Corporate Governance in Australia After Hih Essay

In the set out of various bodily s potfuldals, regulatory bodies and incarnate brass section were dictated at a lower place pressure by shargonholders and s checkholders to song a tighter grip in presidency corporations conduct. The obligations, roles and responsibilities of affairs stewards argon under exam of Corporations title, listing rules, playrys code of unified establishment, moral philosophy as well as social standards.At the same time, advocates of market forces as a replacement to regulations and mandate continue to pursue for market de modulate and liberalisation based on the believe that political sympathies intervention leave behind only distort resources allocation and hinder market development. The collapse of Australian caller-up HIH Insurance Ltd (HIH) in 2001 was analysed in terms of its conduct and ossification to the Corporations coiffure, listing rules as well as code of bodily brass as released by the Australian Securities Exchange (A SX) merged nerve Council (CGC).Reforms in regulations and the Corporate Governance rationales and testimonials 2007 by ASX CGC were used to recommend best practices in corporate governance that should throw taken place in HIH. Lastly, the accomplishment of globalization and challenges to good corporate governance resulting from globalization were discussed from the perspective of home(a) government, regulatory bodies as well as the corporation it self.jurist Neville Owen, The purplish heraldic bearinger in the HIH princely Commission hatch described corporate governance as the framework of rules, congenatorships, systems and processes within and by which authority is exercised and control take in corporations, and the Australian Securities Exchange (ASX) Corporate Governance Council added that corporate governance relates to and influences how the objectives of the confederacy atomic number 18 set and achieved, how venture is monitored and assessed, and how execution is optimized (The HIH Royal Commission, 2003 ASX Corporate Governance Council, 2007).The gist of corporate governance has evolved over time and, in the strictest sense, is linked to the legislation that allows its existence. The law sets forth a companys rights and responsibilities but this can differ from country to country. However, it is generally accepted that corporate governance extends beyond the law to include a giveation of best practices and worry ethics (Birt, Chalmers, Beal, Brooks, Byrne, & Oliver, 2008).The structure of corporate governance as put forth by Farrar (2005) and represented in the figure below illustrates the relationship within the corporate governance structure Figure The structure of corporate governance (Farrar, 2005). The issues environ the rights and responsibilities of corporations are complex and ever changing as monetary markets fuck off more global, corporations become larger and more powerful, and societys perceptual experience of the c orporate role changes.A school of thoughts advocates for market forces to be the regulator of the monetary market. The neo? liberals assume that factor markets work efficiently without government intervention if property rights and competition are guaranteed. They considered government interventions as little efficient than market? based solutions and stresses that government interventions hamper private area development and that government should concentrate on improving the enabling of furrow environment through deregulation (Emeseh, Ako, Okonmah, Obokoh, & Ogechukwu, 2010).Neo-liberalism challenges the conventional structuralist orthodoxy of government intervention by highlighting the negative effects of financial repression on economic growth and development. They refer financial repression to be the set of government sub judice restrictions preventing financial intermediaries in the economy from functioning at their full capacity. The distortion of domestic help financial markets through rules and legislation is claimed to have negative impact on economic growth. In essence, corporations should be relied on in the main to self? regulate in the critical aspect of occupation activities.Neo-liberalism has prompted many countries to hold liberalisation and deregulation of their financial markets on the recommendations of the World Bank and IMF (Emeseh, Ako, Okonmah, Obokoh, & Ogechukwu, 2010). The authoritative role of market forces in contributing to good corporate governance and strong corporate performance has for some time been emphasised 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 level-headed regulation (duPlessis, McConvill, & Bagaric, 2005).However, through-out the last two decades, legislation reforms and corporate governance has as well as gr receive rapidly, particularly since the collapse of Enron Corporation in 2001 and the subsequent financial problems of some other companies in various countries. As financial scandals continue to emerge, thither will be continued attention placed on corporate governance issues, especially relating to transparency and manifestation, control and accountability, and the most appropriate form of mount up structure that whitethorn be capable of preventing such scandals occurring in future (Mallin, 2007).In pursuance of good corporate governance, an area of care would be how managing directors conduct and decisions should be in the best interest of the company, its shareholders and other relevant stakeholders. In this context, the agency theory is a very adequate framework that can describe the problems associated with the principal-agent relationship caused by separation of ownership and control between shareholders (the principal) and directors (the agent) in corporations.Information asymmetry, moral hazard, difference in attitude towards risk and difference in interest between shareholders versus directors are common agency problems that would usually be at the expense of shareholders (Mallin, 2007 Rahman, & Salim, 2010). For example, directors whitethorn have a wider range of economic and social guides (such as to maximize compensation, security, status and to boost their own reputation), while shareholders are enkindle