Corporate Social Responsibility (CSR)
Question 1
Corporate social responsibility is basically a concept whereby organizations combine their social and environmental concerns in their business and also in their communication with the stakeholders. In addition to this, CSR is defined as an extended view of responsibilities that arises from the obligations of corporate governance. Following are the dimensions involved in CSR:
- A responsibility towards society and environment.
- A commitment towards to environmental and social reporting.
- Commitment given to employees.
- Focusing on improving the stakeholder relation.
The directors of the company has several statutory legal responsibilities with respect to CSR activities. Under common law, they have a general obligation of performing in the best interest of the company. In other words they are responsible to take care of the financial well-being of their stakeholders. However they are also liable to perform some statutory regulatory activities for conducting the affairs of the business. In relation with CSR, section 180 and 181 of the Corporation Act 2001 are the two most relevant sections. Under these sections, directors have some limitations in committing company resources to activities of CSR. Also the directors should not fixate the profit maximizing activities in short term for the purpose of excluding wider CSR considerations. Moreover, they do not have discretion in respect of the judgements taken on behalf of the company (Dropbox. 2018).
Yes, there is a legal justification for the directors to engage in CSR activities. Fulfilling the corporate social responsibility is one of the legal regulatory requirement which is to be fulfilled by the companies. Complying with the CSR activities is required as per the provisions of Corporation Act 2001 and non-compliance may lead to several types of penalties and consequences. It is the legal responsibility and duty of the directors to get involved in CSR activities as per the provisions of Corporation Act (Dropbox. 2018).
Question 2
Audit committees are crucial component of good and effective corporate governance. As the establishment of audit committees has received significant attention, so it can be assumed that they are an innovation of modern corporate governance (Dropbox. 2018). In Australia, as per the ASX principles companies are required to establish an audit committee and if they fail to do so, then they have to provide a proper reason for the same. All the Australian companies listed on S&P and ASX All Ordinaries Index are required to comply with the requirements of this committee. ASX defines a two-fold responsibility of audit committee which is as follows:
- Review and examine the financial statements of the company
- To ensure external auditors’ independence and competence (PwC. 2018).
However, apart from its roles and responsibilities, the committee also certain benefits such as it assist the directors in meeting and fulfilling their fiduciary responsibilities. It also improves the quality of financial reporting and statutory audit. In addition to this, it helps the directors of a company to take correct decision regarding the choice of independent external director. Nevertheless, the audit committee strengthens the overall internal control framework of the company and thus it can be said it is an essential feature of good and effective corporate governance (Turley and Zaman, 2004).
Role of Audit Committees in Effective Corporate Governance
However, the failure of companies like Enron and WorldCom are because of the worst performance of their corporate governance and audit committees. The CG of these companies were not able to abide the rules and regulations according to government experts and so does the audit committee. Moreover, auditors were forbidden by Securities Exchange Commission from owning stock in client’s company. Furthermore, the rules followed by the committee were not able to accomplish and meet the desired objectives and goals. This is the reason for such big failures. Therefore, it can be said that if proper control and right direction is been provided to the audit committees, they will surely improve the performance and position of the company. Though for Enron and WorldCom they are the reason for failure but proper guidance may lead to a successful establishment of audit committees (Bloomberg.com. 2018).
Question 3
ASX Corporate Governance Council has set some parameters or standards for the corporate governance of Australian companies. The ASX CGC was established in 2002 and it aimed at producing the best practice corporate governance principles and recommendations in order to guide the listed companies so that they follow standards of corporate governance. The ASX CGC has eight principles which are to be followed by each and every entity. Among those, the second principle deals with the structure of board of directors (Dropbox. 2018). According to this principle, a listed company should have an appropriate size, composition, skills and commitments of board. As far as the member of ‘I Design’ are concerned, for becoming the board of directors, they have to fulfil certain requirements. As per ASX CGC principles,
- An effective board must be establish which has competence to deal with current and emerging issues.
- The board which can effectively review the performance of management and can make an independent judgement.
- As per the principle, the board should be comprising of majority of independent directors. Here, independent means that director should be free of any other business and management that can materially interfere (Asx.com.au. 2003).
- The board should have a chairperson who is an independent director and the leader of the board. The person appointed as a chairperson must have sufficient and relevant knowledge and must pursue competent skills in order to monitor the overall functioning of board.
- The CEO and chairperson cannot be the same person.
- In addition to this, the board should also have a nomination committee which consist of minimum three independent directors chaired by the chairperson.
