'Corporate Governance in Australia After Hih Essay\r'

'In the light of non-homogeneous corporeal s gougedals, regulative bodies and collective validation were home plated under pressure by sh arholders and stakeholders to cast a tighter grip in g overnment deed of conveyanceivity corporation’s conduct. The obligations, lineaments and responsibilities of union’s stewards ar under scrutiny of Corporations act upon, inclination rules, body politic’s code of corporeal presidential term, ethics as surface as tender standards.\r\nAt the same time, advocates of food marketplace forces as a replacement to rules and formula ride out to pursue for market deregulating and liberalisation ground on the believe that government interference forget only distort resources all toldocation and hinder market growth. The s go on of Australian troupe HIH Insurance Ltd (HIH) in 2001 was analysed in terms of its conduct and compliance to the Corporations lick, listing rules as intumesce as code of somat ic governance as relaxd by the Australian Securities diversify (ASX) corporal organization Council (CGC).\r\nReforms in regulations and the integrated Governance Principles and passports 2007 by ASX CGC were used to recommend go around practices in somatic governance that should have a bun in the oven taken place in HIH. Lastly, the effect of globalization and challenges to good bodily governance resulting from globalization were discussed from the perspective of national government, governory bodies as well as the corporation itself.\r\njurist Neville Owen, The Royal Commissioner in the HIH Royal Commission explanation described somatic governance as the fashion model of rules, births, systems and put to workes within and by which authority is fared and controlled in corporations, and the Australian Securities Exchange (ASX) Corporate Governance Council added that merged governance relates to and influences how the objectives of the party atomic exit 18 set and achieved, how risk is monitored and assessed, and how slaying is optimized (The HIH Royal Commission, 2003; ASX Corporate Governance Council, 2007).\r\nThe meaning of corporate governance has evolved over time hardly, in the strictest sense, is colligate to the legislation that allows its existence. The law sets forth a fellowship’s rights and responsibilities but this can differ from turn overry to country. However, it is generally accepted that corporate governance extends beyond the law to include a consideration of outperform practices and handicraft ethics (Birt, Chalmers, Beal, Brooks, Byrne, & conclave A; Oliver, 2008).\r\nThe social system of corporate governance as pull forth by Farrar (2005) and represented in the figure below illustrates the parityship within the corporate governance structure: var.: The structure of corporate governance (Farrar, 2005). The issues surrounding the rights and responsibilities of corporations are complex and ever changing as pecuniary markets become more global, corporations become larger and more powerful, and society’s perception of the corporate role changes.\r\nA school of thoughts advocates for market forces to be the regulator of the fiscal market. The neo? liberals assume that factor markets institute in force(p)ly without government intervention if property rights and contender are guaranteed. They considered government interventions as less efficient than market? based solutions and stresses that government interventions h adenosine monophosphateer insular sector development and that government should concentrate on improving the enabling of business environment through deregulation (Emeseh, Ako, Okonmah, Obokoh, & Ogechukwu, 2010).\r\nNeo-liberalism challenges the conventional structuralist orthodoxy of government intervention by highlighting the negative effects of â€Å"financial repression” on stinting growth and development. They refer financial repression to be the set of government legal restrictions preventing financial intermediaries in the economy from functioning at their in full capacity. The distortion of domestic financial markets through rules and legislation is claimed to have negative impact on economic growth. In load, corporations should be relied on in the main(prenominal)(prenominal) to self? regulate in the critical aspect of business activities.\r\nNeo-liberalism has prompted many countries to implement liberalisation and deregulation of their financial markets on the recommendations of the World Bank and IMF (Emeseh, Ako, Okonmah, Obokoh, & Ogechukwu, 2010). The significant role of market forces in bring to good corporate governance and strong corporate motion has for some time been tensenessed in economic literature on the corporation and corporate law. In fact, advocates consider the influence of market forces to be an effective substitute for formal legal regulation (duPlessis, McConvill, & Bagaric, 2005).\r\nHowever, through-out the last both decades, legislation reforms and corporate governance has also grown rapidly, evently since the collapse of Enron Corporation in 2001 and the resultant financial problems of proterozoic(a) companies in various countries. As financial scandals slide by to emerge, there will be continue help placed on corporate governance issues, specially relating to transparency and divine revelation, control and accountability, and the most appropriate form of dining table structure that may be assailable of preventing such scandals occurring in future (Mallin, 2007).