Corporate Governance Framework Of Practices †MyAssignmenthelp.com

Question: Discuss about the Corporate Governance Framework Of Practices. Answer: Corporate governance: An Overview In the modern era of global competition where there is lack of economic certainty, it is imperative to understand the role played by the business corporations. The framework of practices and rules by which a board of directors through which board of directors exercises control or direct the company, is known as corporate governance framework. In other words, corporate governance refers to the relations and the processes by which a corporation is directed or controlled by the directors of the company (Rao and Tilt 2016). An effective corporate governance framework aims at striking balance between the interests of several stakeholders of the corporation. The market-oriented economy and globalization are significant factors that make corporate governance quintessential for the corporations in the modern day. Corporate governance: Concept and significance in corporate sector Corporate governance refers to the approach in which a corporation is governed. It is a technique or a mechanism that is used by the directors to govern the company. The corporate governance framework refers to the interaction that takes place between several participants including the stakeholders, shareholders, management and the board of directors of the company. An effective corporate governance framework is significant in a corporate sector as it assures the providers of finance of receiving a fair return on their investment. It does not distinguish the tasks or functions of the managers and the owners rather ensure that their functions are harmonized. Further, the framework of effective corporate governance ensures accountability and transparency of the corporation towards the stakeholders as well as the shareholders of the company (ArAs 2016). The concept ensures that the rights of the shareholders are safeguarded and that functions are carried out in the best interests of the stakeholders and the community altogether. Good corporate governance encompasses both institutional and social aspects that encourage a corporation that is trustworthy as well as ethically and morally upright. ASX Principles and Recommendations Purpose of ASX Principles and recommendations In order to promote good corporate governance, the ASX Corporate Governance Council has set out Principles and Recommendations (Principles and Recommendations) in 2003 as minimum standards to be followed by the corporations in order to achieve good governance outcomes. The Principles and Recommendations have been stipulated in accordance to the ASX Listing Rule 4.10.3 that required the listed entities to either publish on its websites about the principles and recommendations that it has implemented in its practice or include the same in the annual report of such listed entities (Clapp and Rowlands 2014). However, the Principles and Recommendations are not mandatory but the Board of Directors are not obligated to adopt such principles but they are required to provide explanations if they do not adopt such principles and recommendations. The ASX Council stated that different types of entities might legally adopt various governance practices depending on their complication, size and corporate culture resulting which the ASX Principles and Recommendations do not endow with any corporate practices that is binding upon the listed entities to adopt. ASX Principles and Recommendations: The Structure The structure of the ASX Principles and Recommendations includes eight essential principles that are necessary for corporations to achieve good corporate governance outcomes: It is essential for a listed entity to act ethically and morally; It is essential for a company to include formal and rigorous procedures for safeguarding and verifying the validity of the reports of the company; A listed entity must establish and disclose the relevant roles and responsibilities that are conferred on the Boards and management of the organization. The entities must ensure that such responsibilities are subjected to regular monitoring; It is necessary for a listed entity to compensate to the director for seeking the attention of highly experienced and qualified directors and senior executives for ensuring that the interests of the security holders are aligned with such directors and executives; An effective risk-management framework must be established to conduct a review regarding the efficacy of the corporate governance structure from time to time; A listed entity must ensure balanced and timely disclosure of all the matters that must be disclosed which any prudent personality would otherwise anticipate to have a significant effect on the price or worth of its securities; A listed entity must comprise a board that is of an appropriate work, skills, size and obligation to facilitate the Board perform their obligations effectively; If not, why not approach The ASX Principles and Recommendations persist to ensure that all the listed entities are bound by the governance practices adopted by the corporations. Since the Principles and Recommendations set out by ASX, do not mandate the governance practice that is appropriate for the type of listed entities, it is entirely dependent on the Board of Directors and body that is entitled to discharge legal responsibility on behalf of the company with due care and diligence. Thus, good corporate governance framework ensures that the corporation has appropriate governance arrangements (Crane and Matten 2016). Under the Principles and Recommendations, if the listed entity board considered that any of the Principles and recommendations is not appropriate for any specific circumstances of the corporations, the Board is not under any obligation to adopt any such principles or recommendation. However, if the Board of Directors of any listed entity did not adopt the recommendation, it was obligated to provide justification for not adopting the same. This procedure is known as the if not, why not approach where if a listed entity does not adopt any principles or recommendation set out by ASX, it is mandatory for explaining why the company has not adopted the principles or recommendations. The advantage of this approach is that it enables the company to provide sufficient information about the governance arrangements of such listed entity in the market so that security holders and other stakeholders in the investment community can have a conversation with the board regarding such matters. Again, such information shall assist the security holders to consider such factors while voting on particular resolutions (Liang and Renneboog 2017). The investors should also consider such information while determining whether investments should be completed into the securities of the business entity. Thus, this if not, why not