Corporate Governance

A decade ago, the term 'corporate governance' was barely heard. Today, like climate change and private equity, corporate governance is a staple of everyday business language and capital markets are better for it.
Corporations are part of every society and are the livelihood of many communities. They mobilize and combine capital, raw material, labor, management expertise and intellectual property from a variety of sources to produce goods and services that are useful to members of society. Corporations purchase goods and services, generate jobs and income, distribute profits, pay taxes, and contribute to foreign exchange
In general terms, corporate governance provides guidelines for all corporate participants as regards their rights, obligations and accountability, as well as processes for identifying and evaluating challenges encountered in the corporate sphere.
No aspect of business or finance has changed more dramatically over the past decade than corporate governance. Until recently it has been unthinkable for a shareholder resolution to be sponsored by an institutional investor, or for a resolution sponsored by an individual investor to get more than 3 per cent of the vote. Suddenly institutional investors are submitting dozens of shareholder resolutions, all with substantial support. Astonishingly, shareholders have been responsible for the departures of CEOs from the giants of Corporate.
The new approaches to governance encompass various models described in regulatory theory as well as maintaining some hard law and some command and control mechanisms. It frequently enjoins the collaboration of pluralist group of interested non-state parties that implement or are affected by the implementation of policy groups .The model for the production of corporate governance followed by numerous countries, initiated in the United Kingdom, involves the use of corporate governance codes, which are the deliberations of interested groups, such as institutional share holders, managers, scholars and government bodies.
Corporate governance is, 'the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations.' It encompasses the mechanisms by which companies, and those in control, are held to account. Corporate governance influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimized.
Effective corporate governance structures encourage companies to create value, through entrepreneurialism, innovation, development and exploration, and provide accountability and control systems commensurate with the risks involved.
2.Corporate Governance in Australia

Corporate governance structures and practices continue to be important in determining the cost of capital in a global capital market. Australian companies must be equipped to compete globally and to maintain and promote investor confidence both in Australia and overseas. In an examination of our corporate governance practices, Australia starts from a position of strength. However, it is important to periodically review those practices to ensure they continue to reflect local and international developments and promote high standards of transparency about the corporate governance practices of listed entities.

2.1 Brief History:
The Australian Government's Corporate Law Economic Reform Program (CLERP) was announced in 1997 as an initiative to improve the regulation of companies operating in Australia. The CLERP is an ongoing program which seeks to ensure that Australia's business regulation is consistent with international best practice and provides an appropriately secure environment for investment in Australia. The program is specifically aimed at enhancing the transparency of financial information and the accountability of market participants by modernizing the regulation of fundraising, takeovers, directors' duties, corporate governance, financial reporting, financial markets and investment products (some of which can now be undertaken remotely by a part time Financial Director or "Virtual FD" - see e.g. - rather than a full time Financial Director in-house. The policy frameworks that have been developed under the CLERP since 1997 have prompted the enactment of legislation in all these key areas of company regulation.
The ASX Corporate Governance Council was established in August 2002 as a collaborative, industry-based body set up to develop corporate governance recommendations for listed entities which reflect international standards. It includes representatives from more than 20 business, shareholder and industry groups from disparate business backgrounds, each offering valuable guidance and information specific to their constituencies and industry. On 1 January 2003, the ASX introduced a number of significant amendments to the ASX Listing Rules to enhance compliance with corporate governance best practice. Three months later the ASX Principles of Corporate Governance were released, which represent the most comprehensive statement of best practice in Australia.

2.2 Role:
ASIC contributes to Australia's economic reputation and wellbeing by ensuring that Australia's financial markets are fair and transparent, supported by confident and informed investors and consumers. ASIC is an independent Commonwealth Government body. It is set up under and administer the Australian Securities and Investments Commission Act (ASIC Act), and it carry out most of their work under the Corporations Act.
Australian Corporations Act generally complies with the OECD principle regarding effective redress for stakeholders whose rights have been violated. The Companies Law provides that, in the context of a merger, corporate bond holders, creditors of merging companies and any shareholders may object to the relevant.

Under ASX Listing Rule 4.10.3, companies are required to provide a statement in their annual 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 following them. Annual reporting does not diminish the company's obligation to provide disclosure under ASX Listing Rule 3.1.
The Australian Securities and Investments Commission responsible for overseeing the matrix of corporate governance regulation, ASIC is granted wide powers of investigation by the ASIC Act 1989 (Cth). ASIC also has a general power to do 'whatever is necessary for or in connection with, or reasonably incidental to, the performance of its functions'. Separately, provisions in the Corporations Act confer further investigative powers on ASIC. At the conclusion of an investigation, if ASIC believes that an offence may have been committed, it can commence prosecution itself or refer the matter to the Commonwealth Director of Public Prosecutions (DPP) .
ASIC deals with both civil and criminal matters. ASIC's enforcement actions are best classified as either civil (restitutionary in nature) or penal (punitive in nature). The most frequently occurring civil actions are: (i) applications to the court to restrain the payment or transfer of money or property where there has been a breach of the law, (ii) applications to the court for injunctions to restrain breaches of the law, and (iii) applications to the court to wind up companies.
ASIC penal sanctions can be separated into two separate categories: (i) wrongdoing for which the penalty is specified in the particular section, or s 1311; or (ii) wrongdoing under a civil penalty provision. Section 1311 is a general penalty provision which provides that when a provision in the Corporations Act provides a penalty for a certain offence, then that penalty will apply. Where there is no prescribed penalty, s 1311 prescribes other penalties. Civil penalty Provisions are either civil or criminal. Civil penalties prescribe an order prohibiting a person from managing a corporation for an unspecified period and/or a fine of up to AUD200,000. Criminal penalties apply when a person contravenes a civil penalty provision knowingly, intentionally or recklessly with dishonest intent. Criminal penalties include a fine of up to AUD200,000 and/or five years imprisonment.
In addition to enforcing relevant provisions of the Corporations Act 2001, ASIC sets standards, issues best practice guidelines, and (together with the ASX) has a key role in disseminating information to the market. It should be noted that disciplinary action may also be taken by the ASX against companies in breach of its Listing Rules, including suspension of an entity's securities from quotation or, ultimately, de-listing. Enforcement of the Corporations Act 2001 may also be undertaken by private action in the courts.

