Background and Introduction
Question:
Discuss about the Implication of ASX Corporate Governance Principles.
The ASX Corporate Governance Council was established by ASX in the year 2002 for developing and issuing principles-based recommendations on the corporate governance practices to be implemented by the business entities in Australia listed on ASX. The standard corporate governance principles are developed for promoting the trust and confidence of the investors in the business operations of the entities and meeting the varying needs and expectations of the stakeholders. The business entities listed on ASX need to ensure that their corporate governance practices are developed in relation to the principles developed by the council. As such, the compliance of Woolworths Limited as per the ASX Corporate governance principles can be analyzed through reviewing its corporate governance statements and the information published in the annual report. Woolworths Limited, one of the most recognized retailing brands of Australia, develops and issues its corporate governance statement. The compliance of the company’s corporate governance statement as per the principles of ASX Corporate Governance Council is analyzed as follows:
As per the ASX Corporate governance principles, the business entities listed on ASX should disclose the necessary information regarding the roles and responsibilities of the board and management. Also, the measures adopted by the company on monitoring and reviewing their information should be disclosed. The corporate governance statement of Woolworths Limited has effectively disclosed the role and responsibilities of the board. The Board is accountable to provide a strategic direction toe the company for enhancing the shareholder value. The various responsibilities of the Board is also disclosed in the statements such as financial oversight, developing risk management framework, leadership selection, social responsibility and others. In addition to this, the various duties of the directors such as representing the board to shareholders and others are disclosed in the statement (Bazley, Hancock and Robinson, 2014). The performance evaluation strategies adopted for reviewing the performance of Board and management is also discussed in the corporate governance statement. As per the statement, the Chairman is responsible for carrying out the performance evaluation process and the review of the Board performance is carried out annually. The director performance is evaluated by the Chairman by discussion with them on individual basis and providing them the feedback. Thus, it can be said that the company has effectively followed this principle of ASX Corporate Governance Council (Woolworths Group: Corporate Governance Statement, 2017).
As per this ASX principle, there should be the presence of an effective board structure of adequate size, composition, skills and commitment so that it is able to effectively carry out its duties (ASX Corporate Governance Council, 2014). Woolworths Limited in its corporate governance statement has provided information about the board structure, skills and composition. The board structure is composed of independent non-executive directors having varying skills, background and experience. The key skills and experience required by the company for an individual to become a member of the board is also stated in the corporate governance statement. The different committees established for providing assistance to the Board so that they carry out their duties effectively are also stated. However, the information regarding the Board Commitment is not adequately disclosed in the governance statement of the company (Woolworths Group: Corporate Governance Statement, 2017).
ASX Corporate Governance Principles for Business Entities
The company should also disclose the information for ensuring that it carries out is business operations in an ethical and responsible manner (ASX Corporate Governance Council, 2014). It has established the core values, code of conduct and policy framework for providing guidelines to all the employees regarding the standard behavior to be conducted in the workplace. In addition to this, it has also developed a Corporate Responsibility Strategy 2020 for defining its commitments to the stakeholders and promoting the social and environmental development (Woolworths Group: Corporate Governance Statement, 2017).
There should be the presence of a formal and rigorous process for verifying and safeguard the integrity of its corporate reporting (ASX Corporate Governance Council, 2014). In order to comply with this corporate governance principle of ASX, Woolworths have disclosed that its corporate reporting process is assured by the external auditor Deliotte. In addition to this, the Group also carries out internal audit that is managed by the Group Risk and Assurance Team. Thus, the audit process of the Group assures that the integrated reporting process is free from any error (Woolworths Group: Corporate Governance Statement, 2017).
