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PACC6004: Financial Management - Corporate Governance - Assessment Answer

Solution Code : 1AADH

Question : Financial Management

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Financial Management Assignment

Assignment Task

The purpose of this assignment is for students to:

  1. Demonstrate an understanding of the nature of the corporate entity and be aware of the authoritative influences that underpin accounting and reporting in the Australian and global regulatory environment; and
  2. Explain the issues surrounding contemporary accounting controversies, in this case on corporate governance in diverse contexts using social, ethical, economic, regulatory and global perspectives.

ASSIGNMENT QUESTION

Corporate governance is the system by which companies are directed and controlled (Cadbury Committee, 1992#).

Using the annual reports of Westpac Group (a financial institution based in Australia) and OCBC Group (a financial institution based in Singapore), search for any disclosures in these two institutions’ corporate governance principles and practices. In relation to these disclosures:

(a) Identify any differences or similarities in their corporate governance practices; and

(b) Provide any reasons from the business and regulatory environments in the countries to explain these differences?

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Solution:

Corporate Governance

Corporate governance encompasses rules, regulations and processes applied for the direction, control and management of a company. Ideal Corporate governance must aim for balance in the interests of the company’s stakeholders and management including government and the society. A good corporate governance policy frames the company's objectives covering management, action plans and internal controls so as to ensure proper disclosures ("Corporate Governance Definition | Investopedia", 2003)

The Governance rules and controls dictate the corporate behaviour of the company and are often indirectly influenced by the shareholders; though it is the board of directors that play a pivotal role in this process due to the direct ramifications of governance on equity valuation.

Good corporate governance makes a company’s public image reliable, represents management integrity and ensures scandal free operations. Proper audit is also a part of good governance. Lack of adequate and sufficient cooperation and improper selection of auditors can cause the publication of noncompliant financials. Similarly, an improperly designed executive compensation packages may act as a disincentive for the corporate officers. Improper structured Board of Directors is also an example of bad governance.

Absence of corporate governance policies would result in lack of transparency in management and controls and may also be a sign of non-alignment of incentives. Stakeholders today expect genuine corporate behaviour encompassing societal and environment contribution, and also look for ethical governance apart from profitability from a company.

Based on governance metrics it was found in a research that companies with poor governance also have low cash reserves due to increased capital expenditures and acquisitions as managers tend to spend the cash in such a scenario rather than hoarding it. (Herford, Mansi, & Maxwell, 2008).

Corporate governance is a dynamic force that has to keep evolving keeping up to the developments. The ASX corporate governance council for example has enumerated a set of principles which may not be mandatory in nature but ensure the achievement of investor confidence. Principle 1 stresses on defining foundations for management. Principle 2 stresses the importance of balanced skills, experience and independence on the board. Principle 3 stresses the need for integrity and ethical decision-making by the corporate officers. Principle 4 stresses meeting the information needs through proper reporting policies. Principle 5, stresses the provision of timely and correct picture of all material information. Principle 6 stresses the protection of shareholder’s rights. Principle 7 recognizes the need for internal control to curb risk and uncertainty. Principle 8 stresses the importance of rewards to attract the skills and performance(Lama & Anderson, 2015).

Similarly, the SID or Singapore Institute of Directors has been set up for the professional development of corporate leaders to ensure highest standards of corporate governance. The first principle in the code re iterates basic and vital responsibilities for the directors to ensure effective conduct of duties by acting honestly, diligently and disclosing all possible conflicts of interests ("SID", 2016)

Identification of differences or similarities in the corporate governance practices of Westpac Group (Australia based institution) and OCBC Group (Singapore based institution) based on the perusal of their annual reports.

The OCBC Bank ensures investor protection and fairness in its operations by upholding the highest degree of corporate governance. This it does by abiding to the Banking (Corporate Governance) Regulations 2005, Banking (Corporate Governance) (Amendment) Regulations 2010, corporate governance guidelines issued by the Monetary Authority of Singapore and Singapore Exchange Securities Trading Ltd.’s Code of Corporate Governance 2012.

The Westpac group follows the ASX Corporate Governance Principles and Recommendations as amended in 2014 and also complies with the Corporations Act and the governance requirements under CPS 510.

OCBC has 78 independent directors out of 11 while Westpac has 8 independent directors out of 9.