\r\nIn sideline of good corporate governance, an area of use up would be how directors’ conduct and decisions should be in the best engagement of the lodge, its shareholders and separate relevant stakeholders. In this context, the agency surmise is a very suitable frame exploit that can describe the problems associated with the principal-agent relationship caused by separation of self-possession and control between shareholders (the principal) and directors (the agent) in corporations.\r\nInformation asymmetry, chaste hazard, difference of opinion in attitude towards risk and difference in interest between shareholders versus directors are cat valium agency problems that would usually be at the disbursal of shareholders (Mallin, 2007; Rahman, & Salim, 2010). For example, directors may have a wider cast of economic and social needs (such as to maximise compensation, security, status and to boost their own reputation), duration shareholders are interested only in maximizing fleet on investments.\r\nFurthermore, as directors are usually assure to the familiarity on short term basis, they may be eager for short-run payoffs within their rivet term, whereas shareholders’ interest would be based on long success. Australian companies have a unitary come on structure and the regulatory framework for corporate governance and direc tors’ duties is governed by (i) Statute ( nonably the Corporations Act), (ii) Common law rules (for example, cases relating to directors’ duties), (iii) The company’s constitution, and (iv) Guidelines issued by the Australian Securities and Investments Commission (ASIC) (Dibbs bow-wow Gosling Lawyers, 2003).\r\nASIC plays a vital role in enforcing and regulating company and financial services laws to protect Australian consumers, investors and creditors. It acts as Australia’s corporate regulator and administers various legislations including the Corporations Act 2001, Australian Securities and Investments Commission Act 2001, and so forth (Australian Securities ; Investments Commission, 2010a).\r\nBy the Corporations Act, general duties imposed on directors and officers of companies are stated as (i) the duty to doing their powers and duties with the dish out and diligence that a reasonable person would have which includes taking pure tones to curb t hey are the right way informed intimately the financial position of the company and ensuring the company doesn’t trade if it is insolvent, (ii) the duty to exercise their powers and duties in good organized religion in the best interests of the company and for a proper purpose, (iii) the duty non to improperly use their position to gain an payoff for themselves or someone else, or to cause hurt to the company, and (iv) the duty non to improperly use selective information obtained through their position to gain an advantage for themselves or someone else, or to cause detriment to the company (Australian Securities ; Investments Commission, 2010b). Beyond their legal duties and obligations, directors are also anticipate to meet commercial expectations in the interest of stakeholders, which include, but are non limited to, shareholders. These commercial expectations essentially get directors to drive the bottom line and lead appropriate shareholder returns.\r\nTaking it a step further, many directors of today are challenged to embrace collar-fold bottom line reporting and consider the economic, social and environmental ramifications of their corporate activities (Lucy, 2006). While the scope and laws fall inment the conduct of directors are wide and many, intentional and un knowledgeable breach has shocked the financial market and mankind numerously. Till today, HIH Insurance Ltd (HIH) that went into liquidation in early 2001 is well remembered by almost every Australian as a collapse caused by mis attention of the company, and various get on members were brought to court on charges including vainglorious tawdry information with the intention of deceiving other card members and the company’s scrutinizeor.\r\nAs one of Australia’s largest insurers, the company ran into debts of over AUD$5 billion and subsequent to the collapse, the government carried out an expensive exercise to see to it many of the failed policies (Ma llin, 2007). According to the HIH Royal Commission composing on the failure of HIH, it was concluded that investigators did non dislodge fraud or embezzlement to be behind(predicate) the collapse. The failure was more the result of attempts to paper over the cracks caused by over-priced acquisitions (notably FAI Insurance Ltd) and too much corporate extravagance based on a mis patternion that the ‘ coin’ was there in the business. The primary reason for the large loses was that adequate provision had not been make for indemnity claims and past claims on policies had not been properly priced.\r\nHIH was mis reignd in the area of its core business activity (Bailey, 2003). In chorus, the HIH Royal Commission report fundamentally states that the main reasons for the failure of HIH was poor forethought and greed characterised by (i) a wish of attention to detail and skills, (ii) a lack of accountability for performance, and (iii) a lack of honor in the companyâ€⠄¢s internal processes and systems (Nicholson, 2008). judge Neville Owen further commented in the report on what was the essence of good corporate governance: â€Å"The governance of a public company should be about stewardship. Those in control have a duty to act in the best interests of the company.