Regulation 2: Corporate Governance

Question 1

What is corporate governance? What is effective corporate governance?

Answer 1

• The system by which companies are directed and managed. Influences how objectives are achieved, risk is assessed, and performance optimised.
• Effective corporate governance structures encourage companies to create value and provide accountability and control systems accordingly

Question 2

Why is corporate governance important?

Answer 2

• Investors must feel that their capital is being used appropriately
• In a world where capital is highly mobile, corporation (and countries) cannot afford to ignore their investors’ (shareholders’) expectations

Question 3

OECD Principles of Corporate Governance (2004): ensuring basis for effective corporate governance framework

Answer 3

• promote transparent and efficient markets
• be consistent with the rule of law
• articulate division of responsibilities among supervisory, regulatory and enforcement authorities

Question 4

OECD Principles of Corporate Governance (2004): rights and equitable treatment of shareholders

Answer 4

• framework should protect and facilitate shareholders’ rights
• equitable treatment of shareholders, including minority and foreign holdings

Question 5

OECD Principles of Corporate Governance (2004): role of stakeholders in corp governance

Answer 5

• framework should encourage the rights of stakeholders

- encourage active co-operation between corporations and stakeholders in creating wealth, jobs and sustainability

Question 6

OECD Principles of Corporate Governance (2004): disclosure and transparency/responsibilities of the board

Answer 6

• timely and accurate disclosure should be made on all material matters
• framework should provide monitoring of management by the board, and board’s accountability to the company and SHs

Question 7

Features of the OECD guidelines

Answer 7

• Are predicated on the acceptance of a view that the corporation that gives special status to shareholders (narrow view)
• Focus is on publicly listed companies
• Principles are non-binding

Question 8

ASX Corp Gov Principles 2014

Answer 8

1. lay solid foundations for management / oversight
2. structure the board to add value
3. act ethically and responsibly
4. safeguard integrity and corporate reporting
5. make timely and balance disclosure
6. respect the rights of security holders
7. recognise and manage risk
8. remunerate fairly and responsibly

Question 9

ASX Corp Gov Principles: how to achieve best practice principles 2 and 4

Answer 9

2. structure the board to add value: chair of the board should be independent and not the CEO
3. safeguard integrity in corporate reporting: audit committee which has a least three members which are non-executive directors

Question 10

ASX Corp Gov Principles: Application and disclosure requirements

Answer 10

• They are merely guidelines, recognised that they are not a “one size fits all” solution
• Again, primacy of shareholders, narrow view
• Under section 4.10, the company is required to provide a statement in their annual report disclosing the extent to which they have complied with the principles, and give reasons why they haven’t been followed

Question 11

Globalisation and regulation: within Australia

Answer 11

• A nation’s regulatory framework is essentially in competition with the regulatory frameworks of other nations (as is the tax system)
• A certain level of regulation is attractive to business
• Too much regulation is not attractive to business (too expensive)

Question 12

Globalisatoin and regulation: outside Australia

Answer 12

• Aus companies operating abroad will typically be less legally constrained in respect of wages, health and safety and environmental standards
• Some argue that Aus Gov should insist they companies implement Aus standards on these matters
• Assurance problem: AUS companies may be willing to observe higher standards if they can be assured that their competitors are also doing so