As per this ASX principle, the company should disclose all the materialistic information impacting the price of the securities in a timely and balanced disclosure. Woolworths Limited ensures that all its stakeholders are informed about the material matters of the company through ASX announcements, periodic communications and diverse range of forums and publications as per its shareholder communication policy provided on its official website (ASX Corporate Governance Council, 2014). In addition to this, it also adopts the use of regular email notifications in respect of the major events for corporate reporting in order to promote multiple stakeholder engagement. Also, the materialistic information is disclosed to the end-users through the conducting an annual general meeting, publishing annual report and releasing the financial statements depicting its financial performance on an annual basis (Woolworths Group: Corporate Governance Statement, 2017).
The rights of the security holders should be respected by the company through providing them all the necessary information and allowing them to exercise their rights effectively ASX Corporate Governance Council, 2014). As per the ASX principle, Woolworths have developed an investor relations program that aims to facilitate effective communication with the security holders. In addition to this, its continuous disclosure policy aims to provide its shareholders all the required information appropriate. The policy aims to promote the confidence of the shareholders in the business operations through providing them timely, direct and equal access of the required information useful in decision-making. However, it corporate governance statement has not discussed the facilities provided to security holders for exercising their rights (Woolworths Group: Corporate Governance Statement, 2017).
The company should develop an effective risk management framework for periodic review of the risk in order to mitigate it in advance. Woolworths, as per this ASX principle, has effective disclosed its risk management framework and policy in its corporate governance statement (Plessis, McConvill and Bagaric, 2005). The Group faces various types of strategic, financial, operational and compliance related risks due to complex nature of its business operations. Its risk management framework includes booth the risk management policy and the enterprise risk management framework. It has also provided a detailed description of its risk governance practices and the consecutive responsibilities of the Board in managing and monitoring the risk. Also, its annual report has provided detailed information regarding the material business impacts and the consequent mitigation plans adopted by the Group for overcoming them (Woolworths Group: Corporate Governance Statement, 2017).
Woolworths Limited Board and Management Roles and Responsibilities
The company should develop an effective remuneration policy for attracting and retaining high quality directors and designing attractive remuneration package for attracting, retaining and motivating high quality senior executives (ASX Corporate Governance Council, 2014). As per the principle, Woolworths Board reviews the performance and approves the remuneration for CEO and the executive committee members. The annual report of the Group has also provided detail information about the pay of the executive key management personnel (KMP). The remuneration framework has described the policies adopted by the Group for deciding the remuneration of the KMP for ensuring that the compensation provided to them is fair and just (Woolworths Group: Corporate Governance Statement, 2017).
The analysis of the risk assessment process in Woolworths Limited will provide an understanding of the internal control framework adopted by it for ensuring that material information provided to the auditors is free from any material misstatement. As such, the present section discusses the risk assessment procedures used for assessing the risk that material misstatement exists (Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, 2018). The assessment of the audit risk can be carried out the use of an effective risk assessment procedure having the following steps:
Woolworths Groups is a recognized brand in retailing in Australia and is actively involved in providing is retails services to million of customers every day. Its main retail operations include supermarket, petrol, liquor, merchandise, home improvement, hotels and Gambling. It is strongly committed in providing high quality products and services to the customers at low cost (Woolworths Group, 2018).
The Group generates large part of its income from the supermarket and Grocery stores in Australia. The company mainly targets the markets of Australia and New Zealand The supermarket chain of Woolworths account for about 80% of the market of the Australia (Woolworths Group, 2018).
The Group has implemented the business strategy of developing its business on the principle of integrity for achieving the satisfaction of its stakeholders. In this context, the company aims to deliver the bets in convenience, value and quality to the customers. It has partnered with thousand of local farmers and manufactures to provide fresh food products to the customers in its supermarket and grocery stores (Woolworths Group: Annual Report, 2017).