\r\nThey must use the company’s resources productively. They must understand that those resources are not personal property. The last years of HIH were marked by poor leadership and inept management. Indeed, an attitude of likely indifference to, or deliberate disregard of, the company’s underlying problems pervades the affairs of the group. ” (The HIH Royal Commission, 2003). The supra comment can be loosely translated to severalise that the directors of HIH have failed their duties. Notably, in April 2005, Mr Ray Williams, the fountain party boss Executive Officer (chief operating officer) of HIH, was sentenced to four-and-a-half years’ jail with a n on-parole period of two years and nine months.\r\nMr William’s sentencing follows ASIC’s successful civil penalization legal proceeding on the three miserable charges which Mr. William pleaded guilty to. The three criminal charges were (i) that he was reckless and failed to properly exercise his powers and discharge his duties for a proper purpose as a director of HIH Insurance Limited when, on 19 October 2000, he signed a earn that was misleading, (ii) that he authorised the issue of a course catalog by HIH on 26 October 1998 that contained a temporal omission, and (iii) that he make or authorised a instruction in the 1998-99 Annual Report, which he knew to be misleading, that overstated the operating profit before kinky items and income tax by $92. 4 million (Australian Securities & Investments Commission, 2005a).\r\nASIC’s HIH investigation also led to criminal prosecutions of 9 other causality higher-ranking executives, including directors of FA I, HIH and associated entities on 31 Corporations and Crimes Act charges. Of high public interest was Mr Rodney Adler, a former director of HIH and the absolute majority possessor of FAI was sentenced to four-and-a-half years’ jail, with a non-parole period of two-and-a-half years, on four charges arising from his conduct as a director of the HIH group of companies in 2000. ASIC’s chairman, Mr Jeffrey Lucy, in his public statement said, â€Å"Mr Adler was in a position of trust as a director of HIH but he put his own financial interests before the interests of HIH shareholders” (Australian Securities & Investments Commission, 2005b).\r\nMr Adler was sentenced later on pleading guilty to four criminal charges: (i) two counts of disseminating information on 19 and 20 June respectively, perspicacious it was false in a material particular and which was likely to induce the purchase by other persons of shares in HIH contrary to s999 Corporations Act 2001, (ii ) one count of obtaining money by false or misleading statements, contrary to s178BB Crimes Act 1900 (NSW), and (iii) one count of universe intentionally dishonest and failing to discharge his duties as a director of HIH in good faith and in the best interests of that company contrary to s184(1)(b) Corporations Act 2001 (Australian Securities & Investments Commission, 2005b). HIH’s disastrous business feigns in U. K. , U. S. , acquisition of FAI Insurance Ltd. nd the Allianz joint venture were set as what ultimately brought HIH down. These instances of poor decision-making were caused by and reflect a poor corporate governance culture. Corporate governance issues identified included (i) an over-dominant chief executive officer whose decisions were never questioned, (ii) an ineffective chairman who failed his responsibility to administrate the functioning of the board, (iii) an ineffective board who failed to grasp the concept of conflicts of interest, and was unable to monitor and does not question management performance, (iv) inappropriate conduct in remuneration lay and performance measurement ( generally made by Mr.\r\nWilliams who, although not a member of the committee, attended all meetings by invitation), (v) an ineffective audit committee who showed no line of work with risk management and internal control, and (vi) compromised auditor independence (the auditing company was Arthur Andersen and HIH’s board had three former Andersens partners †one of them was the chair of the board yet continued receiving fees under a consultancy agreement. Andersens also derived significant fees from non-audit work which gave rise to a conflict of interest with their audit obligations) (Lipton, 2003). Subsequent to HIH’s collapse, The Corporate Law stinting Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (commonly known as ‘CLERP 9’) came into force on 1 July 2004. CLERP 9 incorporated a number of reco mmendations made in the HIH Royal Commission Report. Reforms were made relating to (i) disclosure of directors’ remuneration, (ii) financial reporting, (iii) auditors independence, (iv) continuous disclosure, and (v) enhanced penalty provisions.\r\nCLERP 9 also deals with accounting standards, expensing of options, compliance controls, and cost increase of greater shareholder participation at meeting †all of which represents a significant development in the corporate law framework (Deloitte Touche Tohmatsu, 2005; Alcoc, & Bicego, 2003). preceding to CLERP 9 coming into force, advocates of corporate governance were captivated with Australian Stock Exchange Limited (ASX) release of the â€Å"ASX Corporate Governance Council’s (CGC) Principles of Good Corporate Governance and Best Practice tributes” in exhibit 2003. ASX CGC adopted the same ‘ article of faiths based’ approach as taken in the UK Combined Code which governs entities listed on the London Stock Exchange. ASX listed entities are at indecorum not to comply with the recommendations, but if they do not, they must explain why not. The Guidelines were built on the opinion that one size does not fit all companies.