Bellamy's Governance and Financial Performance

This solved assignment focuses on Bellamy's, examining its corporate governance structure and the challenges it faces regarding financial management. It analyzes potential solutions to improve governance effectiveness, including increasing independent directors on the Board. The analysis highlights the importance of effective governance in ensuring accurate financial reporting and sound decision-making for a company like Bellamy's.

Running head: ACCOUNTING AND CORPORATE GOVERNANCE
Accounting and Corporate Governance
Student’s Name:
University Name:
Author Note

1ACCOUNTING AND CORPORATE GOVERNANCE
The Issues
The issue presented in the case study is that the company named Bellamy’s has
performed very poorly in the current financial year therefore the key reasons as to why such a
condition had occurred and the specific areas where the loopholes lie that have led to such a
downfall has to be identified. Whether the company has adhered to the corporate governance
principles laid down by the Australian Securities Exchange has also to be judged and then
relevant solutions are to be provided. Therefore in this study a brief understanding of the
corporate governance principles can be achieved along with its practical applications.
Background
The major issue that led to the downfall of Bellamy’s is a range of expenses that
formed a greater part of the revenue earned by the company in the financial year of 2016.
Marketing and promotion costs contributed to a 4.5% of revenue. This particular expense in
relation to marketing was not at all effective. An unprecedented increase in the cost of
overhead also contributed to the critical condition faced by the company. In order to improve
and come out of the problem the company decided to reconstruct its composition of the
Board of Directors. Moreover the composition of the previously formed Board of Directors
was only partially compliant with the ASX Recommendations (Bellamy’s Annual Report, pg
– 22). As a result the composition of the Board of directors was changed due to the decision
taken in the general meeting held in the date of 28 February 2017 (Tricker & Tricker, 2015).
The composition of the Board was changed on the belief that the new composition will make
the Board more efficient in nature and will result in more business opportunities. The new
composition will make the Board more effective in monitoring the activities of the
management along with the implementation of the organizational plans that aim at increasing
the revenue of the firm.

2ACCOUNTING AND CORPORATE GOVERNANCE
The management of Bellamy’s after the change in the composition of the Board of
Directors stated that the newly created Board of Directors complied with the 3rd edition of the
ASX Governance Principles and Recommendations. The new Board came out with an
optimistic approach and claimed that the Board was constructed in such a way that it would
be able to guide and look out for the management of the company and help it in effective
decision making that would enable the business to get a hold of the long term opportunities of
the market. But there have been certain recommendations that restricted the Board from
exercising its fullest potential. (Van den Berghe, 2012).
A major issue is that as mentioned in the disclosure, half of the Directors are
independent Non-executive Directors (Bellamy’s Annual Report, pg – 22). This evidently
does not comply with the recommendations of the ASX, as according to the
recommendations the majority of the members of the Board should be independent. The
belief of the board that non executive directors bring into the company new perspectives and
viewpoints is not totally accurate. Though it is acceptable that the non executive directors are
experienced as because they have worked in different domains of the same industry and
climbed the ladder to such a high position in the hierarchy of authority, non executive
directors do not really have detailed information about the happenings or tips and tricks of the
organization which is very easily available to an executive director (Kathy Rao, Tilt, &
Lester, 2012). This fact is proven from the information published in the disclosure of the
company that the company having majority of independent non-executive directors is not a
very practical idea because of the size of the Board and the current conditions in which the
company operates (Bellamy’s Annual Report, pg – 23). Moreover the non executive directors
having independence may prove to be more fatal for the company as the entire power is given
to the members who do not belong to the company intrinsically and work due to performance
remunerations (Ahmed & Henry, 2012).

3ACCOUNTING AND CORPORATE GOVERNANCE
In addition to this the performance evaluation of the board also may not have been
done properly. It should be checked whether the requirements of the Charter are met by the
Board of Directors of the company.
Analysis
Now in order to lift the condition the company and to increase the efficiency of the
presently changed Board of Directors Bellamy’s should strictly adhere to the Corporate
Governance Principles and recommendations provided by the council. Therefore the first
governance structure where the company made a mistake is that it did not give prior
importance to the composition of its Board of Directors.
Now in case of Bellamy’s, both majority of the members were not independent and
the most of them were non executive directors. Many experts are of the opinion that hiring
directors from outside the company lead to increase in effectiveness of the work performed
by the Board because it leads to a distinction between the top level decision management and
control. These experts are of the opinion that these outside directors work with more
efficiency because of the fact that they get performance incentives along with increased
reputation due to their work (Corporate Governance and Company, pg – 375). But this is not
completely true as because the outside directors may be very sincere in their work but they
will definitely not have the knowledge about the inner techniques and knits and grits of the
company (Recommendation 2.4, page – 17). Some experts recommend non-executive
directors in the board of members as because they believe that this reduces the chance of non
compliance with the GAAP (Corporate Governance and Company, pg – 375). But this is not
the real case as an executive member is informed about the company in all aspects, that is, he
knows the areas where fraud may occur or the transactions that are more likely to be
subjected to the risk of material misstatement, hence violating the GAAP (Yarram, 2015).