only in maximizing return on investments.Furthermore, as directors are usually contracted to the company on short term basis, they may be eager for short-run payoffs within their contract term, whereas shareholders interest would be based on long-term success. Australian companies have a one(a) jump on structure and the regulatory framework for corporate governance and directors duties is governed by (i) Statute (notably the Corporations sham), (ii) Common law rules (for example, cases relating to directors duties), (iii) The companys constitution, and (iv) Guide rootages issued by the Australian Securities and In vestments Commission (ASIC) (Dibbs Barker Gosling Lawyers, 2003).ASIC plays a vital role in enforcing and regulating company and financial services laws to protect Australian consumers, investors and creditors. It acts as Australias corporate regulator and administers various legislations including the Corporations Act 2001, Australian Securities and Investments Commission Act 2001, etc. (Australian Securities Investments Commission, 2010a).By the Corporations Act, general duties imposed on directors and officers of companies are tell as (i) the duty to exercise their powers and duties with the care and diligence that a valid person would have which includes taking cadences to find out they are decently informed close to the financial position of the company and ensuring the company doesnt trade if it is insolvent, (ii) the duty to exercise their powers and duties in good faith in the best interests of the company and for a proper purpose, (iii) the duty not to im powerful us e their position to gain an advantage for themselves or someone else, or to cause detriment to the company, and (iv) the duty not to improperly use 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 reasoned duties and obligations, directors are in any case expected to meet commercial expectations in the interest of stakeholders, which include, but are not limited to, shareholders. These commercial expectations requiremently require directors to drive the permeate line and provide appropriate shareholder returns.Taking it a step further, many directors of today are challenged to embrace triple bottom line reporting and consider the economic, social and environmental ramifications of their corporate activities (Lucy, 2006). While the telescope and laws governing the conduct of directors are wide and many, intentional and unintent ional recrudesce has shocked the financial market and public numerously. Till today, HIH Insurance Ltd (HIH) that went into small town in early 2001 is well remembered by almost every Australian as a collapse caused by mismanagement of the company, and various board members were brought to court on charges including giving misleading information with the intention of deceiving other board members and the companys auditor.As one of Australias largest insurers, the company ran into debts of over AUD$5 billion and subsequent to the collapse, the government carried out an pricey exercise to underwrite many of the failed policies (Mallin, 2007). According to the HIH Royal Commission Report on the failure of HIH, it was concluded that investigators did not find fraud or embezzlement to be behind the collapse. The failure was more the result of attempts to theme over the cracks caused by over-priced attainments (notably FAI Insurance Ltd) and too much corporate lavishness based on a misconception that the money was there in the business. The first-string reason for the huge loses was that adequate provision had not been do for policy claims and past claims on policies had not been properly priced.HIH was mismanaged in the area of its hollow business activity (Bailey, 2003). In chorus, the HIH Royal Commission report essentially states that the main reasons for the failure of HIH was despicable management and greed characte bestrided by (i) a lack of attention to detail and skills, (ii) a lack of accountability for performance, and (iii) a lack of integrity in the companys internal processes and systems (Nicholson, 2008). Justice Neville Owen further commented in the report on what was the essence of good corporate governance The governance of a public company should be nigh stewardship. Those in control have a duty to act in the best interests of the company.They must use the companys resources productively. They must hear that those resources are not pe rsonal property. The last old age of HIH were marked by poor leadership and inept management. Indeed, an attitude of apparent indifference to, or deliberate disregard of, the companys underlying problems pervades the affairs of the group. (The HIH Royal Commission, 2003). The above comment can be loosely translated to say that the directors of HIH have failed their duties. Notably, in April 2005, Mr Ray Williams, the former Chief Executive Officer ( chief executive officer) of HIH, was sentenced to cardinal-and-a-half years jail with a non-parole period of two years and nine months.Mr Williams sentencing follows ASICs successful civil penalty proceedings on the trine unlawful 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 flake out his duties for a proper purpose as a director of HIH Insurance Limited when, on 19 October 2000, he sign-language(a) a letter that was misleading, (ii) that he authorised the issue of a prospectus by HIH on 26 October 1998 that contained a clobber omission, and (iii) that he make or authorised a statement in the 1998-99 Annual Report, which he knew to be misleading, that overstated the operating profit before abnormal items and income levy by $92. 