increases value in the organization. Most of the board members are expected to be independent directors, where the chairman of the board is also required to be an independent director. The duties of the chairman of the board and the CEOare not to be carried out by the same person in an organization. The distinction ensures that chances of a conflict of interest in operations of the organization are eliminated. For instance, if the CEO is also the chairman and top management engages in earnings management, the CEO would not expose such an issueyet an independent director is likely to expose it to the relevant stakeholders (ASX 2017, p. 1).
The third ASX principle is to promote ethical and responsible decision making processes in their decision making processes. The actions are expected to create confidence to stakeholders in regards to the operations of the organization. It also ensures that all legal obligations of the organization and the expectation of stakeholders are met in the organization (Muswaka 2013, p.70). Fourthly, ASX requires that accountant entities should safeguard the integrity of their financial reporting process. Such a process will enhance the reliability of the data presented in financial statements of such accounting entities (ASX 2017, p. 4).
The fifth corporate governance principle by ASX is that of making timely and balanced disclosures. Companies are expected to establish written rules that ensure compliance with ASX provisions. The sixth principle requires that such accounting entities must respect the rights of the shareholders. This ensures that there are no agency problems arising from management in the organization focusing on maximizing their individual’s gains at the expense of the interests of the shareholders (ASX, 2017, p.5).
The seventh principle by ASX is that of recognizing and managing of risk. This aids in ensuring that all of the external and internal environment risks that are facing the organization are mitigated in a timely manner. The board members in public listed companies should ensure that risk management process and internal control systems in an organization is established. The last principle by ASX requires that the listed public companies in the Australian stock exchange market should remunerate employees fairly and responsibly. The principle requires that such accounting entities must establish remuneration committees. In scenarios where the remuneration committees are not established, there are high chances that top management may end up over rewarding themselves against the wealth maximization interests of the shareholders(ASX 2017, p. 6).
If not why not approach
The principle indicates that the principles provided by ASX do not constitute the only viable mode of corporate governance and deviation from such principles does not equally mean that an accounting entity would not be able to maximize its profitability. The approach indicates that the principles presented by the organization provide a clear practice that the organizations need to adopt in order to enhance their corporate governance framework. The approach recognizes that there is no one model of corporate governance in organizations. As a result, reporting on the company corporate governance practice rather than conformity with particular models is central to the fulfillment of the ASX model (ASX 2017, p. 6).
ASX monitoring process
In order to ensure compliance with the provision, ASX undertakes three annual reviews of the companies’ level of disclosure on corporate governance. Companies are encouraged to improve their level of compliance through simplification of their corporate governance statements. Such disclosures may be tabular or narrative in nature but should be easy to understand. Companies, through their directors, are expected to provide feedback to ensure that their operations are in line with ASX requirements (ASX 2017, p. 4).
Corporate governance principles history
Corporate governance has remained a dynamic force in the Australian market. In March 2003 during the early stages of development of corporate governance principles, the ASX Corporate Governance Council developed its initial principles of corporate governance. The first principles provided the framework for good corporate governance in the country. These principles have been updated especially in 2010 when major amendments were made. The new principles became applicable in 2011. As a result, all of the ASX listed companies were expected to present a statement in the annual reports indicating the extent the principles of corporate governance has been adhered to in the organization. In 2014, further enhancements of the principles of corporate governance were carried out (Bedard, Chtourou, & Courteau 2004, p. 15). The eight overarching principles in the initial editions were retained in the latest ASX editions on corporate governance. Under recommendation 1.2, listed companies are expected to undertake checks on individuals selected as directors. The Australian Standard AS 4811-2006 O on employment is applicable in this particular case. The requirement for mandatory disclosure in organizations has resulted in a scenario where all public listed companies are disclosing their level of corporate governance disclosure (Dechow & Sloan 1995, p.201). Disclosure on corporate governance helps the organizations in ensuring that their approach to corporate governance. Current developments in corporate governance have led to ASX considering the revision of its rules to allow the publicly held companies to disclose their commitment to good corporate governance on their websites as opposed to confining such disclosures to their annual reports (ASX 2017, p. 5).
