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BULAW5915 Corporate Law for Financial Service Industry

Questions:

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.
and

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

Answer:

Part A

The Commonwealth Bank of Australia is a company whose conduct is being considered by the Royal Commission to inquire and report the misconduct in the organization (Tanzer, 2016). Royal Commission started its investigation on the financial service industry regarding the misconduct within its system including forged documents, alleged bribery and others. The Commission in its financial advice closing submission found that clients were charged fees by the entities of CBA for no service. Further it was alleged that they did not have adequate resources to provide ongoing services to their clients. It was also submitted by the Council Assisting that with respect to orphan child, there were instances of contravention of Sec 12 DI(3) of ASIC Act. Commonwealth Bank of Australia follows a strict corporate governance rules. It has a focus on creating a governance to strengthen the relationship with their customers (Toohey, 2014). It has always been their objectives to reduce and control the risk outcomes. The Commonwealth Bank of Australia has a commitment to improve the financial well-being of their customers (Commbank.com.au, 2018). Their corporate governance practices are developed and refined from time to time with the evolving regulations and laws, and stakeholders expectations. The organization has set up an effective governance policy which determines the appropriate arrangements for corporate governance of the Bank. A board has been composed for Commonwealth Bank of Australia to frame the corporate governance policies for the organization and its subsidiaries. Their governance policy includes approving the share trading, anti-bribery policies, anti-corruption policies, delegation of authorities policies and continuous disclosure. The company has adopted a code of conduct which prohibits money laundering and counter terrorism. The company follows a strict principle for fraud control and whistleblower policy. The arrangement was made in compliance with the recommendations mentioned in the third edition of the ASX Corporate Governance Council Corporate Governance Principles and Recommendations. The Corporate Governance Statements of the company published on 8 August 2018, is an example of its ideal corporate governance arrangements. The practices which they had adopted have followed the recommendations which are set out in the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations. The Commonwealth Bank of Australia has implemented policies and drafted a code of conduct, which regulates the behavior of the Directors, Employees, Senior Executives and the stakeholders. They follow a culture which provides whistleblower protection to their people (Matthews, 2016). An anti-corruption and anti-bribery policy is implemented in the institution to protect their customers and communities. The adherence to good corporate governance of the company is reflected in their policy for the director which imposes certain duties on them.

Duties of directors


Directors of Commonwealth Bank are obligated to follow their duties and responsibilities. After the alleged scandal of money laundering incident took place, the company has improved their policy and set up a Board. The Board assesses on a regular basis, the independence of the Directors to ensure that the Non-Executive Director are engaged in any business that would interfere with their position. The directors are required to be careful to disclose any material relationship or contact according to the Corporations Act. The Directors should strictly adhere to the policies relating to the matters of voting, in which they may have an interest. The details of the offices which are held by Directors with other organizations should be set out in the website of the Bank and in the Directors’ Report. The Directors should not be associated directly with any substantial shareholder. The Non- Executive Directors are not to carry out any role for the Bank except for the role of a Director. The Non-executive Directors are bound to not having a material contractual relationship with Commonwealth Bank except for the role of the director of the Bank.

ASX Corporate Governance Council Corporate Governance Principles and Recommendations

The principles which have been mentioned in the ASX Corporate Governance Council Corporate Governance Principles and Recommendations have been followed by the Commonwealth Bank of Australia. The guidelines have provided that the corporation should act with ethics and responsibilities. A company should maintain regular and balanced disclosure. It should recognize the risk factors and mange it (Klettner Clarke & Boersma, 2014).

Disclosure

The Commonwealth Bank of Australia takes into consideration their obligation to make continuous disclosure The Bank has a policy which is written to comply with the obligation to make disclosure. The company is expected to disclose immediately any information in the market which would materially affect the price or value of CBA shares. The directors, executives and secretary of the company needs to identify and material information to their people. The information regarding changes in financial performance, a debt capital raising, a legal dispute, any material fraud, changes in the Board of Directors or Group Executives, changes in credit rating applied to the Bank or its securities, a matter which may adversely affect the reputation of Commonwealth Bank of Australia should be disclosed to the market (Continuous Disclosure Policy, 2018). The Commonwealth Bank of Australia should immediately disclose the material information to the ASX unless it comes under the exempted criteria.

Ethics and Responsibility

CBA ensures that it acts ethically and responsibly during its course of conduct.  The organization is focused on adopting a policy to take decisions lawfully and ethically and discharge their obligation in a responsible manner. Their code of conduct designed to identify, manage and prevent the actual, perceived and potential conflict of interests. CBA should make a disclosure to their clients about any event which may cause risk of damage to the client. They will review and assess the policies from time to time and take steps to redress any deficiencies which are identified. The Group has taken a step towards prevention of slavery and human trafficking in their business (Schoenmaker, 2013). . They are committed to zero tolerance for any culture of corruption and bribery. They would consider, identify and control the events of corruption and bribery according to the Anti-Bribery and Corruption Policy. The organization follows a transparency in its dealings.

