Corporate Governance and Directors †Free Samples to Students

Question: Discuss about the Corporate Governance and Directors. Answer: Introduction Good corporate governance in Australia prominently supports a board which is independent in nature, specifically with regards the companies which are listed in the ASX. As per the ASX Corporate Governance Principles and Recommendations 1, more than 50 percent of the members in the board should not be dependent or related in any way. If the board thinks that it would not follow the said recommendation, then it will have to state the reason behind the said decision[1]. The theory which talks behind the said statement is that the directors should not be prejudiced by anybody or such linkages in any manner which would intervene with the implementation of their imaginative and autonomous judgement. As directors of IPO Insurance Limited, both Peter and Jane are legally bound and accountable to the company under the common law, fiduciary duties and statute law. There responsibility comprises of performing the duties in such a manner so as to ensure that there does not exist any conflict of interest, they perform their duties with care and diligence and for a purpose which is best suited for the health of the company and last but not the least, to use the position they hold and data they possess in a proper manner. Although a board can very well have a mix of executive and non-executive directors as there lies no such proof that a board with independent directors will only perform to the best interest of the company[2]. Executive directors are to perform dual functions, one of a senior executive such as CFO and the other of a board member. In the eyes of law, even if they are employees of a company on a full time basis yet they have to comply with the basic duties and responsibilities entrusted on the directors. The same is a common phenomena in companies which are listed in the stock exchange or even those whose scale of operations are large[3]. The role of an executive director and so that of Peter was a confusing one. The board of directors is a committee which is appointed to work in a manner which would be in the best interest of the shareholders. Generally, it is the CEO who is a part of the executive team of the board but there may be times when the CFO is also appointed as one. Further to this, there are certain duties of being a part of the board which are not apt for an executive director to perform, such as a CFO serving on the audit committee. In Australia, an executive director holds a fiduciary duty towards the company. As per Section 181(1) of the Corporations Act 2001, a director is expected to perform his duties in good faith which is best for the health of the company. Thus Peter should perform his duties as an executive director with due care and diligence, honestly and must not mis-utilize the power of his position as a CFO[4]. As per the court case of Vines, the CFO who is also acting as an executive director, is expected to elevate issues for discussion with the board[5]. Last but not the least, it is the duty of a director to ensure that the financial records are maintained adequately and all the transactions are recorded transparently and correctly, else it would lead to contravention of the Corporations Act 2001. As per the Corporations Act 2001, a non-executive director is a person who is not an employee of the company. However, a non-executive director is not similar to an independent director as the latter not even has any relations with the company but for being a director unlike the former. But even then some of the basic duties which govern the executive directors, does govern the non-executive directors as well. The UKs Higgs Review details non-executive directors as custodians of the governance process.[6] The main elements of the role and responsibility of a non-executive director includes development of strategy for the proposals, monitoring of the performance of the management as to how successful it has been in meeting up with the aims and objectives of the corporation and how honest is the financial information being disclosed in the statements. A non-executive director also is generally a part of various other sub-committees such as Jane being a part of the audit committee. Further as per the Listing Rule 12.7, an audit committee further should only comprise of directors who are not executive in nature[7]. Thus Jane is rightly appointed to be a part of the audit committee. As is understood from above, both the executive and non-executive director i.e. Peter and Jane have breached their duty of care to IPO while adopting the 2016 financial report due to which their share prices suffered and so the shareholders also had to face a huge loss. First and foremost, Peter being a CFO of IPO cannot be a part of the audit committee, although his appointment as an executive director is right. Holding of a position which one is not permitted to is in contravention of the Act[8]. Further, Peter being into the operations of the management has an additional duty to ensure that the books of accounts reveals the correct information, but Belinda the assessor who is also related to Peter does not disclose the actual claims which the company has to meet towards the flood loss. Peter also agreed to the same so as to give a rosy picture which would help in the merger with BMP. Thus Peter in this case has breached his duty of care and diligence towards the shareholders of IP O. He has not performed his functions which would best fit the purpose of the company by hiding the main data which would show the true picture of the profitability[9]. Secondly, being a non-executive director, Jane should have at least acted independently and not accept the financial information. Neither has any provisioning been done nor has the claims management been accounted for properly in the financials. Jane although had raised an eyebrow when the financials were presented, yet the same was endorsed by Jane. He ultimately believed Peter without probing into the matter. Thus being a non-executive director, Jane failed to exercise due care and diligence while agreeing to whatever Peter had to present in the financial report. Until and unless proper evidences were checked, Jane should not have accepted the same even if it was agreed upon by other directors. By not qualifying his opinion to the financial report presented by Peter, Jane as a non-executive director breached his duty of care by not acting successfully as a custodian to the governance process[10]. Bibliography Corporations Act (2001) (Cth) Corporate Governance Principles and Recommendations, (2nd ed), ASX Corporate Governance Council, Sydney, 2010 Directors - What are my duties as a director? Australian Securities and Investment Commission https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-are-my-duties-as-a-director/#3 Flint, Geoffrey, Non-Executive Directors General Law Duty of Care and Delegation of Duty: But do we need a Common Law Duty of Care? (1997) 9Bond Law Review196 https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1132context=blr Higgs D, Review of the Role and Effectivenss of Non-Executive Directors, Department of Trade and Industry, London, 2003, p 11. Lester, Tim and Joanna Yoon,Corporate governance and directors' duties in Australia: overview(January 1, 2017) https://uk.practicallaw.thomsonreuters.com/1-502-9743?transitionType=DefaultcontextData=(sc.Default)firstPage=truebhcp=1 R Baxt,Duties and Responsibilities management of Directors and Officers(20th ed), Australian Institute of Company Directors, Sydney, 2012 Role of non-Executive directors(2016) https://www.companydirectors.com.au/~/media/cd2/resources/director-resources/director-tools/pdf/05446-1-11-mem-director-tools-bc-non-executive-directors_a4_web.ashx General Duties of Directors(January 2013) Australian Institute of Company Directors https://aicd.companydirectors.com.au/resources/all-sectors/roles-duties-and-responsibilities/general-duties-of-directors Vines was the CFO and executive director of GIO Group. See(2003) 48 ACSR 291for the judgment and[2007] NSWCA 75for the April 2007 decision in the NSW Court of Appeal.