corporate governance.docx

Title SheetThe Report QuestionCorporate governance, how a company is run, is becoming an important issue for companies to consider due to numerous recent high-profile corporate failures. As a result, businesses are starting to use a corporate governance statement as a way to communicate their corporate governance practices and promote their ethical credentials to interested parties, such as shareholders. This statement is often incorporated into the companys annual report. To assist with the development of good corporate governance and clear corporate governance statements the ASX Corporate Governance Council has developed a set of principles and recommendations to guide companies.What is corporate governance and why is it an important issue for companies? Select the principles in the ASX Corporate Governance Councils Corporate Governance Principles and Recommendations that are most relevant to your BABC001 industry. For each principle you select, explain the main focus of the principle and why it is relevant to your BABC001 industry. Evaluate how well your BABC001 companys corporate governance statement communicates information on the principles you selected.Table of contentsEXECUTIVE SUMMARYI1. INTRODUCTION12. THE DEFINITION OF CORPORATE GOVERNANCE AND ITS IMPORTANCE12.1 Definition of corporate governance12.2 The importance of corporate governance23. PRINCIPLES CLOSELY RELATED TO FINANCIAL SERVICESS23.1 Background of financial services23.2 Ethical and responsible decision making33.3 Risk management33.4 Fair and responsible remuneration34. EVALUATION IMPLEMENTATION OF CORPORATE GOVERNANCE IN ANZ44.1 Background of ANZ44.2 Overall evaluation44.3 Appropriate decision making44.4 Risk management54.5 Remuneration policy55. CONCLUSION56. REFERENCE6EXECUTIVE SUMMARYThe purpose of this report was to introduce corporate governance and its importance, together with the ASX principles closely related to financial servicess and evaluation of the ANZs corporate governance statement. This report is based on academic paper and the ASX guideline. Findings indicate that corporate governance refers to the set of mechanisms which can influence the decision making process and the ASX principle 3, 7, 8 are closely related to financial services and ANZs operation. In conclusion, corporate governance is beneficial for company to operate smoothly, gain public reputation and avoid potential hazard. In addition, financial services and ANZ should in particular pay close attention to ethical decision making, risk management and fair remuneration.I1. INTRODUCTIONDue to the economic crisis in 2008, companies in financial services value more on corporate governance in recent years. Corporate governance is thought highly of in financial services and many financial enterprises establish their own corporate governance regulations. However, problems still exist in their operation and they do not fully comply with the corporate governance which they state. Although corporate governance is a powerful tool for financial enterprises to keep their operation smoothly, they also need to evaluate its implementation of corporate governance. This report will define corporate governance, explain the importance of corporate governance, introduce the ASX principles which are closely related to financial industry, and evaluate the implementation of corporate governance in ANZ.2. THE DEFINITION OF CORPORATE GOVERNANCE AND ITS IMPORTANCEIn order to avoid scandals like earnings management happening again, company intensifies the supervision of the administration itself. Corporate governance then spreads.2.1 Definition of corporate governance According to the ASX (2010), corporate governance is interpreted as the skeleton of companies internal and external regulations, together with the power implementation and distribution. It contains companys objective, risk management and appropriate decision-making. Additionally, corporate governance involves the set of mechanisms that influence the decisions made by managers when there is a separation of ownership and control (Larcker et al., 2004).2.2 The importance of corporate governanceCorporate governance aims at creating value for companies. Effective corporate governance can help companies obtain public trust and confidence. It is important for companies to announce a strong promise that they can deal well enough with agency problems to convince public and gain reputation in the public (Bitner & Dasher, 2007). In addition, appropriate corporate governance can help companies operate smoothly. Bitner & Dasher (2007, para4) point out that well implemented corporate governance can help companies balance risks and profits. Besides reputation and better operation, corporate governance can also help companies avoid potential hazard. According to Licciardo (2011, para9), appropriate corporate governance framework can contribute to companies avoidance of potential loss of reputation and confidence in management, helping companies finance easier. Therefore, appropriate corporate governance can lead companies to better reputation, operation and avoidance of unnecessary loss, which is important to companies.3. PRINCIPLES CLOSELY RELATED TO FINANCIAL SERVICESS3.1 Background of financial servicesFormal financial services can date back to 17th century when the first national century bank, Bank of England, established in 1694. At first, financial institutions only provide financial support for government. Due to the increasing demand of financial capital, financial services began to provide personal service. Now, financial services have been one of the most important industries in the world. However, owing to the characteristic of high