Listing rules versus ASX principles
The ASX listing rules are aimed at informing companies intending to list in the Australian Stock Exchange market. For accounting entities to be listed in the Australian Stock Exchange market, they need to maintain structural mechanisms that aid them in identifying risks, including environmentaland social risks (Beneish, & Vargus 2002, p.767). The organizations intending to list on the Australia Stock exchange need to have good corporate governance strategies. Nevertheless, the strategies should provide a flexible way of attaining the corporate governance requirements as additional approaches to corporate governance among organizations are acceptable as long as they are reasonable (Bédard, & Gendron 2010, p. 200).Nonetheless, irrespective of the approaches taken, the organizations must ensure that discloses whether and how it is adhering to corporate governance especially when it comes to accounting for the economic, environmental and social sustainability risks. Alternative measures of attaining the corporate governance, under the ‘if not why notapproach’ are also adopted. There is thus a strong link between listing rules and the ASX principles. Thus, the principles are critical in informing the operations of publicly listed companies in contemporary organizations (ASX 2017, p.6).
Sources for making disclosure
According to the ASX 2014 requirements on making disclosure in the commitment of the organization to good social responsibility, organizations need to communicate how they are handling social, economic, and environmental related risks in their organizations. They are also expected to communicate their efforts in ensuring that there is effective internal control in their operations. There are various avenues through which such organizations can make their disclosure on corporate governance. According to the ASX 2014 corporate governance guidelines, organizations are expected to make their disclosures in their annual reports (Cohen, Krishnamoorthy & Wright 2008. p.181). Currently, there are ongoing discussions where the ASX is intending to allow companies to not only focus their reporting on corporate governance on the annual reports but also on their websites. Such a move would ensure that the organization’s commitment to corporate governance is understood by all key stakeholders who visit its websites. Increased avenues of the disclosure have made it easier for such accounting entities to disclose their corporate governance engagements to many stakeholders (ASX 2017, p.5).
Corporate social responsibility
Different organizations have different orientations to corporate social responsibility. The approach to social responsibility is also highly influenced by the passion of managers or founders of organizations (Aboody, Hughes, & Liu 2005,p.651). For example, executives who were abused as young girls may opt to invest in the empowerment of the girl-child. Others who are into sport may be drawn to support of sports. As a result, it would be wrong to delegate corporate social responsibility guidance to the ASX (ASX 2017, p. 3).
Non listed companies imply that the risks are employed by individuals’ owners. They have the discretion to manage risks or not (Chang & Sun 2009,p.30). Nevertheless, the adoption of corporate governance principles is likely to increase the confidence of stakeholders such as customers and employees on the organization. Such a move would increase employee productivity and the desire by customers to purchase products (ASX 2017. p.4).
Inferring from this report, it is evident that corporate governance is important in organizations. It increases the level of reliability of the operations of an organization to its stakeholders. As indicated in the above report, ASX plays an important role in ensuring that all public listed companies engage in sound corporate governance in their operations. Nevertheless, there is no single best approach to corporate governance and unique measures taken by the public-held companies are recognized.
List of References
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ASX 2017. Corporate governance principles and recommendations. Available from http://www.asx.com.au/documents/asx-compliance/final-revised-principles-complete.pdf (Accessed Jan. 16, 2018)
Bédard, J & Gendron, Y 2010, ‘Strengthening the financial reporting system: Can auditcommittees deliver?’, International journal of auditing, 14, 2, pp. 174-210.
Bedard, J, Chtourou, SM & Courteau, L 2004, ‘The effect of audit committee expertise,independence, and activity on aggressive earnings management’, Auditing, 23, 2,pp13-36.
Beneish, M & Vargus, M 2002, ‘Insider trading, earnings quality, and accrual mispricing’,The Accounting Review, 77, 4, pp. 755-91.
Chang, JC & Sun, HL 2009, ‘Crossed-listed foreign firms’ earnings in formativeness, earningsmanagement and disclosures of corporate governance information under SOX’,International Journal of Accounting, 44, 1, pp. 1-32.
Cohen, J, Krishnamoorthy, G & Wright, A 2008, ‘Form versus substance: The implicationsfor auditing practice and research of alternative perspectives on corporategovernance’, Auditing: Journal of Practice & Theory, 27, 1, p. 181.
Dechow, PM & Sloan, RG 1995, ‘Detecting Earnings Management’, Accounting Review, 70, 2, 193-225
Muswaka, L. 2013. An Appraisal of the Protection of Stakeholder Interests under the South African Companies Act and King III. World Journal of Social Sciences, 3, 5, pp.67-75.
Ueng, C. (2015). The analysis of corporate governance policy and corporate financial performance. Journal of Economics and Finance, 40, 3, pp.514-523.