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Impact of Corporate Governance on Investment Decisions - Expert Assignment Help

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Question

Assessment Task 2

Part 1: Case Study

'Directors warn the buck stops with chief executives in the latest salvo in the business culture wars between government, regulators and boards.

Australian Securities Commission chairman Greg Medcraft last week said that accusations he wants to change the law to hold directors criminally liable for wayward culture are a misunderstanding and he is not pushing for changes 'at this stage'.

Tensions between directors and ASIC have escalated following the regulator's cases against Westpac Banking Corp and ANZ Banking Group and Labor's call's for a royal commission into the banking sector which have given rise to accusations the regulator is seeking to become the culture police.

Directors including Qantas Airways' Jacqueline Hey, Australia Post chairman John Stanhope and founder and director of IBIS World Phil Ruthven told an Australian Institute of Company

Directors lunch on Wednesday that while boards can 'set the right tone', the buck stops with the CEO.

'CEOs set culture not boards,' Mr Ruthven said.

Patrick Durkin 'Directors of boards warn that buck stops with CEOs' The Australian Financial Review Thursday 14 April 2016, p.8

Required: 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 analysing how the company should define and delineate the separate roles, duties and responsibilities of the company's board of directors from those of the CEO. Your report should contain specific recommendations on the separate roles of directors and the CEO. 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.

Part 2: Case Study

'Since detailed data on corporate governance indicators first became widely available about 25 years ago, evidence has emerged that simple top-down strategies favoring well-run companies could yield outperformance. However, probably because this effect became known to many investors, that simple approach seems to be no longer effective. None the less, we do identify some ways in which investors can still adopt strategies that may be able to take advantage of corporate governance indicators'.

Required: Assume you have been employed as a corporate governance consultant by the Australian Institute of Company Directors (AICD). The AICD is concerned that investors do not value good corporate governance in their investment decision-making models. Your assignment is to prepare a report to be submitted to the AICD evaluating the evidence that good corporate governance is positively associated with high investor returns. In your report the AICD has asked you to make recommendations so that companies with good corporate governance practices can align these practices to maximise their investor returns.

Solution

The growth of institutional investors in Australia is phenomenal with the introduction of superannuation funds. The investor landscape is further supported by the set up of industry bodies – the Investment and Financial Services Association (IFSA) and the Australian Council of Superannuation Investors (ACSI). The primary objectives of industry bodies are to promote investments, facilitate investment decisions and ensure investor rights. Institutional investors in Australia have begun to give more importance to being diligent and active in exercising their rights. The investors focus on corporate governance as a factor of a company's performance is gaining momentum. The presence of good corporate governance practice assists investors in their decision making as a company with well–structured monitoring and compliance framework to avoid risks and related costs and ensure long-term shareholder returns.

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Companies that ensure quality improvements to their corporate governance policies are found to have a higher stock return (Bushee & Noe 2000). As corporate governance practices are linked with corporate social responsibility and shareholder value creation, Australian companies are widely adopting it (Narracott & Bristow 2001). Institutional investors have become a major part of equity markets with their ability to control the Board or management activities through their shareholding and voting rights (Gillan & Starks 2003).

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