4 million (Australian Securities & Investments Commission, 2005a).ASICs HIH investigation also led to criminal prosecutions of 9 other former senior executives, including directors of FAI, 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 majority owner 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. ASICs chairman, Mr Jeffrey Lucy, in his public statement said, Mr Adler was in a position of self-confidence as a director of HIH but he p ut his own financial interests before the interests of HIH shareholders (Australian Securities & Investments Commission, 2005b).Mr Adler was sentenced after pleading guilty to four criminal charges (i) two counts of disseminating information on 19 and 20 June respectively, knowing it was off-key in a material particular and which was likely to induce the get 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 world 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). HIHs disastrous business ventures in U. K. , U. S. , acquisition of FAI Insurance Ltd. nd the Allianz joint venture were identify as what ultimately brought HIH down. These instance s 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 top doged, (ii) an unproductive chairman who failed his responsibility to oversee the functioning of the board, (iii) an ineffective board who failed to grasp the concept of combats of interest, and was unable to monitor and does not question management performance, (iv) inappropriate conduct in remuneration setting and performance measurement (mostly made by Mr.Williams who, although not a member of the committee, be all meetings by invitation), (v) an ineffective audit committee who showed no fretfulness with risk management and internal control, and (vi) compromised auditor independence (the auditing company was Arthur Andersen and HIHs board had three former Andersens partners one of them was the chair of the board provided continued receiving fees under a consulta ncy 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 HIHs collapse, The Corporate Law Economic 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 recommendations made in the HIH Royal Commission Report. Reforms were made relating to (i) revelation of directors remuneration, (ii) financial reporting, (iii) auditors independence, (iv) continuous disclosure, and (v) set upd penalty provisions.CLERP 9 also deals with accounting standards, expensing of options, compliance controls, and encouragement 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). Prior to CLERP 9 coming into force, advocates of corporate governance were deli ghted with Australian Stock Exchange Limited (ASX) release of the ASX Corporate Governance Councils (CGC) linguistic rules of Good Corporate Governance and crush Practice passports in March 2003. ASX CGC adopted the same principles based draw close as taken in the UK Combined Code which governs entities listed on the capital of the United Kingdom Stock Exchange. ASX listed entities are at liberty not to comply with the recommendations, but if they do not, they must explain why not. The Guidelines were built on the public opinion that one size does not fit all companies.The Guidelines contained 10 essential Corporate Governance Principles (Principles) and 28 Best Practice Recommendations (Recommendations) which was later rewrite in August 2007 as Corporate Governance Principles and Recommendations (Guidelines) comprising of 8 Principles and 26 Recommendations (Farrell, Harding, Spilsbury, 2003). The Guidelines also reflect ASX CGCs emphasis in continuous disclosure by listed co mpanies. Each Principle has a Guide to reporting about the Recommendations at the end of the chapter discussing what should be disclosed and where. Under ASX Listing dominion 4. 10. 3, companies are required to provide a statement in their one-year report, disclosing the extent to which they have followed the Recommendations in the reporting period.Where companies have not followed all the Recommendations, they must identify the Recommendations that have not been followed and give reasons for not pursual them the if not, why not approach (ASX Corporate Governance Council, 2007). In relation to HIHs case, a number of the Guidelines Principles provide fairly extensive reportage of corporate governance issues identified in HIH earlier. Principle 1 highlights the need for companies to establish and disclose the respective roles and responsibilities of the board and management. In the 2007 edition, 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 HIHs situation of an over-dominant CEO and ineffective chairman and board.Where 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 universe independent directors to moderate 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 appointment practices in the company. This Recommendation also provides shutdown in relation to HIHs case whereby the board was mostly made up of directors hired by Mr.Wi lliam, 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 encourage enhance performance). This Recommendation helps to ensure directors are given access 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 ethical and responsible decision-making.Beyond legal obligations, directors are expected to make decisions that satisfy not only the companys shareholders but other stakeholders as well (this principal includes amalgamation from Principle 10 of the 2003 edition Guidelines which was to recognize the legitimate interests of stakeholders). To achieve this, Recommendation 3. 1 encourage s companies to establish and disclose their code of conduct pertaining to integrity practices, legal practices and handling of unethical practices. Aligned with this, Recommendation 3. 2 promotes the establishment and disclosure of companys 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 recognize and manage risk,HIH has been considerably questioned of its various business decisions, mostly of which contributed to huge loses and ultimately the companys 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 HIHs board of directors) for A$300 million which FAI was later estimated to be worth dear A$100 million, (ii) re- demeaning the California market in 1998 and failure to take the difficult decision to exit the market when it proved unprofitable, and (iii) the decision to enter a sector (insurance and re-insurance of film-financing) that has proved problematic for many market participants in London (Cagan, 2001).The lack of risk management within HIH was apparent and Mr. Adlers unethical conduct was evident with his imprisonment. In view 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 machine risk management and internal control system to manage the companys material business risks and report to it on whether those risks are being managed effectively.