Question

Company: The A2 Milk Company Limited (A2M)

Research Based Report – Corporate Governance & Risk Management

As a new accounting graduate, you have just joined the financial reporting unit of a company. Your company is listed in Australian Securities Exchange (ASX). The Chief Financial Officer (CFO) approaches you with your first task.

In the latest Board meeting, directors of your company expressed concerns about issues related to corporate governance and particularly risk management. New and emerging disruptions to the global economy, such as the Covid-19 pandemic, global trade tensions, technological advances and cybersecurity, add to the growing risks that companies have to deal with. The Board stressed that in times of crises, good corporate governance and risk management are more important than ever. It is also noted that the Corporate Governance Council’s Corporate Governance Principles and Recommendations (the Fourth Edition) was released on 27 February 2019 and takes effect for a listed entity's first full financial year commencing on or after 1 January 2020. Therefore, the Board has decided to conduct a review of relevant issues.

Required:

Based on the Board's decision, the CFO asks you to prepare a business research report focusing on the following three aspects:

(1) Identify and explain TWO key issues related to risk management in the Corporate Governance Principles and Recommendations (the Fourth Edition). The Fourth Edition can be found on the Corporate Governance Council’s website.

(2) Critically analyse to what extent corporate governance reporting of your company can be enhanced in relation to the TWO key issues that you have identified in part (1). In your analyses, you should refer to your company’s most recent Corporate Governance Statement.

(3) Your company is consider expanding its operations to a foreign country. You are required to nominate a specific foreign country and critically analyse TWO major environmental and/or social risks that the company should consider when operating in this foreign country .

Answer 1

1- Identified and explain two key issues related to the risk managment .......... Corporate governance should therefore ensure that risks are understood, managed, and, when appropriate, communicated. ... Attention should be paid to both financial and non-financial risks, and risk management should encompass both strategic and operational risks.

The key changes reflected in the 4th Edition is a shift towards recognising the importance of monitoring and taking responsibility for culture, conduct and behaviour within the corporate group, as well as focussed management of non-financial risks, in addition to the traditional focus on financial risks and performance.

As with previous revisions to the Principles and Recommendations, early adoption of new aspects of the 4th Edition has been encouraged by the ASX Corporate Governance Council and we expect to see some 30 June year end companies early adopt aspects of the 4th Edition for their FY19 corporate governance statement.

Changes from the 3rd Edition

KEY CHANGES

Consistent with the consultation draft and international developments in governance regulation, the key changes reflected in the 4th Edition Corporate Governance Principles and Recommendations (Recommendations) is a shift towards:

• recognising the importance of monitoring and taking responsibility for culture, conduct and behaviour within the corporate group; and
• focussed management of and disclosure in relation to non-financial risks, including ESG risks, in addition to the traditional focus on financial risks and performance.

• NEW RECOMMENDATIONS

  The 4th Edition Principles and Recommendations includes 9 new recommendations which are summarised below:

• Culture - As part of the 4th Edition’s focus on conduct and behaviour, 3 new recommendations are included under Principle 3:
  • Values - A listed entity should articulate and disclose its values.
  • Whistleblower policy – A listed entity should have and disclose a whistleblower policy and ensure that the board or a committee of the board is informed of any material incidents reported under that policy.
  • Anti-bribery and corruption policy – A listed entity should have and disclose an anti-bribery and corruption policy and ensure that the board or a committee of the board is informed of any material breaches of that policy.
• Corporate reports - New recommendation 4.3 provides that a listed entity should disclose its process to verify the integrity of any periodic corporate report it releases to the market that is not audited or reviewed by an external auditor. Unlike similar provisions in the 3rd Edition Principles and Recommendations, this new recommendation extends beyond financial reports to ensure the highest standards in all corporate reporting.
• Company announcements – Under recommendations 5.2 and 5.3, it is recommended that a listed entity ensure that its board promptly receives copies of all material market announcements and requires copies of new and substantive investor or analyst presentation materials to be released on the ASX Platform ahead of the presentation.
• Voting by poll - New recommendation 6.4 provides that all substantive resolutions at a meeting of security holders be decided by a poll rather than by a show of hands.

2- critically analysis to what extent corporate governance reporting to your company.......

Corporate governance has become a topic of broad public interest as the power of institutional investors has increased and the impact of corporations on society has grown. Yet ideas about how corporations should be governed vary widely. People disagree, for example, on such basic matters as the purpose of the corporation, the role of corporate boards of directors, the rights of shareholders, and the proper way to measure corporate performance. The issue of whose interests should be considered in corporate decision making is particularly contentious, with some authorities giving primacy to shareholders’ interest in maximizing their financial returns and others arguing that shareholders’ other interests — in corporate strategy, executive compensation, and environmental policies, for example — and the interests of other parties must be respected as well.

3- your company is consider expanding its operations to the foreign company.........

Business Environments

There are numerous types of business environments, however the political, the cultural, and the economic environments are the prime ones. These factors influence the decision-making process of an international business firm. It is important to note that the types of environments we discuss here are interlinked; meaning one’s state affects the others in varying dimensions.

The Political Factors

The political environment of a nation affects the legal aspects and government rules which a foreign firm has to experience and follow while doing business in that nation. There are definite legal rules and governance terms in every country in the world. A foreign company that operates within a particular country has to abide by the country’s laws for the duration it operates there.

Political environment can affect other environmental factors −

• Political decisions regarding economy can affect economic environment.
• Political decisions may affect the socio-cultural environment of a nation.
• Politicians may affect the rate of emergence of new technologies.
• Politicians can exert influence in the acceptance of emerging technologies.

The Economic Factors

Economic factors exert a huge impact on international business firms. The economic environment includes the factors that influence a country's attractiveness for international business firms.

• Business firms seek predictable, risk-free, and stable mechanisms. Monetary systems that acknowledge the relative dependence of countries and their economies are good for a firm. If an economy fosters growth, stability, and fairness for prosperity, it has a positive effect on the growth of companies.

• Inflation contributes hugely to a country's attractiveness. High rate of inflation increases the cost of borrowing and makes the revenue contract in domestic currency. It exposes the international firms to foreign-exchange risks.