Corporate Governance Issues In Australia: Analysis And Recommendations

Increasing Women on ASX200 Boards: Importance and Warnings

Corporate governance has become an impotent aspect of the current company’s success. The latest scandals in many companies have been attributed to poor corporate governance. The recent Commonwealth Bank’s scandal in Australia occurred because of the ineffective corporate governance that allowed the manipulation of the bank’s financial statements. The culture of the boards in Australia can explained as rooted in agency theory where the members of the boards are predominantly agency-reasoning persons that want to only promote their interests at the expense of the shareholders. The paper will investigate five articles regarding corporate governance issues in Australia.

The article entitled “ASX200 boards near 30pce gender target: AICD” underscores the need to incorporate more women as directors towards promoting corporate governance. The article recognizes that there are an increasing percentage of women on boards in Australia’s 200 largest firms in the recent years. Statistics shows that the females in boards in Australia hit the mark of 28.5 per cent in 2018, which was up from 25.4 per cent. There is an increase in the number of women in senior leadership positions at ASX200 females and the increase in the number of chief executives (Patten, 2018, pp. 1). In May this year, reports indicated that the new directorships on ASX200 comprised 36 per cent that were mainly women; however, this figure increased to 50 per cent between June and August this year, which was a positive trend. AICD chairperson Elizabeth Proust emphasized that the progress of attaining the 30 per cent mark for females on ASX200 boards has been steady where it was improvement from less than 10 %  in 2009. In addition, the article stresses that the percentage of women of boards of the 100 largest firms was higher at 30.5 per cent, placing Australia ahead of Britain, Canada, and the United States, where the percentages were 28.9 %, 23.9 %, and 23.6 %. The article further highlighted the warning by the Australian Council of Superannuation Investors to firms (including TPG Telecom) that did not have women directors that they will vote against the re-election of directors (Taylor, 2017, pp. 1). Finally, the author underscored the importance of smaller firms struggling in the gender stakes at the board level.  

The article entitled “Company boards are stacked with friends of friends so how can we expect change” explains the challenges facing the boards of different companies in Australia. Smith (2018) explains that the corporate governance in Australia is at a crisis in that there is no diversity or independence on the Australian company boards. The author claims that there were only 18.1 per cent of women in board’s seats in ASX100 firms and improved in 2015 to 25.2 per cent. In 2015, 58 per cent of the directors in the ASX100 and 49 per cent in the ASX200 were individually connected to the firms. These connections were detrimental to the growth of the company because it may impair the judgement of the directors, where these directors could serve their own interests and not look at the interests of the company and its shareholders. An example of this effect was in the Enron and HIH Australia failure in their corporate governance. In addition, the article further claims that social identity was key criteria in the appointment of directors and independence and diversity elements are not considered (Smith, 2018, pp. 1). This is promoted by the group think where members of the board are more concerned with being liked and connected member of a specific social group, where members will conform to a status quo that guarantees them membership perks as highly paid directorship responsibilities. The author concludes that the group think philosophy will make boards to sign off questionable business deals that the current banking sector.

Challenges Facing the Boards of Different Companies in Australia

Agency theory is an appropriate theory that better explains the current crisis facing corporate governance in Australian companies there is lack of independence and diversity in terms of appointing directors. Agency theory, as pioneered by Jensen and Meckling (1976), is a well-liked principle in corporate governance. Accordingly, the agency theory holds that in a public company, there exists a primary challenge in line with shareholders’ concerns: senior management does not at all times work to optimize shareholders’ return on investment (ROE). In line with company management, the agency costs would be produced by the variance amid his significance plus those of external shareholders. The agency costs will tend to promote the interest of the corporate executive where the appointment of board of directors is not based on merit, but rather “friendship” (Kulik, 2005, pp. 349). The lack of diversity and independence among the ASX100 and ASX200 companies in Australia has been attributed to a well-built agency culture with cooperatively non-compliant customs, a bountiful rare-failure setting, and fresh recruits with modest business ethics on the training (Wallace, 2015, pp. 1).

It is also evident from the article that many business directors and executives’ hires individuals that are part of the company or having connections with the company that will at the end promote their interests rather than that of the shareholders of the corporation (Greber, 2018, pp. 1). The lack of diversity has been attributed to agency-reasoning where the recruitment process is not objective. The recruitment process recruits only individuals that have connections with the company and not based on qualified individuals from the outside world. This will allow the board members to promote unethical practices that will hurt the interests of the shareholders. This has affected the ethical practices of firms in Australia where corporate governance have been affected by unethical practices that are promoted at the board and senior management level (Broome, Conley & Kimberley, 2011, pp. 760).

The agency theory better explains the failure of corporate governance in several companies that was hit by corporate scandals. The theory better explains how Enron was affected by corporate scandal in 2001, where the board of directors and senior management promoted their interests through unethical practices. Enron never trained its employees on ethics that resulted in unethical practices while the senior management and the boards failed to carry out risk management as their responsibility into averting the corporate scandal (Harwell, 2018, pp. 1). The agency theory holds that there was lack of balance between stewardship reasoning and agency reasoning that resulted in unethical practice. This is clear in the second article that was analysed in 1(a) above.

In the two articles, there are many corporate governance issues that affect the performance and the existence of firms in Australia and other parts of the world. The issues highlighted in the article have resulted in crisis in corporate governance that has led to poor governance permitting corporate scandals in different sectors of economy, such as the banking sector. In the articles, there was like of diversity where women were inadequately represented in the board of directors and senior management positions that affected the constitution of the board. There was also the challenge of lack of independence among the directors because the directors had conflict of interest in regard to the company’s interest because they were connected to the company. In addition, remuneration was another issue that resulted in bad management in the company’s boards (Frost, 2018, pp. 1). The other issues that arose in the articles were the pressure from the shareholders on ROE on the management.