The computation of the fiannacil ratios of the income sttsment of the Group is as follows:
Income statement Ratios:
Gross profit margin: Gross profit /Net Sales
Gross Profit (2017) = 15929 AUD million
Net Sales (2017) = 55669 AUD million
Gross profit margin Ratio = =28.61%
Net profit margin = Net Profit/Net Sales
Net Profit (2017) = 1534 AUD million
Net Sales (2017) = 55669 AUD million (Woolworths Group, 2017)
Net profit margin Ratio = 2.75%
Balance Sheet Ratios
Current Ratio: Current Assets/Current Liabilities
Current Assets (2017) = 6,994 AUD million
Current liabilities (2017) = 8,824 AUD million
Current Ratio (2017) = 0.79 times
Debt Equity Ratio = Debt/Equity
Debt (2017) = 13040 AUD million
Equity (2017) = 9526 AUD million (Woolworths Group, 2017)
Debt Equity Ratio (2017) = 1.37 times
The Group in its annual report has discussed the relevant financial risks that can impact the materialistic information provided in the financial statements and thus have to be taken into account by the auditors at the time of carrying out the audit (Auditing and Assurance Standards Board, 2009). The risk is categorized as follows:
- Market Risk: The market risk relates to the significant risk arising from the movement in the foreign currency. The auditors need to take into account the impact on the various elements of the financial statements due to risk exposure of the foreign currency. The company in order to mitigate the risk of foreign currency has entered into forward exchange contracts and foreign currency options. This will helps the company to hedge the risk related to changes in the foreign currency. In addition to this, it also faces significant risk related to fluctuations in the interest rates on its borrowed funds. The company has managed the risk related to interest rate through developing an appropriate combination between the fix and floating rate with the use of swap contract options (Woolworths Group: Annual Report, 2017).
- Liquidity Risk: The risk is related to the incapability of the company to meet its financial obligations in the future due to occurrence of any adverse situations. For managing this risk, the company has developed a liquidity risk management framework as per which it develops and maintains a liquidity reserve that helps it to effectively mitigate the liquidity risk (Woolworths Group: Annual Report, 2017).
- Credit Risk: The risk associated with the default of a counterparty to meet its obligations resulting in causing financial loss to the company. In order to mitigate this risk, the Group has developed a policy directing the managers to only invest funds for short-term and the counterparty is assigned a credit rating that limits the amount of money credit to them. This helps Woolworths in reducing the financial loss occurrence due to possibility of default by the counterparty (Woolworths Group: Annual Report, 2017).
Conclusion
Thus, it can be said that Woolworths Limited has effectively complied with the ASX Corporate governance principles that has enabled it to develop a strong brand image in the stakeholder’s mind. Also, the risk assessment procedures have ensured that it has taken effective steps in reducing the financial risk that can cause material misstatements.
References
ASX Corporate Governance Council. 2014. [Online]. Available at: https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf [Accessed on: 16 April 2018].
Auditing and Assurance Standards Board. 2009. Auditing Standard ASA 520 Analytical Procedures. [Online]. Available at: https://www.auasb.gov.au/admin/file/content102/c3/ASA_520_27-10-09.pdf [Accessed on: 16 April 2018].
Bazley, M., Hancock, P. and Robinson, P. 2014. Contemporary Accounting PDF. Cengage Learning Australia.
Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. 2018. [Online]. Available at: https://auditinghelp.com/identifying-and-assessing-the-risks-of-material-misstatement-through-understanding-the-entity-and-its-environment-13914 [Accessed on: 16 April 2018].
Plessis, J., McConvill, J. and Bagaric, M. 2005. Principles of Contemporary Corporate Governance. Cambridge University Press.
Woolworths Group 2017 – Corporate Governance Statement. 2017. [Online]. Available at: https://www.woolworthsgroup.com.au/content/Document/Woolworths%20Group%202017%20-%20Corporate%20Governance%20Statement.pdf [Accessed on: 16 April 2018].
Woolworths Group. 2017. Annual Report. [Online]. Available at: https://www.woolworthsgroup.com.au/icms_docs/188795_annual-report-2017.pdf [Accessed on: 16 April 2018].
Woolworths Group. 2018. [Online]. Available at: https://www.woolworthsgroup.com.au/page/about-us [Accessed on: 16 April 2018].
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