The Role of Corporate Governance in Business Organizations
Corporate governance is defined as a system that directs and exercise control over the companies. The Board of Directors is accountable for governing the companies. The shareholders of the companies play a significant role in appointing auditors and directors of the company to their satisfaction of an appropriate organizations structure in place. The board of the company is responsible for establishing the strategic aims and objectives of the company and supervises the business operations of the company with his expertise and effective leadership skills (ArAs 2016).
The concept of corporate governance defines the way in which companies are governed. A good corporate governance framework have a positive impact on every aspect of an organization right from communication to strategic decision-making, communication and leadership. However, the concept entails the control that the board of directors exercise over the organization to enhance its performance.
The significance of corporate governance in the corporate sector lies in the fact that it enables the Board to comprehend the role of the management. Such framework should have characteristics that contribute to effective governance and acts as tools that address government risk. Although there may be difference in the inner working strategies of corporate governance, but the business practices are uniform in nature (Clapp and Rowlands 2014). One of the many roles that corporate governance play include the strategic decisions made for the welfare of those with a stake in the successful outcomes of the business organizations. Apart from the importance that is given to the shareholders, the Boards have increasingly laid more emphasis on the welfare and interests of the stakeholders such as potential customers, customers, and non-customers who are affected by the decisions taken by the company. The emergence of corporate governance has enhanced accountability and transparency of the organizations towards its stakeholders as well.
Purpose of the Principles and recommendations
The Principles and Recommendations stipulates the corporate governance that are recommended to be used in business practices by entities listed on ASX because these principles shall enable the companies to achieve good governance consequences and fulfill the expectations of the investors in several circumstances (Larcker and Tayan 2015). The main purpose of using these principles and recommendations is to build confidence of the investor about an organization, as this is the most important essential factor for the ASX listed companies to compete for capital.
The ASX Corporate Governance Council Principles and Recommendations [Principles and Recommendations] have identified that various entities are legally entitled to adopt distinct forms of government practices depending on their complexity, history, size and corporate culture. This forms the reason why Principles and Recommendations do not stipulate any particular corporate governance related practices that must be adopted by the ASX listed entities.
Purpose of the Principles and Recommendations
Structure of Principles and Recommendations
The structure of the Principles and Recommendations strives to promote eights essential central principles:
- A listed entity must disclose and establish responsibilities and relevant roles of the management and board of the organization. They must establish rules that monitors performance;
- A listed entity is required to act responsibly and ethically;
- A listed entity must have rigorous and formal processes that aims at safeguarding and verifying the veracity of the corporate reporting.
- A listed entity is required to respect the rights of the security holders by enabling them have access to proper facilities and information to effectively exercise such rights.
- A listed entity is required to establish an effective risk-management framework that reviews the efficacy of the structure periodically.
- A listed entity should pay sufficient compensation to the director to draw attention of highly qualified and experienced directors and senior executives to ensure alignment of their interests with that of the security holders.
The government practice that is adopted by a listed entity is the responsible of the board and the body who is conferred with the legal responsibility for managing the business with care and due diligence. Therefore, such legal authority must ensure that the organization has the appropriate governance structure (Moriarty 2014).
As per the Principles and Recommendations, if a Board of Directors of any listed entity believes that any particular recommendation and principles is not appropriate for any specific circumstance, the entity is not obligated to adopt such recommendation. However, if it adopts such recommendation, it is required to explain adopting such recommendation, thus, applying the ‘if not, why not approach’.
This explanation of the ‘if not, why not approach’ shall provide adequate information about the governance arrangements of the corporate entity:
- to enable the stakeholders and the security holders have a discussion with the board management regarding governance matters;
- to assist the security holders take into consideration such information while voting on specific resolutions;
- to assist the investors in considering such information while determining whether to invest in the securities of the entity;
Thus ‘if not, why not’ approach is essential to the operation of the Principles and Recommendations under the ASX Corporate governance Principles and Recommendations.
The ASX Corporate Governance Council is committed to conduct a persisting review of these principles to ensure that they are effectively implemented in the business practice. The review of the implementation of such principles shall take into consideration of all the international and local developments and continue to demonstrate international best business practice (Tai and Chuang 2014). The review regarding the implementation of such Principles and Recommendations shall enable the investors and companies to provide feedback about such implementation and the impact that such principles had on the business organizations. Such feedback is provided to the ASX Corporate Governance Council either directly or to any of the member bodies of the Council. In regards to the implementation of such Principles and Recommendations, ASX Corporate Governance Council shall continue to conduct such review of the impact of the principles and recommendations. The review shall be followed by examination and collation of disclosures made in annual consideration and reports regarding the feedback received.
The ASX Corporate Governance Council Principles and Recommendations emerged in 2003. The second edition was released in 2007 and a new recommendation on composition and diversity of the remuneration committee were added in the year 2010. The purpose of the emergence of the corporate governance Principles and Recommendations aims at meeting the reasonable expectations of the investors in most of the situations.
The Principles and Recommendations have been developed to produce result that is of high quality and is effective ensuring integrity. These Principles and recommendations do not require a ‘one size fits all’ approach’ to corporate governance instead it asserts that the design that is most appropriate for the business practice which will help to maximize the performance of the company and enhance the accountability for the welfare of the braider economy and shareholders of the company (Tricker and Tricker 2015). The Principles and Recommendations acts as guidance for the companies enabling them to determine the amount of benefits it has undergone after the change in the business approach considering the specific circumstances of the company.
Structure of Principles and Recommendations
Every ASX listed entity is obligated to include in its annual report either of the corporate governance statements that qualifies the requirements of that rule as stipulated under Listing Rule 4.10.3. The corporate governance statement must reveal the extent to which the business entity has abided by the recommendations set out by the Council during the reporting period.
