essay of BAO3309 ADVANCED FINANCIAL ACCOUNTING (2)

Requirements
“Corporate governance is the system by which companies are directed and managed. Good corporate governance structures encourage companies to create value and provide accountability and control systems commensurate with the risks involved” (ASX Corporate Governance Council, Principles of Good Corporate Governance and Best Practice Recommendations, March 2003, p. 3)


Corporate governance involves decision making by the people who run an organisation, decisions made by management affect the well being of stakeholders.

In many cases, people who are responsible for safeguarding the interest of the stakeholders abused their positions and power which resulted in corporate collapses and environmental disasters. Few examples are Enron, Parmalat, Onetel, and WorldCom

Due to several corporate collapses and environmental disasters, importance of corporate governance has become a dominant issue and there are several theories provide different explanations about the behaviour of people responsible for decision making.

REQUIRED:

A. Review ASX’s principles of good governance and provide a critical analysis of corporate governance principle/s related to decision making.

B. Critically discuss the notion that corporate governance principles should only be applied on large organisations because they are too costly for smaller companies.

C. From a review of last three years i.e., 2005, 2006 and 2007 annual reports of an Australian firm listed on ASX. Identify and critically discuss firm’s disclosure of corporate governance practices during the last three years.

D. Critically discuss with the role of agency theory in corporate governance.

Assignment :
Abstract

Corporate governance is the way companies managed and controlled. The directors play a vital role in the corporate governance, who take the most of the responsibilities with the company’s strategy, appointment, the policy for development and so on. ASX Corporate Governance Council published two set of corporate governance principles to regulate and provide recommendations to companies which will influence the way they make decisions. Because the development of the modern economic scale and the opportunities, not only the large listed company adopt the 10 principles of the corporate governance, but the small business also accept it for the future development although it cost a lot. E-pay Asia Limited is a listed company in ASX which headquarter is in Sydney, providing the software and services. The company strongly endorses the corporate governance and also take advises developed by ASX to manage the daily business affairs. However, the agent cost which arises from the agent theory in the corporate governance can not be ignored. Companies should take it as a serious problem and try to minimize the costs.

Introduction

Corporate governance constitutes the strategy, implement, employees, cultures, laws and departments as a system which will affect the control and direction of a company to achieve success and control risk. . ASX Corporate Governance Council set up 10 principles of the corporate governance to help the companies with daily management and business. E-pay is an example provided to explain how the 10 principles work in a corporation. Although the corporate governance has many advantages, agent cost still a problem raised from the agent theory in corporate governance which needs more attention.

Part A

The ASX Corporate Governance Council has established two visions of corporate governance principles in order to motive the investors and to help companies satisfy stakeholder. These documents represent corporate governance effectively, while there is a little difference between the two editions. For the latest edition, the original principles 7 and 10 are cancelled. The ASX Corporate Governance Council revises the 10 principles to 8 which are as follows: (http://www.asx.com.au/supervision/governance/)

Principle1: lay solid foundation for management and oversight

Principle 2: structure the board to add value

Principle 3: promote the ethical and responsible decision-making

Principle 4: safeguard integrity in financial report

Principle 5: make timely and balanced disclosure

Principle 6: respect the rights of shareholder

Principle 7: encourage enhanced performance

Principle 8: recognize and manage risk

Principle 9: remunerate fairly and responsibly

Principle 10: recognize the legitimate interests of shareholder

These principles play a vital role in decision-making. Some of the reasons are represented below.

Principle1which is lay solid foundation for management and oversight clarify the separate roles and responsibility of board and management. That means when the board and management will follow their own responsibility to make decision.

Principle 2 structure the board to add value which states that a company should have an effective board to discharge its duties. This principle especially ask the directors (whether independent or dependent) should have their own judgments on the board decisions.

Principle3 promote ethical and responsible decision-making has the influence on decision-making as well. It ask the company to consider about the stakeholders which includes the shareholders, employees, customers, suppliers, etc when they face the decision whether to comply with the legal obligation or their reasonable expectations according to different circumstance in every company.

Principle4 safeguard integrity in financial report requires the company to establish a structure to make truly represents of their financial position. So, the company may consider the auditors opinions when they make decisions in order to achieve the request.

Principle6 respect the rights of shareholder which specified that company should communicating with their shareholder frequently, give them prepared and understandable information about the company’s financial position, and make easy access for them to attend the general meetings, which are all methods to empower shareholders’ rights. Such requests may effects the company with some decision on how to protect the rights of shareholders.

Principle8 recognize and manage risk suggest that company should have a system to control the business risk. Risk management which involves identifying, accessing and control of the risk may help the company to process the potential opportunities and at the time control the disadvantage aspects. Different decisions may make by the company when consider the risk and the profit of a particular project.

Principle9 remunerate fairly and responsibly ensure that the remuneration is reasonable and sufficient. With the satisfied salary, the employee, especially the management, will consider the benefit of company and shareholders’ wealth first when they make decisions.

Part B

There is a discussion that whether smaller organization should adopt the corporate governance, because it needs too much money for small companies to establish and run systems with daily business affairs .However, the practicing of the corporate governance is very different between the large and small companies. Informal arrangements works in small corporations which has little cash base and assets. Medium to large corporations need formal system to run business and to achieve successful.

