In: Accounting
Would a company that complies with ASX corporate governance principles and discloses their compliance accordingly achieve superior financial performance?
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According to James D. Wolfensohn, President of the World Bank - “The proper governance of companies will become as crucial to the world economy as the proper governing of countries.”
According to Professor Bob Tricker - “Whilst management processes have been widely explored, relatively little attention has been paid to the processes by which companies are governed. If management is about running businesses, governance is about seeing that it is run properly. All companies need governing as well as managing.”
The phrase “corporate governance” describes “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled within corporations. It encompasses the mechanisms by which companies, and those in control, are held to account.”
Good corporate governance promotes investor confidence, which is crucial to the ability of entities listed on the ASX to compete for capital.
The Need for Corporate Governance
The globalisation of economies, and thereby financial and investment markets, in the 1990s has led to the increasing convergence of originally separate initiatives in corporate governance. This development has accelerated following the financial turmoil in world financial markets in 1998.
The purpose of the Principles and Recommendations
These Principles and Recommendations set out recommended corporate governance practices for entities listed on the ASX that, in the Council’s view, are likely to achieve good governance outcomes and meet the reasonable expectations of most investors in most situations.
The Council recognises, however, that different entities may legitimately adopt different governance practices, based on a range of factors, including their size, complexity, history and corporate culture. For that reason, the Principles and Recommendations are not mandatory and do not seek to prescribe the corporate governance practices that a listed entity must adopt.
The structure of the Principles and Recommendations
There are 8 basic principles on which they are structured :
1. Lay solid foundations for management and oversight
Recommendation 1.1 - A listed entity should have and disclose a board charter setting out: (a) the respective roles and responsibilities of its board and management; and (b) those matters expressly reserved to the board and those delegated to management.
Recommendation 1.2 - A listed entity should: (a) undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a director; and (b) provide security holders with all material information in its possession relevant to a decision on whether to elect or re-elect a director.
Recommendation 1.3 - A listed entity should have a written agreement with each director and senior executive setting out the terms of their appointment.
Recommendation 1.4 - The company secretary of a listed entity should be accountable directly to the board, through the chair, on all matters to do with the proper functioning of the board.
2. Structure the board to add value
Recommendation 2.1 - The board of a listed entity should: (a) have a nomination committee which: (1) has at least three members, a majority of whom are independent directors; and (2) is chaired by an independent director, and disclose: (3) the charter of the committee; (4) the members of the committee; and (5) as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or (b) if it does not have a nomination committee, disclose that fact and the processes it employs to address board succession issues and to ensure that the board has the appropriate balance of skills, knowledge, experience, independence and diversity to enable it to discharge its duties and responsibilities effectively.
Recommendation 2.2 - A listed entity should have and disclose a board skills matrix setting out the mix of skills and diversity that the board currently has or is looking to achieve in its membership.
Recommendation 2.3 - A listed entity should disclose: (a) the names of the directors considered by the Board to be independent directors; (b) if a director has an interest, position, association or relationship of the type described in Box 2.3 but the board is of the opinion that it does not compromise the independence of the director, the nature of the interest, position, association or relationship in question and an explanation of why the board is of that opinion; and (c) the length of service of each director.
Recommendation 2.4 - A majority of the board of a listed entity should be independent directors.
Recommendation 2.5 - The chair of the board of a listed entity should be an independent director and, in particular, should not be the same person as the CEO of the entity
Recommendation 2.6 - A listed entity should have a program for inducting new directors and provide appropriate professional development opportunities for directors to develop and maintain the skills and knowledge needed to perform their role as directors effectively. New directors undertake an induction program
3. Act ethically and responsibly
Recommendation 3.1 - A listed entity should articulate and disclose its values
Recommendation 3.2 - A listed entity should: (a) have a code of conduct for its directors, senior executives and employees; and (b) disclose that code or a summary of it
Recommendation 3.3 - A listed entity should: (a) have and disclose a whistleblower policy; and (b) ensure the board or committee of the board is informed of any material incidents reported under that policy.
Recommendation 3.4 - A listed entity should: (a) have and disclose an anti-bribery and corruption policy; and (b) ensure that the board or committee of the board is informed of any material breaches of that policy.
4. Safeguard integrity in corporate reporting
5. Make timely and balanced disclosure
6. Respect the rights of security holders
7. Recognise and manage risk
8. Remunerate fairly and responsibly
So Accordingly , an investor whether a banker or money lender or common stock holder will have a greater trust in companies who are following all the principles and recommendations given by ASX , as a result the co’s financial growth is achieved.