Corporate Governance Issues in Red Health Limited
Discuss about the Corporate Governance issues in Light of the ASX’s.
Corporate governance refers to the mechanisms employed by corporations for their administration and management. This is mainly in the hands of the executive officers and the Board of Directors. Corporate governance principles refer to certain ethical standards that the company must adhere to in order to ensure the rights of all stakeholders are adequately safeguarded (Tricker and Tricker 2015). In Australia strong corporate governance principles were formulated by the Australian Securities Exchange’s (ASX) Corporate Governance Council following the corporate governance failure in the HIH Insurance fraud scandal (McCahery, Sautner and Starks 2016). The council formulates corporate governance principles which should be ideally incorporated into the framework of all corporations functioning within the jurisdiction of the Australia Commonwealth (Claessens and Yurtoglu 2013). The third edition of these principles is the latest recommendation. These principles seek to device a transparent and ethical structure through various disclosures and other mechanisms that enhance the financial and ethical accountability. The following paragraphs will seek to identify the corporate governance issues in a given set of circumstances in light of the principles formulated by the ASX’s Corporate Governance Council and recommend two discussions in relation to the said identification.
Red Health Limited (RHL) is a public limited company that is a majorly owned subsidiary of Blue Health Limited (BHL). Marcel has been recently appointed as a director of RHL and was previously engaged as the Corporate Relations Officer of the company. During her tenure she was tasked with answering shareholder concerns and in many situations was compelled to not adequately address these concerns. The shareholder concern in question alleged various activities that were in contravention of the ASX’s Corporate Governance Principles. These are:
- A non-executive director, namely, Carlos is allegedly involved in bribery of officials in another jurisdiction. These have also been reported in the media. There are also reports of drug testing without consent in the facility in addition to environmental concerns and child labour allegations.
- There are investigations regarding inflated profits being reported. There are also concerns raised in the public domain by auditors about the accuracy of the financial statements disclosed by BHL which are ratified by internal audit teams.
- There were bonuses paid to the Directors under the head of “lack lustre annual performance” which appear to be in the financial-self interest of the directors and executive management.
These are thus the corporate governance issues identified within BHL along with non-disclosures (Marcel being compelled to not address concerns of shareholders).
The third edition of the ASX’s Corporate Governance Council’s recommendations provide for eight principles which should be ideally incorporated into the framework of a company. The first principle prescribes the structuring of the administration and management in a way that facilitates management and oversight (Klettner, Clarke and Boersma 2014). In this given scenario the management can be seen to endorse bribery and drug testing without consent. In light of these facts it can be inferred that the foundations of management and oversight in the company are not sufficient enough to ensure ethical transactions and this would thus be in contravention of the first recommendation.
The Second recommendation of the ASX’s Corporate Governance Council necessitates the structuring of the structuring of the board in a way that maximizes value derived (Beekes, Brown and Zhang 2015). This mainly prescribes the appointment of more non-executive directors in order to add value to the board. The given scenario however establishes the blatant abuse of power by a director through bribery and other unethical practices. Such activities go against the idea of adding value to the board and are in fact detrimental to the value of the board.
Analysis of ASX’s Corporate Governance Council Recommendations
ASX’s Corporate Governance Council’s third principle proposes an obligation on the management to act ethically and responsibly. Thus, the board of a corporation functioning within the jurisdiction of Australia has an obligation to ensure that the activities undertaken by them are not unethical or illegal (Khan, Muttakin and Siddiqui 2013). The acts of Carlos are unethical and illegal in the face of it and thus the board of BHL does not adhere to the third principle recommended by ASX. This obligation also applies to unethical practices such as employment of child labour and environmental degradation through business activities. Thus these are contraventions of the third principle as well.
Principle 4 and 5 of the ASX’s Corporate Governance Council’s recommendations deal with safeguarding the integrity of corporate reporting and making disclosures. These principles make it an obligation on the company to provide shareholders with accurate and true information on the financial standing of the company. This is more reliable when the corporation employs an external auditor to review their financial statements (Christensen et al. 2015). Accurate representation of profits is also included in this obligation. BHL does not employ an external auditor and internal processes are employed for the same. This undermines the credibility of the financial statements disclosed. Furthermore, shareholders are the primary stakeholders of the company and need to be informed of all material issues that maybe related to the business they have invested in. Not addressing the concerns of the shareholders would be a contravention of this principle as it is a material disclosure which needs to be made by the company. This is also a part of the 6th principle formulated by the ASX’s Corporate Governance Council which deals with the rights of security holders. Not making these disclosures is an infringement of the shareholders rights to all material information.
