Review Corporate Governance Requirements

Review corporate governance requirements

Contents

Key to resources 2

Introduction 3

Need for good corporate governance 4

Organisations involved in corporate governance 5

Basic elements of a system of corporate governance 7

Role of government in corporate governance 8

Summary 9

This learning guide is based on the following resource(s):
Textbook
Adams K, Grose R and Leeson D (2004) Internal Controls and Corporate Governance (2nd edn), Pearson/Prentice Hall
(This textbook is based on the AUS 402 published in 2002. AUS 402 has been updated with the new standard ASA 315 under 2006 legislation).
CD-ROM
Adams K, Grose R and Leeson D (2004) Internal Controls and Corporate Governance – Instructor’s Manual (2nd edn), Pearson/Prentice Hall
Online
· Australian Government Auditing and Assurance Standards Board: www.auasb.gov.au/. Select the link Standards and Guidance which brings you to the AUASB Standards and Pronouncements to obtain all the auditing standards. You can download ASA315 Understanding the entity and its environment and assessing the risks of material misstatement.

Key to resources

Resource / Textbook
1 / Performance criterion*12.1 Define corporate governance, p 273
2 / Attempt end of chapter question 12.5, p 280
3 / Performance criterion 12.2, p 274
4 / Attempt end of chapter question 12.6, p 280
5 / Performance criterion 12.3, p 275
6 / Attempt the self-check question 12.3a, p 277
7 / Attempt the case application question 12.9, p 280
8 / Performance criterion 12.4, p 277
9 / Attempt end of chapter question 12.7, p 280
10 / Performance criterion 12.5, p 278
11 / Attempt end of chapter question 12.8, p 280

* The term ‘performance criterion’ is the reference used in the textbook. It is not related to the performance criteria for the unit of competency addressed in the learning guide.

Introduction

The corporate world in the 1990s was rocked by a number of high profile businesses collapsing amidst accusations of unethical business practices. The fall of companies like Enron, HIH and Ansett exposed flawed management practices at the most senior level. This has given rise to concerns about management processes, known as corporate governance.

What do we mean by ‘corporate governance’?

In general terms, corporate governance is all about accountability and the systems and controls that need to be in place to hold directors and management accountable.

How those people and funds are managed so that the goals are achieved is called accountability.

Internal control policies and procedures determine how, when and where that accountability is exercised.

/ Activity 1

Using your preferred search engine (eg Google), do a search on the internet on collapsed corporations using key words like ‘corporate governance’ and the name of the company, eg HIH, One Tel, Enron... Read about the reasons for their collapse.

Read on when you’ve finished this activity.

/ Now go to Resource 1
The location of this and all other resources for this learning guide is found in the Key to resources at the front of this document.
There are two references in the text that you might note, including:
1 Henry Bosch (former Chairman of the Australian Securities and Investments Commission and the ‘Bosch Committee’), in describing corporate governance, talks about:
· directors being accountable to their shareholders and shareholder participation being necessary to make that accountability effective
· any system of good corporate governance is to allow the board and management the freedom to drive their company forward but to exercise that freedom within a framework of effective accountability.
2 The Organisation for Economic Cooperation and Development (OECD) Ad Hoc Task Force defines corporate governance:
‘as a set of relationships between a company’s management, its board, its shareholders and other stakeholders’.
/ Now go to Resource 2
It’s time to do an end of chapter question.
The answers to end-of-chapter questions and case studies are found in the Instructor’s manual for the textbook.

Need for good corporate governance

/ Now go to Resource 3
This resource examines the reasons why corporate governance has become a global necessity.

There appear to be three factors driving the worldwide focus on corporate governance:

· small shareholders investing in public companies for the first time—this has happened because governments have privatised government utilities (Qantas, Telstra and the Commonwealth Bank) and organisations have demutualised (AMP Insurance and NRMA)

· the effect these companies have on the Australian economy and the Australian Stock Exchange (ASX) share price index

· globalisation of trade and financial markets that exposes local organisations to increased competition and local companies going overseas to expand their markets.

There is a growing segment of the market that will only invest in businesses that adopt high standards of ethics and corporate governance. This has also translated into environmental and community social issues such as fossil fuels, water and child obesity.

/ Now go to Resource 4
It’s time to do an end of chapter question.

Organisations involved in corporate governance

‘Best practice’ is a phrase and concept that has been adopted by and applied to many facets of government and business enterprises over the last twenty years. It has found a new home in corporate governance and has raised the corporate governance debate to new levels.

/ Now go to Resource 5
Many Australian and international organisations have issued best practice in corporate governance.