\r\nThe Guidelines contained 10 ‘essential’ Corporate Governance Principles (Principles) and 28 Best Practice Recommendations (Recommendations) which was later revised in August 2007 as â€Å"Corporate Governance Principles and Recommendations” (Guidelines) comprising of 8 Principles and 26 Recommendations (Farrell, Harding, ; Spilsbury, 2003). The Guidelines also reflect ASX CGC’s emphasis in continuous disclosure by listed companies. individually Principle has a ‘Guide to reporting’ about the Recommendations at the end of the ‘chapter’ discussing what should be disclosed and where. chthonic ASX Listing Rule 4. 10. 3, companies are required to translate a statement in their annual report, disc losing the goal to which they have followed the Recommendations in the reporting period.\r\nWhere companies have not followed all the Recommendations, they must identify the Recommendations that have not been followed and give reasons for not following them †the â€Å"if not, why not” approach (ASX Corporate Governance Council, 2007). In relation to HIH’s case, a number of the Guidelines’ Principles provide sanely extensive coverage of corporate governance issues identified in HIH earlier. Principle 1 highlights the need for companies to turn out and disclose the respective roles and responsibilities of the board and management. In the 2007 fluctuation, the Guidelines added the Recommendation 1. 2 for companies to disclose the process for evaluating the performance of senior executives (ASX Corporate Governance Council, 2007). This Principle serves to provide disclosure in relation to HIH’s situation of an over-dominant CEO and ineffective chairm an and board.\r\nWhere HIH was highlighted to have a board that was ineffective and failed its duties, Principle 2 states that companies need to structure the board to add value with an effective composition, size and commitment to adequately discharge its responsibilities and duties. Recommendations in the principle placed importance in having a majority of the board and the chairman being independent directors to ensure independence in board decisions and prevent conflict of interest. Recommendation 2. 4 suggests that companies should establish a nomination committee to ensure appropriate selection and assigning practices in the company. This Recommendation also provides resolution in relation to HIH’s case whereby the board was by and large made up of directors hired by Mr.\r\nWilliam, including the former Andersen partners. In the 2007 edition, the Guidelines added the Recommendation 2. 5 for companies to disclose the process for evaluating the performance of the board, its committees and individual directors (previously this was part of Principle 8 in the 2003 edition, titled â€Å"encourage enhance performance”). This Recommendation helps to ensure directors are given admission charge to continuing education to update and enhance their skills and knowledge that are necessary in performing their duties (ASX Corporate Governance Council, 2007). Principle 3 discusses how companies should promote honest and responsible decision-making.\r\nBeyond legal obligations, directors are judge to make decisions that satisfy not only the company’s shareholders but other stakeholders as well (this principal includes amalgamation from Principle 10 of the 2003 edition Guidelines which was to â€Å"recognize the legitimate interests of stakeholders”). To achieve this, Recommendation 3. 1 encourages companies to establish and disclose their code of conduct pertaining to right practices, legal practices and handling of unethical practices. A ligned with this, Recommendation 3. 2 promotes the establishment and disclosure of company’s policy concerning trading in company securities by directors, senior executives and employees (ASX Corporate Governance Council, 2007). Relating to Principle 3 and Principle 7 titled â€Å"recognize and manage risk”,\r\nHIH has been considerably questioned of its various business decisions, mostly of which contributed to huge loses and ultimately the company’s insolvency. Criticized decisions made by the company are many, and on top of the list include (i) the acquisition of FAI Insurance (majority-owned by Mr. Adler who later became a member of HIH’s board of directors) for A$300 million which FAI was later estimated to be worth just A$100 million, (ii) re-entering the atomic number 20 market in 1998 and failure to take the baffling decision to exit the market when it proved unprofitable, and (iii) the decision to enter a sector (insurance and re-insurance of f ilm-financing) that has proved involved for many market participants in London (Cagan, 2001).\r\nThe lack of risk management within HIH was apparent and Mr. Adler’s unethical conduct was evident with his imprisonment. In befool of the importance of risk management, Recommendation 7. 1 urges companies to establish policies for the over sight and management of material business risks (that is financial risks and non-financial risks) and disclose a summary of those policies while Recommendation 7. 2 call for the board to require management to design and implement risk management and internal control system to manage the company’s material business risks and report to it on whether those risks are being managed effectively.\r\n'