The Westpac Board Remuneration Committee recommends and reviews the Company Remuneration Policy and assesses its effectiveness and its conformity to applicable standards; recommends to the Board the specific remuneration levels and structure of the members of the board and committees, the performance of the CEO vis-a-vis is the remuneration received and also advises the board on the propriety of the incentive plans for the above. ("Westpac’s Corporate Governance Statement | Westpac", 2016)

The OCBC Remuneration Committee advises the remuneration level and structure for the executive and non-executive Directors of the company through the advice for the non-executive members is subject to approval at the AGM by the company shareholders. The Committee also from time to time advises on the ideal framework for the remuneration and the human resources management policies and also administer the employee share ownership schemes keeping account remuneration principles, practices and standards as specified. ("OCBC Group - Corporate Governance", 2016)

Westpac is listed on the New York and New Zealand stock exchanges as well. The NYSE Listing Rules mandate shareholders vote and approval on the equity based remuneration plans as well as any changes made to the plan thereon. However, no such laws or securities exchange listing are applicable in ASX. The NYSE Listing Rules require and vest the right in the Board Nominations Committee for finalization of the director nominations for the next annual meeting. However, the Board, discharges this function as per ASX rules and this fact is expressly provided for.

The Westpac Board Committees are sub-divided into Audit; Compliance; Nominations; Remuneration; and Technology. The OCBC committee includes Executive, Remuneration, Audit and Risk Management of the Bank together with The Nominating Committee.

The Board responsibilities of Westpac include monitoring Workplace Health and Safety (WHS) issues while OCBC board identifying the key stakeholder groups affecting risk perceptions are different.

The responsibilities of the Chairman in case of Westpac and the CEO are more profoundly defined including the number of scheduled meetings; 8 in case of Westpac and 35 in case of OCBC.

The Code of Ethics for the Senior Officers for Westpac adheres to the Code of Accounting Practice and Financial Reporting so as to achieve ethical accolades acting honestly and ethically, without conflicts of interest; and by disclosing full, fair, and timely compliance with applicable rules and regulations duly reporting violations on time; and being fully accountable thereby. Similarly, the Code of Conduct for doing Business are very well articulated and defined in the Westpac governance statement but the OCBC statements lacks this precision.

The OCBC statements contain a summary of disclosures towards the end which is missing in the Westpac case.

Finally, sustainability is specifically covered in the statement for Westpac as a company prerogative while it is just mentioned as a responsibility of the board for OCBC.

Apart from these differences, the functions, composition of the various committees are more or less same for both the companies and aim to ensure increased investor protection. Even the risk management governance is aimed at meeting the same objective for both the companies even though differently worded. The Chairman and the CEO discharge their duties seperately, so as to achieve an ideal balance of power and authority for both the companies. Both company boards are elected by Shareholders and operate through the formation of committees

The reasons from the business and regulatory environments in the countries to explain these differences can majorly be attributed to the social, ethical, economic, regulatory and global perspectives.

Investor protection is founded differently in the legal system and the regulatory environment of Singapore and Australia. While Singapore follows a diverse set of legal and regulatory environments; this makes framing of a common set of codes of practice difficult. One also cannot ignore the fact that while OCBC is confined to Asia, the operations of Westpac spread across Australia and USA. This difference is also a major contributor to the differences as enumerated above.

A significant difference in the governing guidelines between Singapore and Australia is due to the fact that capital markets in Singapore are known for large multinational corporations which are majorly owned by institutions which results in a complex set up where these institutions as a matter of right look for assurance of proper responsibility from the management on issues like shareholder rights, compensation policies and responsibilities of the board. While adoption of desirable good governance practices is universal, the code of conduct for both countries is suited to the local culture, the legal system, and institutional setting of capital markets so as to be meaningful. (Miles & Goo, 2013)

Singapore governance code is based on the ‘if not, why not’ rule similar to the ASX’s Corporate Governance and companies are required to disclose their governing practices and known deviations thereon in their financials accordingly.

The code also directs the directors to take objective decisions suited to the best interests of the company making up for the absence of this provision in the Singapore company law. The Corporate law in Australia is extensive enough to provide for these provisions and is self- sufficient to this extent.

The Singapore code provides for the creation of a Nominating Committee to recommend all board appointments’ and formally assess the board effectiveness and contribution of each individual director thereby. Though this appears like an ‘external’ evaluation of performance, consisting of ‘at least three directors’, it is in the nature of an internal scrutiny at the most. Though even Australian corporates have nominating committees; no such mandate is forced on the companies for the role of the committee as such. (2016)

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