Australia

1 The Bosch Committee (1991)
Chaired by Henry Bosch (former chairman of ASIC), the committee published a best practice guide under the title ‘Corporate Practices and Conduct’. The recommendations included that boards should:
- comprise a majority of non-executive directors
- appoint an audit committee
- publish and enforce a code of ethics.
2 Australian Stock Exchange (1994)
ASX listing rules govern the conduct of public companies listed on the stock exchange. Breaches of listing rules can lead to suspension from trading of a company’s shares—not appreciated by shareholders.
Listing rule 4.10.3 is about annual report corporate governance disclosures rather than prescriptive requirements and can be summarised as covering:
- the directors list—to state which individuals are executive and which are non-executive, including the chairman
- director appointment and retirement policy
- identification and management of business risk
- ethical standards, establishment and maintenance policies.
3 Federal Government: Corporate law Economic Law Reform Program (CLERP) 1997
It was not until September 2002 that CLERP (9) centred on corporate governance and put out 41 proposals on auditing regulation and corporate disclosure.

International

Five organisations have issued statements on principles and standards.
1 Organisation for Economic Cooperation and Development (OECD) 1998
Look at performance criterion 13.2 ‘Outline and discuss a framework for good corporate governance’, which examines in some detail the OECD 1998 guidelines and the 1999 Ad Hoc Task Force on Corporate Governance.
2 Cadbury Committee 1992
This United Kingdom committee issued a report with the following key points covering reporting disclosure, ie boards should:
– have checks and balances
– have non-executive directors
– appoint an audit committee
– explain their corporate governance procedures.
3 Hampel Committee 1995
After reviewing the Cadbury report, this committee had its code adopted into the listing rules of the London Stock Exchange.
4 Business Roundtable (BRT) 1997
CEOs of 250 top US corporations make up this group which released a statement of corporate governance in September of that year expanding on the OECD standards and guidelines.
5 Asia-Pacific Economic Cooperation (APEC) 1998
Participants at the December 1998 symposium agreed to the following principles in ‘Corporate governance in APEC-Building Asian Growth’:
– timely and accurate disclosure
– shareholders’ equitable treatment
– shareholders’, directors’ and mangers’ rights and responsibilities
– enforceable accountability standards in decision making.
/ Now go to Resource 6
This is an activity examining a range of corporate codes or principles which have been issued around the world.
/ Now go to Resource 7
This is a case application question which covers the Bosch and Cadbury Committees.
The answers to end-of-chapter questions and case studies are found in the Instructor’s manual for the textbook.

Basic elements of a system of corporate governance

/ Now go to Resource 8
Some of the issues raised by the Hampel Committee that are relevant to this section are:
· accountability mechanisms for public companies
· principles to be applied flexibly and with commonsense
· no prescriptive rules or the tick-a-box exercise
· directors should not focus on shareholders’ short-term interests
· boards responsible to all stakeholders including shareholders.

While boards of directors set policies, it is the translation of those policies into systems and functions that makes corporate governance effective.

This broader focus on everyday operations and systems enables policies based on basic elements to work through all levels of the organisation.

Examples of everyday operations include:

· issuing periodic reports on time (internal and external)

· making taxation payments on time

· delegating authority to all levels of the organisation to allow operations to flow smoothly

· complying with legislation and regulations.

The following are some basic elements:

· sound systems of internal control

· safeguarding of assets

· fraud detected and prevented

· operational efficiently maintained.

Internal and external auditing

Auditing is the essential element that will ensure the board’s policies are implemented and effective.

Internal audit is the independent appraisal of all activities within the organisation with reporting lines to the Audit Committee.

External audit is the independent appraisal of internal control systems and financial transactions, by external professionals with reporting lines to the board and the shareholders.

/ Now go to Resource 9
It’s time to do an end of chapter question.

Role of government in corporate governance

Federal and state governments provide rules and regulations for corporations to allow them to operate responsibly and be good corporate citizens in the society from which they earn their wealth.

These rules and regulations usually come in the form of legislation passed in the respective parliaments.

Examples include:

· Corporations Act

· Income Tax Act

· Fair Trading Act

· Landlord and Tenant Act

· Occupational Health and Safety Act

· industrial relations laws

· alcohol and other drugs regulations

· Australian Competition and Consumer Act.

Some groups in the community have by customs and practice self-regulated activities and procedures. When these bodies can no longer regulate their members, governments step in and legislate to safeguard the community against fraud and misappropriation.

Examples include:

· lawyers

· accountants

· medical practitioners

· architects.

/ Now go to Resource 10
/ Now go to Resource 11
It’s time to attempt an end of chapter question.

Summary

The primary word for this learning guide on corporate governance requirements is ‘review’.

We have looked at:

· definitions

· the need for improved corporate governance

· what organisations in Australia and Internationally have to say about principles and standards

· a system’s basic elements of control

· what role governments play in ensuring corporations act responsibly in Australian society.

Review corporate governance requirements XXX