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Corporate Governance Practices | Accounting Sample | LL4BX

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Question

  • Assume you have been engaged as a corporate governance consultant to a board of directors of a public company listed on the stock exchange.  Your assignment is to prepare a report to be submitted to the Chairman of the board explaining and discussing the roles, duties and responsibilities of the company’s directors. Your report should contain specific recommendations on the roles of non-executive directors and the management of their relationship with executive directors and shareholders.   The Chairman has specifically indicated that she intends to make your report available to shareholders of the company and that the document will be published on the company’s web site.
  • Assume you have been employed as a corporate governance consultant by the Australian Institute of Company Directors (AICD).  The AICD is concerned that the alleged excessive remuneration paid to CEOs is undermining the perceived quality and reputation of company boards, and further is creating conflict between boards and shareholders.  Your assignment is to prepare a report to be submitted to the AICD evaluating the evidence that CEOs and executive remuneration is not aligned with corporate performance.  In your report the AICD has asked you to make recommendations for improving the current corporate governance practices relating to setting, reporting and approving CEO and executive remuneration. 

Solution

Introduction:

In Australia, public-listed companies are highly regulated. Stock markets and their listing rules are of the most vital significance for public-listed companies. Australian Securities Exchange (ASX) and Corporations Act 2001 influence the framework of Corporate Governance, which is the main source of these regulations. This report explores important aspects of corporate governance and, in particular, it focuses on the roles and duties of the company’s directors in corporate governance. 

According to the report published on Financial Aspects of Corporate Governance (1992) by Sir Adrian Cadbury, Corporate Governance is defined as ‘the system by which companies are directed, governed and controlled’. The definition reflects the operational perspective of the corporate governance and further emphasizes that the three main parties involved in corporate governance thinking and practices are-

  • The Shareholders
  • The Board of Directors and
  • The Management

Roles, duties and responsibilities of the company’s directors:

Director of the company is generally responsible to establish systems and processes to control and govern the business performance and the compliance performance of the company. As per relevant sections of the corporation law, the scope of the director’s duties is divided into Fiduciary duties and statutory duties.

Fiduciary Duties:

Directors are fiduciary agents of the company. They own a position of trust and thus their power is to be exercised for the benefit of the company as a whole and not to any particular group of stakeholder.

Duty to act in good faith in the best interest of the corporation and for a proper use:  It is important to note that the definition of ‘proper purpose’ and the ‘company’s best interest’ are applied in conjunction in many cases. For example: The court can still review the case of an exercise of power in good faith (depending on the director’s best judgement) to serve the company’s interest if the ‘purpose’ to use the power is found irrelevant.  (Ramsay, 1997)

Duty of care, skill and diligence: Essential duties of a director are, to be honest, diligent and competent in the role as a director. They must discharge their duties and exercise powers with the care and assiduity that a common person would exercise if they were to assume the role of company director in the same circumstances. However, the position of a director and the duties which they are expected to do vary based on the size and complexity of the business. For complex and large business carried out by a public-listed company, directors are entitled to rely

Other stakeholders such as external auditors, employees, consumers, etc. also play a crucial role. From a relationship perspective, the distribution of rights and responsibilities of the 3 main parties in the organization are specified by the rules and procedures defined in the corporate governance structure. (Tricker, 2015)

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Roles, duties and responsibilities of the company’s directors:

Director of the company is generally responsible to establish systems and processes to control and govern the business performance and the compliance performance of the company. As per relevant sections of the corporation law, the scope of the director’s duties is divided into Fiduciary duties and statutory duties.

Fiduciary Duties:

Directors are fiduciary agents of the company. They own a position of trust and thus their power is to be exercised for the benefit of the company as a whole and not to any particular group of stakeholder.

Duty to act in good faith in the best interest of the corporation and for a proper use:  It is important to note that the definition of ‘proper purpose’ and the ‘company’s best interest’ are applied in conjunction in many cases. For example: The court can still review the case of an exercise of power in good faith (depending on the director’s best judgement) to serve the company’s interest if the ‘purpose’ to use the power is found irrelevant.  (Ramsay, 1997)

Duty of care, skill and diligence: Essential duties of a director are, to be honest, diligent and competent in the role as a director. They must discharge their duties and exercise powers with the care and assiduity that a common person would exercise if they were to assume the role of company director in the same circumstances. However, the position of a director and the duties which they are expected to do vary based on the size and complexity of the business. For complex and large business carried out by a public-listed company, directors are entitled to rely

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