The requirements of the AS listed companies to evaluate their corporate governance practices with that of the recommendations of the Council to disclose the reasons if such governance practices differs from each other. As mentioned earlier that the recommendations of the ASX Council does not follow the ‘if not, why not’ approach, Listing Rule 4.10.3 encourages all the listed companies to adopt the recommendations mentioned under the Councils’ corporate governance principles and recommendations but it does not obligate such listed companies to adopt any particular design or practice (Suliman et al. 2016).
This rule stipulated under the Listing Rule formed the basis of the ‘if not, why not approach’ that forms the fundamental rule of the Principles and Recommendations which also serves to ensure that the market is subjected to an proper level of disclosure regarding the governance practices adopted by the business organization.
According to the Listing Rule, 4.10.3 requires a business entity to publish about corporate governance in its annual report. The Recommendations and Principles also suggest that any information regarding the business entity should be mentioned in the annual report of the entity. Such governance disclosures of the business entity should be mentioned under the ‘corporate governance’ section of such annual report. The corporate governance statement of a business entity may incorporate material by reference if material is freely available and the statement indicates clearly, where the interested parties can obtain a copy of such material. As per Listing Rule 4.10.3, a business entity is required to mention about the fact that it follows all the principles and recommendations of the Council in its corporate governance statement. The corporate governance statement must also include all the policies and practices that the company follows in its practice (Crane and Matten 2016).
The Corporate Social Responsibility enables an organization to contribute to sustainable development by ensuring the best interest of the stakeholders along with the shareholders of the company. The corporate social responsibility of a company enables the company to carry out its business operations in a manner that meets the legal, commercial, ethical and public expectations that is expected from the business organizations by the society. During the Parliamentary Joint Committee (PJC) on Corporations and Financial Services Inquiry, it recommended that ASX Governance Recommendations should be enlarged so as to incorporate CSR sustainability reporting guidelines (Korschun, Bhattacharya and Swain 2014).
Corporate Governance Statements for ASX Listed Entities
In response to the recommendation made by the PJC, the ASX Council stated that it has been proposing changes with respect to Principle 7 of the Principles and Recommendations of the Council dealing with Risk Management. The proposed changes have considered the corporate social responsibilities to be undertaken with respect to the principle of risk management (ArAs 2016). The principle shall include factors that consider best interest of the stakeholders and the welfare of the society. The ASX’s brand and culture is reflected from the behaviors and values of the Board Management. The implementation of ASX principles and recommendations ensures diversity and inclusive work environment where employees are provided with equal access to training, benefits and opportunities. Therefore, as corporate social responsibility requires an entity to ensure social well being besides earning profits for the company, the ASX Council has successfully developed Principles and Recommendations to be implemented in business practice that ensures best interests of the stakeholders as well as the community. Therefore, it would be effective if it monitored the corporate social responsibility performed by the companies.
Corporate governance principles of ASX can be beneficial for the non-listed public companies as it would contribute to long-term survival and its success. The governance framework shall enhance the professionalism in the decision making process of such companies enabling the companies to have access to variety of expertise. Shares in unlisted companies are not liquid which makes it investment risk for the financiers and shareholders; hence, a proper governance framework shall ensure the investors that the investments are well-managed and safeguarded. Therefore, the principles and recommendations of ASX should also be beneficial for the non-listed companies, if they are applicable to such companies (Larcker and Tayan 2015).
Conclusion
To conclude corporate governance has certain limitations such as Increased costs resulting from higher administration expenses. Nevertheless, the positive impact of good and effective corporate governance on the companies that are not listed as corporate governance is all about enhancing accountability and transparency in the prevailing organizational structure. The main purpose of implementing corporate governance principles is to earn wealth ethically and legally which results in high level of satisfaction to the five factors of the organization- employees, investors, vendors, customers and the community.
Reference List
Andriof, J. and McIntosh, M. eds., 2017. Perspectives on corporate citizenship. Routledge.
ArAs, G., 2016. A handbook of corporate governance and social responsibility. CRC Press.
Carlos Pinho, J., Paula Rodrigues, A. and Dibb, S., 2014. The role of corporate culture, market orientation and organisational commitment in organisational performance: the case of non-profit organisations. Journal of Management Development, 33(4), pp.374-398.
Clapp, J. and Rowlands, I.H., 2014. Corporate social responsibility. The Essential Guide to Global Environmental Governance. Routledge: London, pp.42-44.
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Du Plessis, J.J., Hargovan, A. and Harris, J., 2018. Principles of contemporary corporate governance. Cambridge University Press.
Korschun, D., Bhattacharya, C.B. and Swain, S.D., 2014. Corporate social responsibility, customer orientation, and the job performance of frontline employees. Journal of Marketing, 78(3), pp.20-37.
Larcker, D. and Tayan, B., 2015. Corporate governance matters: A closer look at organizational choices and their consequences. Pearson Education.
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Saeidi, S.P., Sofian, S., Saeidi, P., Saeidi, S.P. and Saaeidi, S.A., 2015. How does corporate social responsibility contribute to firm financial performance? The mediating role of competitive advantage, reputation, and customer satisfaction. Journal of Business Research, 68(2), pp.341-350.
Suliman, A.M., Al-Khatib, H.T. and Thomas, S.E., 2016. Corporate Social Responsibility. Corporate Social Performance: Reflecting on the Past and Investing in the Future, p.15.
Tai, F.M. and Chuang, S.H., 2014. Corporate social responsibility. Ibusiness, 6(03), p.117.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
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