For medium and large corporations, directors need the formal arrangement to do a good job. The board of directors should focus on the aim and directions of a company and at the same time decide the best ways to achieve the goals. It is a big challenge for corporations find the aim and goals. Also in the process of implementation to achieve the goals, the management as well as the executive officers plays an important role to control the risk and manage the business well. So the corporation governance in medium to large company is a complete and complex system which is essential and helpful to be success but also need a lot of money and energy to work on it.

As far as I am concerned, due to today’s fierce competition, the small business may also need corporate governance to run the business. Various reasons contribute to this issue. Such as the directors believe that the internal control will increase the efficiency which will bring more benefit, and also the suppliers and customers require strong internal controls. Most importantly, the corporate governance will help the small business to develop and finance to outsider market. In addition, because there are significant changes for the expectations of board and managements which reflect in the corporate laws, it is a wise behaviour for the small business to adjust their corporate governance to get law benefit.

Part C

The e-pay Asia Limited is a company which business includes the software and services. E-pay is the leading provider of electronic top up services for prepaid mobile users in South East Asia Its principal activities are Electronic payments and mobile top up services. After landing the Indonesia market, e-pay has built a successful regional network of Retail Agents, at the same time expanded its service and entered into New Markets. Since then, there is a significant increase of the sales and the revenue.After the review of its last three years’ annual reports, the result is that the corporate governance is well applied in this company, which is very help with the internal control and management of the company’s business.

In the very beginning of the corporate governance part of the annual report, it is clearly state that E-pay Asia Limited company strongly agree with the corporate governance principles and according to the company’s circumstances the Best Practice Recommendations are adopted.

And then, each principle of the Corporate Governance is explained in detail very clearly. From the review of the last three years annual report, there is not much change for the part of corporate governance. The main change is the structure of the board. Due to the development of the business, there is an enlargement of the size of the company. So the number of executive and non-executive directors is increase. And also the nomination committee which the corporate governance suggested is establish in E-pay Asia Limited with the well development of the company.

For the other part of the Corporate Governance in the E-pay Asia Limited company, it well explained policy and aim of the company according to the company’s business and unique situation. To be concrete, firstly, the company specifies the role of, such as the board should protect and enhance the value of the shareholders, setting strategy direction, monitoring the financial performance, identifying and managing the risk, and pointing manage director and so on. Secondly, E-pay Asia Limited Company set their own ethical code which contained the basic principle the employees and external consultant need to follow. Thirdly, there is a committee of auditors which complied with the principle four of corporate governance. The responsibility of the auditing committee contains 1) reviewing of the financial information, accounting policy, 2) and external auditors’ report, monitoring the internal control framework and the ethical standard,3) and ensure that compliance with the Corporation Act, etc. additionally, the annual reports to shareholders are disclosure in its website, and there is a strategy to help the shareholders’ rights internally. Also the remunerations of the directors are outlined in the annual report. One thing which must be point out is that E-pay Asia Limited Company does not adopt the principle which is encouraging enhanced performance for three year continually. The reason is because the board regularly reviews the company performance.

Overall, the E-pay Asia Limited company is well followed the Corporate Governance, and explained clearly the strategy and implement in their annual reports.

Part D

An economic profession Mr. Brown says that agent theory says the role of the board of directors is to be independent intermediary between the principles the people who contribute the resources to the corporation and the agents people who utilize the resources to get things done. Each of the shareholders and managers have different needs and expectations and interests, therefore the board in agent theory is to make decisions how the resources should be allocated.

The main problem in the agent theory is the seperation of the shareholders and the mangement. Each part has its own interest and pursuant benefits. The principle delegate the right of decision-making to agent which causes many problems. The principle may not monitor the agents’ behavior and access the useful information quickly and costlessly. They agency problem arise which is that there is posibility that the agent work on their own benefit againt the shareholders’ wealth. İf this happens, there is no doulbt that the corporate governance will not be well implement. Overall , principals require agents to conduct business and seek success(Ghatak, Healey, & Jackson, 1998). On the contrast, agents may be motivated by incentives to perform for principals. The separation of roles between the board of directors and executive management requires the protection of the shareholders’ interests. As a matter of fact, the agent costs arise which include the monitoring costs, bonding costs and residual loss.

Corporate governance invloves the company structures, business process, cultures and corporate systems which can operate organisations successfully (Keasey and Wright 1993) and mechanisms to cope with these elements, and it is a system by which the companies are directed and controlled. An active participantation of shareholder in managing the corporation through the apointment of directors represent a good corporate governance which will lead to a positive corporate desicion-making.

However, the using of non-executive directors will help to achieve the good corporate governance, because the non-executive directors other than managing directors will provide their advices impartially. There is an expectation that the non-executive directors could bring an independent judgment on the strategy, policy, performance even the vital appointments of the company, which will minimize the agent cost to some degree.

Conclusion

To conclude, it is easily to find that corporate governance is popular among companies no matter listed company or small business although it is costly.

Take the E-pay Asia Limited as an example, the corporate governance in this governance is well compliant with the 10 principles establish by the ASX according to the company’s own situation. And also there is problem. With the popular practice of the agent theory, the agent cost can not avoid which increase the cost of the company. The firms and society should bring their attention on this to minimize the cost, maximize the shareholders’ wealth, and help the company run the business in good corporate governance.

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