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Bellamy’s though tried its level best to adhere to the Corporate Governance structure
as mentioned by the ASX but also failed in the area where it had to be maintained that the
chairman of the Board should very importantly be independent (Recommendation 2.5, page –
18).
Best Option
According to the principle of the ASX Corporate Governance Council the board of
directors is a very important component of an organization. The Council is of the
recommendation that there is an inverse relationship between the number of directors in a
Board to the performance of the company (Tao & Hutchinson, 2013). This means that more
number of members in the Board will lead to unnecessary confusion and complexities. The
process of decision making will unjustifiably be delayed and this will also lead to
communication issues among the members (Corporate Governance and Company. Pg – 374).
Ultimately too many members will definitely spoil the effectiveness of the Board
(Recommendation 2.1, page – 14). Though some experts are of the opinion that a greater
number of Directors will definitely increase the effectiveness of the Board because of the vast
range of specializations and skills that they have an expertise in but they tend to forget the
fact that only specializing or having a particular skill set will not increase the effectiveness of
the company because ultimately what matters is the accurate implementation of those skill
sets in the interest of the company (Corporate Governance and Company. Pg – 374).
Therefore the recommendation that smaller boards will lead to higher company performance
should be followed by the company (Tao & Hutchinson, 2013).
The second governance structure that should be followed by the company is that the
Board of Directors should ensure clear and transparent reporting on the part of the members
of the Board. It has been mentioned previously in this study that the performance evaluation

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of the Board of Directors has not been done accurately. Though Bellamy’s has tried its level
best to increase and improve the performance of the company and has also for this reason has
decided to change the composition of its board of directors but the company should follow
the governance structure in relation to diligence of the Board, that is the Board should meet at
regular intervals and proper evaluation of the tasks carried out by the Board should be
evaluated. Therefore the company should definitely adhere to the recommendation
(Recommendation 1.6, page - 13) of the Council that states that increase in the number of
board meetings will lead to better performance by the company (Chan, Watson, & Woodliff,
2014).
Thirdly the governance structure that should very importantly be followed by the
company is the governance structure related to the board independence. Here comes two most
important theories that run parallel to each other and has led to a lot of arguments as to which
theory should be followed. These two theories namely are agency theory and stewardship
theory.
Agency theory refers to the theory that mentions that the effectiveness of the Board of
Directors is directly related to the number of independent members in the Board. In simpler
terms the perspective of the agency theory is that the control executed or the power exerted
by the Board members are most effective when they are not controlled by the management of
the company (Biesenthal & Wilden, 2014).
Stewardship theory on the other hand mentions that there should be more executive
directors in comparison to non-executive directors. This is because the executive directors
who have worked inside the organization since long act as stewards and can guide the
company to safe shores as because they are familiar with the knits and grits of the company.

6ACCOUNTING AND CORPORATE GOVERNANCE
Therefore the structure recommended by the Council as arises from the above
discussion is that the Board of Directors should be such that not contain a huge number of
members, the number should be optimum and majority of these members should be
independent of the management of the organization (Recommendation 2.3, page – 16).
Secondly the members who are independent should on priority be the executive members of
the organization and not non-executive members (Nana Yaw Simpson, 2014).
Lastly as recommended by the ASX the board of directors should contain majorly of
independent directors (Corporate Governance and Company, pg – 375). Another
recommendation that should be adhered to by the company is that the company should
incorporate a separation in the roles of the chair person of the Board of Directors and CEO.
When such a situation arises then the matter should be handled with utter importance, this is
because if the role of the CEO becomes heavy on the chairman of the Board then the entire
Board would be dominated by the management (Recommendation 2.5, page – 18). On the
other hand if the role of the chairman of the Board becomes heavy on the CEO then the
needed control on management would again suffer (Yarram & Dollery, 2015).
Recommendation
Therefore all the above mentioned governance structures and recommendations not
only remove the governance policy issues but also filter and increase the accuracy of the
management of the financial statements of the company. But most importantly Bellamy’s
should follow one of the above mentioned governance structures and recommendations in
order to increase the effectiveness of the reconstructed Board of Directors. The particular

7ACCOUNTING AND CORPORATE GOVERNANCE
recommendation should be that the Board of Directors of the company should have more
independent directors (Recommendation 2.4, page 17). This is because having more
independent directors would definitely render to the fact that more and more decisions are
taken or more and more action plans are implemented out of the scope of the management. In
case of freedom from the control of the management, the Board would definitely be able to
get the inputs from the management but there would be no mandatory rule that it would have
to adhere by the decisions of the management. Therefore it will definitely be more effective
in resolving the issues with increased effectiveness, thus proving the decision of change of
composition of the Board of Directors to be correct. In the present situation the management
may be overpowering on the Board but if the recommendation is strictly followed then
Bellamy’s will surely improve its performance.
Limitation
The only limitation that apparently may hamper the working of Bellamy’s is the
control of management over the Board of Directors. The management if imposes much
control over the Board of Directors then very naturally the performance of the Board
becomes poor as because the management will continue putting its demands and wants on the
Board thus hampering its own plan of work.

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