Ranking the Key Principles of Corporate Governance

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This essay will present an opinion on ranking of the key principles of corporate governance. The topic will be covered from the perspective of Australian listed companies, which are subject to regulation by the Australian Securities Exchange (ASX).

The ASX Corporate Governance Council defines corporate governance as “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations” (ASX 2007 p3). The latest ASX Corporate Governance Council report (ASX 2007) articulates eight core principles, which the report states are of equal importance. Although primarily targeted at listed companies, the ASX principles are being taken into account by other types of organisations (such as non-listed companies, government agencies and not-for-profits), when developing their own corporate governance structures. Corporate governance in Australia reflects a rich mixture based on legislation (such as the Corporation Act), prescriptive rules (for example the ASX listing rules), the ASX principles and ‘if not, why not’ recommendations, plus public expectations.

The ranking philosophy applied in this essay is based on analysis of the results of international investigations into the underlying causes of the 2008 global financial crisis (GFC). Stakeholder reactions to and perceptions about the standards of corporate governance in the lead up to the global financial crisis are also taken into account.

In light of the global financial crisis, this essay proposes that the corporate governance principles be ranked based on four critical threads: risk management; board and executive remuneration processes; board performance; and finally the exercise of shareholder rights.

The ASX Corporate Governance Council (ASX 2007) details eight core principles: 1.Lay solid foundations for management and oversight – what are the roles and responsibilities of the board and management? 2.Structure the board to add value – the right balance of skills and size, plus a commitment to enhancing shareholder value. 3.Promote ethical and responsible decision-making – integrity and ethics in everything the board does. 4.Safeguard integrity in financial reporting – integrity and timeliness in meeting the information needs of stakeholders. 5.Make timely and balanced disclosure – of all material corporate matters. 6.Respect the rights of shareholders – including facilitating the exercising of those rights. 7.Recognise and manage risk – establish and exercise a reliable and consistent system of risk determination and administration. 8.Remunerate fairly and responsibly – ensuring such compensation is performance based and aligned with stakeholders’ expectations.

The compliance of Australian listed companies against the ASX principles and recommendations is tracked on an annual basis. Of the companies examined for the year ending 31 December 2008 (ASX 2009 p3), 88% were found to be substantially compliant with the key principles. This is a good indication that companies are taking their corporate governance responsibilities seriously and putting appropriate processes in place to comply.

The ASX 2008 corporate governance disclosure report (ASX 2009 p4) found that reporting on the performance of company executives and board could be improved. This can be related to principle 1, requiring disclosure of executive performance processes and principle 8, requiring board and executive remuneration to be performance based. Further, that report determined that aspects of risk management reporting could also be improved (ASX 2009 p4).

The OECD report “The Corporate Governance Lessons from the Financial Crisis” (OECD 2008 p2) concludes that “the financial crisis can be to an important extent be attributed to failures and weaknesses in corporate governance arrangement.” That report (OECD 2008) and the follow-up June 2009 report “Corporate Governance and the Financial Crisis: Key Findings and...
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