The “lack lustre annual performance” bonus paid to the directors does not seem to be in the interests of the company and seems to incline toward the financial self interests of the directors. Under the 1st principle recommended by the ASX’s Corporate Governance Council the management has an obligation to act in the best interests of the company (Young and Thyil 2014). This is contravention of this recommendation. The 8th principle regulates fair remuneration and makes it an obligation to fairly remunerate the administration. This bonus paid seems to be an added claim to the usual remuneration offered to the board and is not justified. Thus, the payment of this additional bonus goes against the 1st and 8th principle formulated by ASX.
Marcel has been tasked with formulating a functional code of ethics for the organization and briefing the board about the same ideals. In light of this responsibility the following recommendations should be considered:
The board of directors has acted unethically in the past and thus has lost credibility before the shareholders and goodwill in the market. As a measure to reinstate their market position the code of ethics should ideally incorporate a Corporate Governance Statement in order to fully explain the implementation of corporate governance principles into the framework of the organizational structure (Kim and Lu 2013).
Recommendations for Red Health Limited
The code of ethics should ideally define the obligation and responsibilities of the board and provide for regular evaluation of the board in light of these obligations and responsibilities (Bottomley 2016). The code of ethics should also provide for repercussions in case of a breach of such obligations.
The code of ethics should provide for an external auditor and define how timely disclosures will be made by the company to the shareholders. It should also include a statement of reliability stating how these disclosures are credible.
The code should additionally provide for clear and transparent communication between the shareholders and the administration. The mode of communication and timeframes for the response to such communications should be defined in the code.
The code should provide for environmental friendly activities to be undertaken by the company. This would define how the company manages its effects on the environment and how it seeks to minimize the environmental implications of their activities (Chapple, Clout and Tan 2014). This should be included in the Corporate Social Responsibility statement undertaken by the company and incorporated into the code of ethics. This should also provide for a complete ban on the employment of child labour and any activities that maybe hazardous to the employees or exploitative.
The final recommendation for the code is a statement of how the administration is to be remunerated and how these remunerations are balanced with their duties and responsibilities (Lama and Anderson 2015). This remuneration should also be subject to the evaluation and the establishment of competent administration of the corporation.
Conclusion
To conclude, the corporate governance principles recommended by ASX’s Corporate Governance Council ensures accountability and transparency within the organizational framework of a corporation. A corporation is owned by the shareholders and the company’s foremost responsibility lies towards protecting their rights. Thus, the shareholders must have accurate information about the affairs of the company at all times. Moreover a corporation has a responsibility towards the society as a whole and must curb all activities that have detrimental effects on the society, whether on environmental or humanitarian grounds. Thus BHL needs to incorporate all of ASX’s Corporate Governance Council’s recommendations in order to sufficiently regain its market position and shareholder credibility. Thus, implementation of a code of ethics is the best recourse available to BHL.
References:
Beekes, W., Brown, P. and Zhang, Q., 2015. Corporate governance and the informativeness of disclosures in Australia: A re?examination. Accounting & Finance, 55(4), pp.931-963.
Bottomley, S., 2016. The constitutional corporation: Rethinking corporate governance. Routledge.
Chapple, L., Clout, V.J. and Tan, D., 2014. Corporate governance and securities class actions. Australian Journal of Management, 39(4), pp.525-547.
Christensen, J., Kent, P., Routledge, J. and Stewart, J., 2015. Do corporate governance recommendations improve the performance and accountability of small listed companies?. Accounting & Finance, 55(1), pp.133-164.
Claessens, S. and Yurtoglu, B.B., 2013. Corporate governance in emerging markets: A survey. Emerging markets review, 15, pp.1-33.
Khan, A., Muttakin, M.B. and Siddiqui, J., 2013. Corporate governance and corporate social responsibility disclosures: Evidence from an emerging economy. Journal of business ethics, 114(2), pp.207-223.
Kim, E.H. and Lu, Y., 2013. Corporate governance reforms around the world and cross-border acquisitions. Journal of Corporate Finance, 22, pp.236-253.
Klettner, A., Clarke, T. and Boersma, M., 2014. The governance of corporate sustainability: Empirical insights into the development, leadership and implementation of responsible business strategy. Journal of Business Ethics, 122(1), pp.145-165.
Lama, T. and Anderson, W.W., 2015. Company characteristics and compliance with ASX corporate governance principles. Pacific Accounting Review, 27(3), pp.373-392.
McCahery, J.A., Sautner, Z. and Starks, L.T., 2016. Behind the scenes: The corporate governance preferences of institutional investors. The Journal of Finance, 71(6), pp.2905-2932.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
Young, S. and Thyil, V., 2014. Corporate social responsibility and corporate governance: Role of context in international settings. Journal of Business Ethics, 122(1), pp.1-24.
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