CORPORATE GOVERNANCE

Topics: Corporate governance, Board of directors, Non-executive director Pages: 15 (2229 words) Published: August 30, 2014
Introduction:
In 2003, the ASX Corporate Governance Council introduced the Principles of Good Corporate Governance and Best Practice Recommendations for all listed companies in Australia. Many listed companies fully or partially adopted the principle. According to the governance code, several studies stated that the code limited individual company’s own opportunity to arrange particular corporate governance that more suited for their circumstances. However, substantive studies and investigations proved that many companies are beneficial to adherence the corporate governance code introduced by ASX Council. This essay will identify how voluntary compliance of governance code has been practiced in Commonwealth bank of Australia (the CBA). Furthermore, the benefit of compliance the governance code for Commonwealth bank will also be analyzed. To achieve the above aims, two major issues will be focused on: board of director and remuneration practice in Commonwealth bank.

Literature review:
Former Chairman of the National Companies and Securities Commission, Henry Bosch made the following useful remark about the importance of good governance: Good corporation governance is desirable and important for two reasons. First, in a well-governed company, the risk of fraud and corporate collapse are reduced, and there are mechanisms that could reduce the likelihood of company controllers enriching themselves at the expense of investors. The second reason is that good corporate governance can increase the creation of wealth by improving the performance of honestly managed and financially sound companies. (Jean Jacques du Plessis,Anil,Mirko 2011).

Rebecca Brown and Tue Gorgens reported several studies in 2009 Treasury Working Paper that found evidence for good corporate governance adding financial value to a company as well. They summarized their findings which focus on the top 300 Australia listed companies and stated companies with better corporate governance outperform poorly governed companies, particularly in relation to earning per share and return on assets. Furthermore, they found that companies that are fully compliant with the AXS Corporate Governance Principles perform better than companies that are only partially compliant. The study result also indicates that companies may find it beneficial to focus on improving corporate governance in the areas of board composition, remuneration, the formation of committees (Rebecca, Tue 2009).

The evidence of the significant of good practice in corporate governance also comes from the OECD Principle of Corporate Governance 2004. The OECD found that corporate governance is a crucial ingredient in improving economic efficiency and growth, as well as enhancing investor confidence (OECD 2004). In order to attract long-term and foreign source of capital, corporate governance arrangement had to be credible, well understood across borders and adheres to internationally accepted principles. Even if CBA did not rely primarily on foreign source of capital, adherence to good practice in corporate governance would help to improve the confidence of domestic investors, reduce the cost of capital, and underpin the good function of financial markets.

Overview of Principles of Good Corporate Governance and Best Practice Recommendations: In 2003, 10 essential principles of good corporate governance were identified: Lay solid foundations for management oversight

The principle recognizes and publishes the respective roles and responsibilities of board and management. Structure the Board to add value
It requires corporations have a board of an effective composition, size and commitment to adequately discharge tis responsibilities and duties. Promote ethical and responsible decision making- actively promote ethical and responsible decision -making. Safeguard integrity in financial reporting

It requires corporations have a structure to independently verify safeguard the integrity...
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