Risk management

Commonwealth Bank of Australia is exposed to financial as well as non-financial risks, and has designed a risk management policies and practices to maintain their standard of governance. The Board may establish a risk committee for that purpose. It has implemented a risk management framework to manage any occurrence of risk. The risk management system is created keeping in mind the evolving risk in the financial services sectors from the changes in the business environment, community expectations and is subjected to review (Tao & Hutchinson, 2013). The framework has covered the three key documents, that is the Group’s Risk Appetite Statement, their Risk Management Approach and the Strategic Business Plan.

Rights and remedies of Shareholders

The Commonwealth Bank of Australia is dedicated to provide better value and outcomes for the shareholders. It provides the shareholders the necessary and high quality information relating to their investment, timely. They are committed to respond to the feedbacks of the shareholders. An investors relations program is held to facilitate the communications between the shareholders and the Bank. It emphasizes on the participation of the shareholders in the meetings and encourages them attend and participate in the Annual General Meeting of the Bank. Additionally, to facilitate the attendance of the shareholders, the locations of the Annual General Meetings are held in capital cities rotationally. CBA encourages the shareholders to present their questions in the Annual General Meetings to provide important insights into their concerns, which enables the Commonwealth Bank to provide feedback. The Bank encourages their shareholders to communicate with the help of electronic measures with the Bank. For this purpose an email address is provided to the shareholders.

Part B

There are certain consequences that the Commonwealth Bank of Australia may possibly suffer if the person who are making decisions on behalf of the company fail to follow the corporate governance principles. Non-compliance of the policies may lead to legal consequences against the organization. An amount of $700 million fine was imposed on the organization for the breach of anti-money laundering policy recently

Importance of Good Corporate Governance

Corporate governance is the system of regulations, processes and practices used to direct and control a firm (Tricker & Tricker, 2015). It is the system to balance the interest of the shareholders, management, customers, suppliers, government and the community. It is purported to provide effective, prudent and entrepreneurial management which helps in delivering success to the company (Todorovic, 2013). The ASX Council has recognized that various entities may adopt various governance practices on the basis of their size, complexity, culture and history. It has provided a set of practices that the listed entities can adopt for achieving good outcomes and meet the expectations of the investors (Davies, 2016). The Council considers that the policies of risk management, disclosure should be fundamentally followed in a financial organization like Commonwealth Bank.

Consequences for not observing good corporate governance

Legal

Commonwealth may face legal consequences for not complying with the principles of ASX. If it contravenes its obligation to disclose necessary information to its clients, it may incur a liability under the Corporations Act (Fanta, Kemal, & Waka, 2013). If any person suffers any loss or damages for breaching the obligations, a criminal or civil liability may arise on the part of CBA. Shareholders may bring a class action against CBA. ASIC can issue a notice for infringing the duties if it has reasonable grounds to believe that Commonwealth has failed to fulfill its obligation to disclosure.

The liability can extend the people as they may face civil or criminal liability for contravening the disclosure obligation. If a person has the capacity to affect disclosure or withhold knowingly an information sensitive for market from the manager, he can be held liable for causing breach to continuous disclosure obligations. In earlier times, Commonwealth Bank was alleged to breach the Anti-Money Laundering and Counter- Terrorism Financing Act. The CBA failed to make report the terrorism financing suspicions in 24 hours (Janda & Chalmars, 2018). Even after having the knowledge of suspicious activity, risk was not actively monitored in 38 instances.

Social

Not observing the policies of governance may have its impact on the society too. Every firm has a corporate social responsibility. The activities of the firm may result into social consequences (Young & Thyil, 2014). Failure to complying with the ASX principles can cause harm to the reputation of CBA. CBA may incur highly high adverse publicity for not observing the policies, which may cause a downfall of its share value in the market. This may affect the flow of capital in the market, which is a concern for the society at large.

Economic

Non-compliance with a good corporate governance principle may cause serious economic consequences for a firm like Commonwealth Bank. It may hamper the economic growth of the whole country. ASX may suspend the shares of CBA from trading if it is of the opinion that the company has failed to, unable to or unwilling to comply with its continuous disclosure obligations. If CBA contravenes the ASX principles of risk management, it may incur some risks and liability for itself. Massive fraudulent or criminal activities within the corporation may result into financial crisis. The downfall of market value may decline the sale of shares and CBA may lose some of its shareholders. CLSA has assumed that if there are continuous incidents like money laundering, the shareholders may face a decline in the growth of profit. Such incidents of downfall of shares may turn into uncertainty of CBA in the market.

Political

There may be political consequences for not complying with the ASX principles of corporate governance. CBA may receive political and bureaucratic criticism. Failure to comply with the recommendation can cause a risk to public interest. The competitive market may face a growth while it will face downfall. There may be a need for new and strict legislative framework. The company which does not follow the principles, may face hindrance from the political force of the Country. The political parties may disapprove certain conducts of the company. For ensuring proper compliance with the principles of corporate governance, Government has created bodies like Royal Commission. Prime Minister Malcolm Turnbull labelled the incident of losing almost 20 million account records, to be an extraordinary blunder.