• Companies in Australia and Sweden should ensure that their boards have shareholder directors that will ensure that they do not have connection with the company to avoid conflict of interests. Shareholders board of directors will ensure that the interests of the shareholders are promoted rather than that of the “friends” in the company who are also serving in the board. Shareholder directors will play a primary role on elements of performance of the company, like negotiating and monitoring of chief executive officer (CEO) compensation, as well as advising on takeover acquisitions. This will help remove the current pressure from the shareholders for the need for the senior management to perform and to assure them of their ROE (Broome, Conley & Kimberley, 2011, pp. 761).
• Independent board of directors should be largely encouraged by the Swedish and Australian companies because they will be less biased and will better promote the interest of the shareholders. The outside boards of directors are independent and that may serve on many boards whilst lacking any specific firm orientation (Swan, 2016, pp. 1). The majority of the company’s board of directors should be independent to stop unethical practices that would result in a corporate governance failure. This implies that companies should ensure that the majority of the independent directors exceed the shareholders directors to reduce the conflict of interest within the company (Klein, 2010, PP. 47).
• The remuneration of the executives should be reasonable where there should be clear guidelines on what the executives should receive as a pay. The current remuneration in Australia and England to executives is beyond the recommended and there is need to balance the compensation with that of the junior employees. This will reduce the current inequalities in pay that will result in potential scandals (Gaumnitz & Lere, 2004, PP. 330).
• Promoting diversity in the board of directors in companies in Australia and Sweden should be priority where the number of women and minorities should be included into the board. This should mean that there should be more women in the board, but appropriate criteria for selection and recruitment should be adopted. In addition, legislation can be enacted to increase the number of women in company’s boards that will bring about gender balance in the boards in the two countries. The enactment of quota legislation should include the input of all the stakeholders to ensure a consensus is attained and avoid future conflicts and improve diversity inboard composition that will eliminate unethical practices (Stephanie, 2014, pp. 1).

Conclusions:

The articles highlight the challenges that affect the Australian companies in regard to corporate governance. The current challenges have been linked to inadequate independence of the board of directors and diversity. There is the need to promote the independence of the board of directors and inclusion of women and minorities in the board of directors. In addition, the remuneration of the executives should be standardized to that of the junior employees to ensure that they are motivated. The majority of the company’s board of directors should be independent to stop unethical practices that would result in a corporate governance failure. It means that firms ought to ensure that the majority of the independent directors exceed the shareholders directors to decrease the conflict of interest within the business.

References:

Broome, L., Conley, J. & Kimberley, K. 2011. ‘Dangerous Categories: Narratives of Corporate Board Diversity’. North Carolina Law Review, 89(2); 759-760.

Frost, S. 2018. ‘APRA chairman Wayne Byres says banking executive pay is out of step and much change’. Financial Review. [Online]. 28 Oct. 18< https://www.afr.com/business/banking-and-finance/financial-services/apra-chairman-wayne-byres-says-banking-executive-pay-is-out-of-step-and-must-change-20180904- h14x9g>

Gaumnitz, B.R. & Lere, J.C. 2004. ‘A Classification Scheme for Codes of Business Ethics’. Journal of Business Ethics. 49 (4);329-335.

Greber, J. 2018. ‘Is Elon Musk running out of time at Tesla’. Financial Review. [Online]. 28 Oct. 18< https://www.afr.com/leadership/company-culture/is-elon-musk-running-out-of-time-at-tesla-20180827-h14ld3>

Harwell, D. 2018. ‘Investors question how long Tesla CEO Elon Musk’s victory lap can last’. Seattle Times. [Online]. 28 Oct. 18< https://www.seattletimes.com/business/wapotesla-hits-key-mark-with-many-more-to-go/>

Klein, T.D. 2010. ‘Built for change : essential traits of transformative companies’. Santa Barbara, Calif. : Praeger.

Kulik, B.W. (2005). Agency Theory, Reasoning and Culture at Enron: In Search of a Solution. Journal of Business Ethics. 59(4); 347-360.

Patten, S. 2018. ‘ASX200 boards near 30pc gender target: AICD’. Financial Review. [Online]. 28 Oct. 18 < https://www.afr.com/leadership/asx200-boards-near-30pc-gender-target-aicd-20180906-h1501q>

Smith, S. 2018. ‘Company boards are stacked with friends of friends so how can we expect change?’ The Conversation. [Online]. 28 Oct. 18< https://theconversation.com/company-boards-are-stacked-with-friends-of-friends-so-how-can-we-expect-change-95790>

Stephanie, S. 2014. ‘Women on Corporate Boards: Non-Quota Initiatives to Increasing Board Gender Diversity in the US’. Grove City College Journal of Law and Public Policy. 5(1);1-12.

Swan, P. 2016. ‘Experienced shareholders better than independent directors for business’. The Conversation. [Online]. 28 Oct. 18< https://theconversation.com/experienced-shareholders-better-than-independent-directors-for-business-61160>

Taylor, D. 2017. ‘Corporate gender equality: Why boards need more women to make more money’. ABC. [Online]. 28 Oct. 2018< https://www.abc.net.au/news/2017-08-17/why-boards-need-more-women-to-make-more-money/8809222>

Wallace, R. 2015. ‘Women to Make Up Half of Boards, Court Posts, Victorian Premier Says’, The Australian. [Online]. 28 October 2018 <www.theaustralian.com.au/national-affairs/state-politics/women-to-make-up-halfboards-court-posts-victorian-premier-says/story-e6frgczx-1227282264297>