In the global financial crisis of 2008 the spotlight was on ‘corporate governanc

Question

In the global financial crisis of 2008 the spotlight was on ‘corporate governance’, that is, how companies are regulated by governments and how they are managed internally. At that time Australia’s regulatory system and the way Australian financial institutions managed their businesses were considered to be one of the reasons Australia was in a relatively good position to withstand the crisis. Yet in 2018 the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (‘the Royal Commission’) is conducting hearings and considering the conduct of some of these same Australian financial institutions (banks and other financial service providers), including their compliance with both Australian law and community standards, together with the sufficiency of the current Australian legal and regulatory structure. Required: A. Choose a company that is currently listed on the Australian Stock Exchange and whose conduct is being considered by the Royal Commission mentioned above. Discuss whether your chosen company adheres to the principles of good corporate governance. Give reasons for your answer, including examples of good or poor corporate governance exhibited by your chosen company. B Discuss the possible legal, social, economic and political consequences that may follow where those making decisions on behalf of the company you have chosen above fail to observe good corporate governance principles. In your response you must identify and discuss two theories that drive views on corporate governance

Explanation / Answer

A. Lets consider the case study for ANZ (Australia and New Zealand Banking Group Ltd). ANZ is listed in the Australian Stock Exchange (currently trading at ~$28 as on Sep 7th). This company follows a strong corporate governance framework, and also boasts about a lot of projects taken up by the company to follow the same. The Corporate Governance Statement published by the company on their website for the year 2017 mentions about the various steps followed by them during the year, for e.g. "1) Developing and implementing the charter of the ESG Committee. 2) Embarking on a program to provide management with Board level advice on ANZ’s core sustainability issues." (quoting the same lines as mentioned in the statement to avoid any incorrect info to be passed on).

In fact, they are also aware and mention that whatever steps they follow, they need to be responsible enough so that they are able to produce valid justifications to the Australian Stock Exchange. As they are listed on the ASX, they have very stringent guidelines towards the corporate governance schedules. They have achieved their mission towards corporate governance to a good extent which as mentioned by them is reflected in the audit reports of E&Y, an independent body for conducting audits. However, there have been cases when the customers have faced ill treatment from the bank officials, for e.g. the case of a farmer couple with whom the bank was so strict that even after a serious tragedy struck with the family they were not ready to be flexible, and which resulted in the couple being completely bankrupt. One of the board of directors mentioned this as ethical lapse during the years when they started and till date.

B. However stringent their corporate governance may be, ANZ is being questioned by the Royal Commission, due to the constant pressure by local groups to scrutinize the governance structure of banking and other financial industry in Australia. Hence, in this context, it becomes very important for them to follow all the policies being laid out, and be justifiable to their actions. Should they fall a prey to any malpractice, the consequences may be against them. The Royal Commission has been hearing quite a few cases with the customers of the Australian banks, and which has thrown light on malpractices being followed at the bank's end. In understanding the consequences, one of the theories that gets immediately highlighted is the "Agency Theory", which suggests the relationship between the shareholders and company executives. It refers that the actual owners are shareholders and they appoint the company executives to act as agents to run that company. In this context, it often follows that the agents may indulge into malpractices like self interest, or may or may not run the company in the exact way the owner wants it to be run as. The second theory which may be considered is the "Stewardship Theory", which refers the company executives and managers as stewards and who work for the owners of the company to achieve and bring maximum success to owners. In this context, it cannot be denied that although the success achieved may be to the fullest for owners, the cost at which the suucess is achieved should also be considered. Hence it becomes the company's social, legal and political resposibilty to secure the best action in favor of the owners, else the consequences may be bad to owners and company executives.

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