2.3 Significance

Shareholders have a number of property rights that should be protected by law. The right of shareholders in public companies to buy, sell and transfer shares is fundamental. In addition to this fundamental right, there are numerous other important rights possessed by equity investors, for example, the right to share in the profits of the corporation and the right to vote on important issues regarding the company's affairs. Management of a company, however, is left in the hands of a board of directors and management team. Chapter 2, Principle A, is a statement of the most basic rights of shareholders that are recognised in legal regimes of almost all developed countries.

Respondents to the ASX Corporate Governance Council's consultation on the changes to the Principles expressed strong support for the 'if not, why not' approach but also expressed a desire for the ASX Corporate Governance Council to provide more explanation about this approach to reporting.

2.4 The Corporate Governance Principles and Recommendations

Principle 1 ' Lay solid foundations for management and oversight
Principle 2 - Structure the board to add value
Principle 3 - Promote ethical and responsible decision-making
Principle 4 - Safeguard integrity in financial reporting
Principle 5 - Make timely and balanced disclosure
Principle 6 - Respect the rights of shareholders
Principle 7- Recognise and manage risk
Principle 8- Remunerate fairly and responsibly

The Recommendations are not prescriptions, they are guidelines, designed to produce an outcome that is effective and of high quality and integrity. This document does not require a 'one size fits all' approach to corporate governance. Instead, it states suggestions for practices designed to optimise corporate performance and accountability in the interests of shareholders and the broader economy. If a company considers that a Recommendation is inappropriate to its particular circumstances, it has the flexibility not to adopt it - a flexibility tempered by the requirement to explain why ' the 'if not, why not' approach

' The proprietary limited or unlimited company must have at least one shareholder, no more than 50 non-employee shareholders, and at least one director who must live in Australia. A secretary can be appointed (sec.204A), that must be at least 18 years of age. One person may simultaneously hold the positions of company director and secretary.
' Most large proprietary companies have to lodge audited accounts. Small proprietary companies only have to prepare audited financial statements if ordered to do so by the Australian Securities and Investments Commission (ASIC) or members holding five percent of voting shares and, in some cases, if controlled by a foreign company.
' Proprietary limited companies are also classified as "large" or "small". A proprietary company is classified as small only if it meets at least two of the following criteria.
' It has assets of less than $12.5 million at the end of a financial year.
' It has fewer than 50 employees at the end of a financial year.
' It has a gross operating revenue of less than $25 million for the financial year

3.Role of corporate Governance in 21st century
Corporate governance practices will evolve in the light of the changing circumstances of a company and must be tailored to meet those circumstances. Corporate governance practices must also evolve in the context of developments both in Australia and overseas. There is no single model of good corporate governance. This document articulates eight core principles (the Principles). Each Principle is explained in detail, with commentary about implementation in the form of Recommendations (the Recommendations). The ASX Corporate Governance Council's Recommendations are not mandatory and cannot, in themselves, prevent corporate failure or poor corporate decision-making. They are intended to provide a reference point for companies about their corporate governance structures and practices.
Corporate governance has become an issue of worldwide importance. The corporation has a vital role to play in promoting economic development and social progress. It is the engine of growth internationally and is increasingly responsible for providing employment, public and private sector services, goods and infrastructure. The efficiency and accountability of the corporation is now a matter of both private and public interest, and corporate governance has thereby come to the head of the international private enterprise agenda. Corporate governance is concerned with the systems of law, regulations, and practices which promote enterprise and ensure accountability. Ensuring transparency and probity in corporate affairs makes a major contribution to improving business standards. A complex interplay of factors contributes to the
proper functioning of a corporate governance system. There are important factors internal to the
corporation, such as the board of directors, capital providers, stakeholders, and management. Likewise, there are important factors external to the corporation, such as laws and regulations, competitive markets, the media, and transparent external auditing measures. Governance failures or weaknesses can reflect aspects of both.

'Corporate Governance in the 21st Century is a very useful addition to the literature on corporate governance . It is worth reading simply because it updates many of the ongoing issues ' such as adoptions of takeover defenses, appointments of independent directors, and increases in foreign direct investment. It is also useful because it examines corporate governance from the perspectives of business as well as law. Furthermore, it provides the beginnings of a framework through which to understand the process of gradual transformation.'

4. Bibliography

Source: ChinaStones -

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