Stakeholder Theory

In this reference the Stakeholder Theory can be discussed, which was embedded in the management principles in the year 1970, which incorporated corporate accountability to a wide range of stakeholders. Stakeholders theory is defined as a group or individual who can be affected by the achievement of the objectives of the organization. Internal stakeholders are distinguished from the external stakeholders of a corporation. While internal stakeholders are the directors and employees, who are directly related to the process of corporate governance, the external stakeholders may include the auditors, creditors, suppliers, community and the government. This theory states that the managers of a firm have range of relationships to serve including the suppliers, business partners as well as the employees. The ASX Corporate Governance Council Corporate Governance Principles and Recommendations adheres to the theory. If CBA fails comply with the guidelines of the mentioned principles and recommendations, it may fail to perform their obligations towards their stakeholders (Beekes, Brown & Zhang, 2015). Stakeholders form a significant part for the decision making process for the company. When CBA announced that they would charging fees for withdrawing cash from another bank’s ATM, NAB’s chief customer officer of consumer banking and wealth, Andrew Hagger appreciated their effort and encouraged the competitive lead of CBA.

Business Ethics Theory

Business ethics theory of corporate governance can be discussed in this prospect, which is the study of business related activities, situations and decisions to address the right and the wrong. Businesses have a huge impact on the society, in terms of employment and services (BORLEA & ACHIM, 2013). Non-complying to a standard practice of management can collapse it. Business collapse is highly responsible for causing an effect in the society. The ethics helps to identify problems and the benefits associated with the ethical issues in the organization. Failure to complying with the business ethics makes the society suffer as a whole (Salim, Arjomandi & Seufert, 2016). A general rule of ethics should be followed in every industry for its growth. All ethical problems should be treated with immense importance and managed carefully. Therefore it is required that the organization should have a strategic policy towards bribery and corruption. The report should be made to proper authority for any such activity. If a company fails to perform their ethical obligations, it shall be liable for their conduct to the public. The business shall be exposed to consequences for not abiding the basic principles of morality. If CBA fails to observe the ethical obligations, the incidents of negligence in reporting suspicious activities within the organization may increase gradually, if CBA does not adhere to the ASX Corporate Governance Council Corporate Governance Principles and Recommendations. Non-ethical behavior in an organization shall cause a down fall of shares as it was happened in an earlier allegation, where shares of CBA shed about approximately 14 per cent of the value. In the case, it was alleged that, Commonwealth had failed to appropriately monitor suspicious transactions (Janda, 2017).

Reference list

Beekes, W., Brown, P., & Zhang, Q. (2015). Corporate governance and the informativeness of disclosures in A ustralia: a re?examination. Accounting & Finance, 55(4), 931-963.

BORLEA, S. N., & ACHIM, M. V. (2013). Theories of corporate governance. Studia Universitatis Vasile Goldis Arad, 23(1), 117-128.

Commbank.com.au. (2018). [online] Available at: https://www.commbank.com.au/about-us/shareholders/corporate-profile/corporate-governance.html [Accessed 10 Sep. 2018].

Continuous Disclosure Policy. (2018). Retrieved from https://www.commbank.com.au/content/dam/commbank/assets/about/investors/corporate-profile/Continuous-Disclosure-Policy.pdf

Davies, A. (2016). Best practice in corporate governance: Building reputation and sustainable success. Routledge.

Fanta, A. B., Kemal, K. S., & Waka, Y. K. (2013). Corporate governance and impact on bank performance. Journal of Finance and Accounting, 1(1), 19-26.

Janda, M. (2017). Retrieved from https://www.abc.net.au/news/2017-08-07/commonwealth-bank-could-face-lost-decade-of-profit-growth/8780132

Janda, M., & Chalmars, S. (2018). Retrieved from https://www.abc.net.au/news/2018-03-20/banking-royal-commission-cba-anz-car-loans/9566060

Klettner, A., Clarke, T., & 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), 145-165.

Matthews, A. (2016). The financial services industry: Whistleblowing and calls for a royal commission. Precedent (Sydney, NSW), (136), 35.

Salim, R., Arjomandi, A., & Seufert, J. H. (2016). Does corporate governance affect Australian banks' performance?. Journal of International Financial Markets, Institutions and Money, 43, 113-125.

Schoenmaker, D. (2013). Governance of international banking: The financial trilemma. Oxford University Press.

Tanzer, G. (2016). BANKING IN AUSTRALIA: UNREGULATED & UNPROTECTED-PART 4.

Tao, N. B., & Hutchinson, M. (2013). Corporate governance and risk management: The role of risk management and compensation committees. Journal of Contemporary Accounting & Economics, 9(1), 83-99.

Todorovic, I. (2013). Impact of corporate governance on performance of companies. Montenegrin Journal of Economics, 9(2), 47.

Toohey, B. (2014). Closing the gap: the case for a Commonwealth Anti-Corruption and Misconduct Commission. Australasian Parliamentary Review, 29(1), 38.

Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and practices. Oxford University Press, USA.

Young, S., & Thyil, V. (2014). Corporate social responsibility and corporate governance: Role of context in international settings. Journal of Business Ethics, 122(1), 1-24.


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