approach is crucial to accomplish the operations of the ASX Principles and Recommendations in the business practice of the corporations. Monitoring of implementation and change in ASX Principles and Recommendations Good corporate governance practice should be developing and be open to all the information needs of the international as well as the local investors. The ASX Corporate Governance Council is responsible for conducting regular review of the Principles and Recommendations for ensuring that such recommendations or principles persist to remain relevant to the business practice, thus, taking into consideration of the international and local developments for demonstrating persistency in international business practice. The ASX Council encourages investors and companies to provide feedback either to the ASX Corporate Governance Council regarding the impact and implementation of the Principles and Recommendations directly or through one of the member body of such ASX Council. The ASX Corporate Governance Council shall go on with the review about the consequence and the implementation of the Principles and Recommendations along with examination of disclosures that the listed entities make in their annual reports considering the feedback received from the companies (Lorek and Spangenberg 2014). ASX Governance principles and Recommendation: The Evolution The principles and recommendations related to corporate governance have been subjected to significant modification since its inception in 2002. The ASX Council released the first edition of the Principles and Recommendations in 2003 followed by its second edition in 2007. A new proposal on diversity and composition of the Remuneration Committee introduced in 2010 was incorporated as amendments to the second edition of such Principles and Recommendations. In regards to the third editions, significant changes have been made with respect to the description of the 8 Principles and the Recommendations stipulated by ASX. However, no amendments or changes have been made with respect to the description of corporate governance, which remains intact as it was in the first two editions. Further, in regards to the current edition 2014, a principle-based approach is maintained which emphasized on the outcomes instead of the process (Poulton, Barnes and Clarke 2017). The latest version is flexible like the previous ones, which is evident from the fact that it permits listed entities to adopt various practices to achieve good corporate governance outcomes as per its composition and size. Relation between the ASX principles and Listing rules According to the Listing Rule 4.10.3, every listed business entity must include its corporate governance statement in its annual report or on its website. The corporate statement must talk about the scope of the implementation of the ASX principles and recommendations during the period when the report is made. The Listing Rule is related to the ASX Principles as Rule 4.10.3 refrains from obligating listed entities to adopt the governance practices that is not suitable to their business practices. However, applying the if not, why not approach the entity is free to adopt any governance practices appropriate for their business practice but must explain reasons for not adopting such principles and recommendations in their business practice. Implementation of corporate governance principles: Disclosures The Principles and Recommendations proposes that any information related to the business entity shall be disclosed in the annual report of the company as is also mentioned under Listing Rule 4.10.3. The business entity must mention about all the recommendations and principles in the corporate governance statement that it follows in its practice. The listed entity must also mention about the policies and practices that a company follows while carrying out its business operations. If eh corporate governance of a listed entity is not provided in its annual report, the entity is required to serve a copy of the corporate governance statement to the ASX Council (Andriof and McIntosh 2017). ASX Monitoring of Corporate social responsibility The Corporate Social Responsibility is the obligation of a company to be accountable to its key stakeholders while carrying out its operations with the objective of attaining sustainable development from financial aspect as well as from environmental aspects. The corporations shall be benefited with an effective corporate social responsibility framework, as it would improve risk management resulting in balanced management decisions that carries out better business operations (Larcker and Tayan 2015). The Parliamentary Joint Committee (PJC) on Corporations and Financial Services Inquiry recommended that ASX Recommendations on governance should be lengthened to include reporting guidelines on CSR sustainability. The ASX asserted that Principle 7 of the Principles and Recommendation set out by the ASX Council deals with Risk Management. The changes proposed entail corporate social responsibilities that should be considered within the Risk Management framework. The incorporation of CSR within this Principle shall ensure welfare of the community and best interests of the stakeholders. The implementation of the Principles and Recommendations guarantees diversity and ensures that the work environment provides the employees with the accessibility to benefits, training and opportunities. Therefore, the essential elements of corporate social responsibility includes a business practice that entails welfare of community and the stakeholders which are successfully achieved through the Principles and Recommendations set out by the ASX Council. Hence, the monitoring of corporate social responsibility could be effective if the ASX performs the same, as it would be a part of the implementation of its Principles and Recommendations. Need for ASX Principles in Non-listed public companies ASX Corporate governance principles can be useful to non-listed companies for its success and long-term survival. The principles and the recommendations enable the non-listed companies to maintain professionalism in its decision making process, giving them access to variety of expertise (Clapp and Rowlands 2014). Further, the shares of the unlisted entities cannot be liquidated thus, making it risky for the shareholders and financiers to make investments in such entities. This risk can be reduced with a proper governance framework that ensures the investors that investments are safeguarded and well managed. Conclusion There are certain limitations associated with corporate governance like higher administration expense, increased costs etc. However, an effective corporate governance framework within a corporation can enhance its transparency and accountability towards its stakeholders and the community altogether. 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