- The size and the composition of the board should be favourable so as to make appropriate decisions with help of diverse skills and perspectives. The size must be limited so that efficient decision making can be done.
- Also if there are non-executive directors, then they should be appointed for a specific period of time subject to ASX Listing rules and Corporation Act provisions (Asx.com.au. 2010).
From looking the above rules, it is suggested to Peter and his friends that they should have a professional composition of board of directors. As all of the six persons are expert in their respective fields and seems to have less knowledge about the ASX principles and legislations. So, in order to have appropriate composition, they should elect the competent and knowledgeable persons as board of directors who can take care of the entire functioning of the company.
Question 4
Yes, as per the insolvent trading provisions the directors of the company are liable for its losses and getting insolvent. Section 588G of the Corporation Act charges a liability on a director who allows the company to trade at the time of its becoming insolvent. The director will be liable if the debt was incurred at the time of insolvency and he or she was actually aware of the fact that there are reasonable grounds for suspecting any sort of insolvency in the company. According to the section 95A of the act, the company become insolvent when it is not able to pay all their debts as and when they become due (Allens.com.au. 2004). Under the provisions of insolvent trading, the liability imposed on the director is wide ranging and rigorous. Two types of penalties are been there namely civil and criminal penalties. The situation where the director decides to trade in the company whilst insolvent and do it intentionally and knowingly, then he or she will be liable to pay a criminal penalty of $200,000 or imprisonment of 5 years. Moreover, the director who found guilty in the criminal offence is restricted to manage any company for 5 years. Civil penalties generally sums up to $200,000 paid by the director to ASIC as a fine. Civil offence does not include disqualification from companies’ management (Allens.com.au. 2004).
However, directors are also provided with number of defences who are found guilt in any insolvent trading action. They are as follows:
- When the director has reasonable grounds to prove that the company is insolvent and will remain insolvent in future also. In other words, when directors prove that they had actual expectations and reasonable ground for the occurrence of insolvency.
- When the director relied upon another person for getting the information regarding insolvency and which makes him or her believe that the actual insolvency is there, on the basis of data provided.
- There is no participation of director in the management at time of debt was incurred is good defence.
- Lastly, responsible and suitable steps taken by the director for preventing the company incurring debt like appointing voluntary administrator (Australian Institute of Company Directors. 2018).
So, considering the case of Karen, Bradley and Owen, the two people except Karen are responsible for paying the criminal liability as both of them knows that their company is facing cash flow problems, still they choose to take loan of $300,000 from Maverick Bank. However, to escape from the liability they can use the defences and justify the same.
References
Allens.com.au. (2004). DIRECTORS’ DUTIES – THE INSOLVENT TRADING ISSUES FROM A LAWYER’S PERSPECTIVE. [Online] Available at: https://www.allens.com.au/pubs/pdf/insol/pap18feb04.pdf [Accessed 19 June 2018].
Asx.com.au. (2003). ASX Corporate Governance Council. [Online] Available at: https://www.asx.com.au/documents/asx-compliance/principles-and-recommendations-march-2003.pdf [Accessed 19 June 2018].
Asx.com.au. (2010). Corporate Governance Principles and Recommendations with 2010 Amendments. [Online] Available at: https://www.asx.com.au/documents/asx-compliance/cg_principles_recommendations_with_2010_amendments.pdf [Accessed 19 June 2018].
Australian Institute of Company Directors. (2018). Insolvent trading Duties of directors. [Online] Available at: https://aicd.companydirectors.com.au/~/media/cd2/resources/director-resources/director-tools/pdf/05446-6-3-duties-directors_insolvent-trading_a4-web.ashx [Accessed 19 June 2018].
Bloomberg.com. (2018). Commentary: How Governance Rules Failed at Enron. [Online] Available at: https://www.bloomberg.com/news/articles/2002-01-20/commentary-how-governance-rules-failed-at-enron [Accessed 19 June 2018].
Dropbox. (2018). Weekly Slides. [Online] Available at: https://www.dropbox.com/sh/dwaacemyzn6alc7/AAA432sIHIRCWabcuto0kFtKa?dl=0 [Accessed 19 June 2018].
PwC. (2018). Role of the audit committee. [Online] Available at: https://www.pwc.com/gx/en/services/audit-assurance/publications/audit-committee-role.html [Accessed 19 June 2018].
Turley, S. and Zaman, M. (2004). The corporate governance effects of audit committees. Journal of management and governance, 8(3), pp.305-332.
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