risk, financial services involved into many troubles for example the economic crisis. To ensure the normal development, financial services should act tighter on the compliance of the ASX principles.3.2 Ethical and responsible decision makingAccording to the ASX principles 3 (2010), companies should proactively implement ethical and responsible decision making. Bitner & Dasher (2007) point out that it is the first priority to create a culture of dissent, which means conduct code. Through creating conduct code, companies can establish an integrity value based situation for the whole companies, facilitating responsible decision making. It may be true that irresponsible strategy can gain short-term benefit for companies. However, companies should not be myopic. They should focus on long-term interest, which is based on the trust of the public. Bhattacharya et al. (2008) point out that companies with positive reputation can gain reputation shield to deflect negative sentiment. In order to obtain long-term benefits, companies should do responsible decision making.3.3 Risk managementIn economic crisis, many banks went bankruptcy due to its high risk investment. Therefore, it is critical to promote adequate risk management in financial services. The ASX principle 7 (2010) requires that companies should establish adequate risk management and internal control. Companies should use the firms risk appetite to determine which risk should be accepted and which should be mitigated or avoided. According to Gates et al. (2012), risk management adds value through removing tail outcomes and reducing earnings volatility. Financial service industry is a high risk industry, which is easy to create economic bubble. Thus, appropriate risk management can help companies avoid bankruptcy and reducing its potential losses.3.4 Fair and responsible remunerationIn recent years, many remuneration discriminations happened in financial services. Top managers huge compensation is likely to harm shareholder value creation (Goergen & Renneboog, 2011). The ASX principle 8 (2010) recommends that the remuneration should be reasonable and clearly related to performance. However, although during economic crisis banking suffered a lot, big banks like JPMorgan and Goldman Sachs still paid their executives high salary which is about one thousand times as much as ordinary staff get. The huge difference in salary between executives and ordinary staff may result in dissatisfaction. In addition, according to Goergen and Renneboog (2011), top managers may receive compensation before they run companies well, which will aggravate the dissatisfaction. Companies in financial services should focus more on this issue than other industry, due to the fact that they may easily create huge difference in salary.4. EVALUATION IMPLEMENTATION OF CORPORATE GOVERNANCE IN ANZ4.1 Background of ANZAustralia & New Zealand Banking Group Limited (ANZ) is one of the Big Four banks in Australia. Its history can date back to 19th century. Now, ANZ has a complete corporate governance and perform well.4.2 Overall evaluationIn ANZs corporate governance statement, it announces that ANZ has fully complied with all the ASX principles and all the principles are mentioned. ANZ shows comprehensive understanding of the ASX principles and set out effective regulations based on the ASX principles. Additionally, the language ANZ used in its corporate governance statement is easy to understand. In general, ANZ performs well in corporate governance statement.4.3 Appropriate decision makingIn order to meet the ASX principle 3 (2010) which requires companies do responsible decision, ANZ (2013) sets two main conduct and ethics codes. One is for employees and the other is for non-executive directors. Its code requires that all members in ANZ should perform honesty and integrity whenever and wherever they are. From ANZs announcement, ANZ has applied the ASX principles to its operations, which is a satisfied scenario for ANZ to make better achievement.4.4 Risk managementRisk management in ANZ is famous in banking. Its risk management was voted as the best practice in global banking. The ASX principle 7 (2010) asks companies to establish adequate risk management and ANZ does distinguished. ANZ (2013) thinks that risks related to financial instruments are an important part of risks in its operation. ANZ classifies risks into different sections and explain its strategies in detail in its annual report. Its main focus is on the credit risk and ANZ uses concentration analysis to evaluate the risk. In this section, ANZ performs distinguished4.5 Remuneration policyThe ASX principle 8 (2010) requires company to ensure the fairness of remuneration. ANZ divides remuneration into three parts: fixed remuneration, short term incentive and long term incentive (ANZ Annual report, 2013). ANZ pays salary through cash and deferred equity. The short term and long term incentive paid based on the performance of staff, which ensures the fairness of remuneration. The board chairmans salary is only ten times as the average salary (ANZ Annual report, 2013), which is much smaller than its banking peer. It can be seen that ANZ has complied with the ASX principle 8 and implements well.5. CONCLUSIONIn conclusion, corporate governance refers to the system of internal and external control as well as the responsibility distribution and evaluation. It is important for companies to run better operation. The ASX principles 3, 7 and 8 are most important and closely linked to financial services. Many companies establish their own corporate governance. However problems still exist in financial services. Better compliance with the ASX principles is needed. Australia & New Zealand B