ACCT20080_2193 Corporate Governance Assignment

Corporate
Governance
Running Head: ACCT20080_2193 0
Student’s Name

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Executive Summary
The principles and rules related to corporate governance are important for each business
as it shows the path to managers to the management of business activities. It also teaches them
how they should behave with their stakeholders. The report is divided into different headings
such as an introduction where the structure of the report along with the overview of the company
is detailed. Commonwealth Bank of Australia has selected an organization for the discussion. In
the next heading, a brief overview of corporate governance in the bank has been mentioned. 80%
of the directors of the bank are independent. Further, the bank provides fixed as well as variable
remuneration to the directors. The board orientation of the bank has been detailed in the next
heading. The applicable theory of orientation is the stakeholder ethics theory due to the majority
of independent directors to satisfy the need of all the stakeholders as well as the issuance of
voluntary disclosures containing corporate governance. As per the belief of legitimacy theory,
CBA seems to be a legitimate origination due to making voluntary discourses related to the
concern of society such as climate change and credit reporting.

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Contents
Executive Summary.........................................................................................................................1
Introduction and summary of the company.....................................................................................1
Corporate Governance.....................................................................................................................3
Board Orientation............................................................................................................................4
Legitimacy theory............................................................................................................................8
Conclusion.....................................................................................................................................10
References......................................................................................................................................11

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“Introduction and summary of the company”
The company selected for the discussion is the commonwealth bank of Australia (the
bank). The motive of the report is to check how seriously corporate governance has been adopted
by the selected bank. The report shall outline a summary of the company and composition of the
board in addition to the summary of its remuneration report. Further, considering the different
kinds of orientation available, the most likely one shall be discussed. In addition to this, it would
also be checked whether the communication that the company used to carry with its
stakeholders. Lastly, a conclusion shall be drawn upon summarizing the key finding of the
report. The stakeholder ethical theory of board orientation has been applied in the report. To
discuss the essential outcomes of the report this is to state that after reading the same, one will be
able to think of an overview of nature, scope, and level of corporate governance adopted by the
bank.
Before moving the discussion to the structure and orientation of the company's board,
first the nature of the business, industry the same is into and recent history is required to know.
The bank is a leading provider of financial service in the country. To become the most accessible
bank of the country, the bank has extensive policies and initiatives in place. The lead
stakeholders of the company are customers, investors, employees, shareholders, and community.
The company provides a variety of loan that also includes home buying facility. The other
services of the company is to provide home insurance, car insurance, life insurance, and others
kind of insurance. To discuss the history of the bank, this is to state that the same was founded in
1911 and started working in 1912 (Rba.gov.au, 2020). At present, the bank has spread its
business to a limit that the number of shareholders is more than 800,000 and several workers are

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nearly 52,000 (Commbank.com.au, 2020). The headquarter of the company is situated in
Sydney, Australia. Further CBA is a multinational bank and has business across Asia, the United
States, and New Zealand.
Recently the bank has been in news for breaching the business ethics as reported under
the report of the royal commission. Due to the identification of misconducts, the bank had to pay
high penalties (Letts, 2018). To overcome such issues in the future, the bank has welcomed the
new banking code of practice recently and now is looking forward to adopting a stronger
structure of corporate governance.
Corporate Governance
In the board of the bank, there is a total of 10 members on the board of the company. One
out of them is chairperson and another one is managing director and chief executive officer. The
other eight members are the independent non-executive director. If to see the ratio of
independent and non-independent directors, this is to state that 80% of directors are independent.
Reports of chairperson and CEO are also a part of annual report, which provides consideration of
corporate governance and beliefs by the company. Since addressing the stakeholders of the
company, the chairperson considered 2019 a very significant year for in the terms of the
company's governance as the same has addressed many issues related to risk, accountability, and
remediation. This report also outlined some priorities of the bank. The company has initiated
some programs to simplify the bank. Further, another focus of the company is to deliver better
outcomes to the customers. Bank is changing its policies and procedures to ensure that all the
customers are likely to get the best products and services. Chairperson in her report stated that
the bank made a more efficient complaint handling process. It clearly shows that the bank is

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taking steps ahead towards good governance and the main focus of the same is customer
satisfaction. The bank also evolved its remuneration framework to support cultural change. In
2019, another area of focus of the company was to make the governance of non-financial risks
such as the risk of compliance and operational risk (Commbank.com.au, 2019a). The bank has
also developed Group Environmental and Social Policy to pursued its commitment to
sustainability.
Similarly, if to check the message of CEO, again it shows that the bank is taking
necessary steps towards efficient corporate governance. CEO stated that the bank is again going
bank to its initial motive where it had a purpose to become a bank for all the Australians. CEO in
its report has identified the advantages of becoming an easy bank. Since February, the bank is
announcing one community benefit each week. It shows that the same is taking the issue of
corporate governance seriously and taking the fulfillment of the expectations of stakeholders as a
matter of priority. Maintenance of financial performance and delivering better results to
customers through technology and services are another area of focus.
To check the way to provide remuneration to directors/executives, the remuneration
report of the company needs to check. The remuneration framework of the company applies to
group executives as well as to the CEO. These people are entitled to get three kinds of
remuneration. One is fixed remuneration and the other ones are variable remuneration that is of
short term as well as long term. Fixed remuneration includes base superannuation as well as
remuneration. The bank used to pay 50% of STVR in cash, 25% in equity for one year and the
rest 25% as equity for two years (Commbank.com.au, 2019b). On the different side, LTVR used
to pay in shares with n dividend right. Here to state that as the name implies fixed remuneration
does not depend on the performance of board members whereas STVR and LTVR vary

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according to the performance. To maintain ethics and governance, all the members of the
remuneration committee are independent directors who are likely to take individual and
independent decisions.
Board Orientation
Till the above discussion, it seems like the bank is having a good level of business ethics
and governance. Now another thing to check the theories of “board orientation”, which applies to
the bank, is also necessary to know. Before discussing theories of board orientation, first, the
basics of the same needs to be clear. “Board orientation” provides the idea of the approach of a
company's philosophy or the track on which the same works. Majorly three factors defined the
orientation of the board. These factors are board focus, board composition, and key
communications.
Firstly, board composition does mean a combination of internal and external directors. In
other words, this can be stated that such composition refers to the proportion of dependent and
independent directors of the company (García, Jose & Herrero, 2018). Different theories of board
orientation describe the different board structure and composition. For instance, if a company
follows the “stakeholder ethical branch theory”, then the same contains a majority of
independent directors to address issues of all the stakeholders.
Another factor to determine the board orientation is board focus. It is nothing but the
priorities of the board. It shows the areas that are most significant for board focus. Similar to the
composition of the board, different theories of board orientation does have a different area of
focus. For instance, under the stakeholder stewardship theory, the main focus of the boras
remains on internal capital management and growth strategy. The last factor to define and judge

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the board orientation theory of a company is key communication. It refers to a different form of
communication that the board of companies adopts and adheres to their practice. Different board
orientation focuses on different communications. For instance, the Shareholder theory of board
orientation makes it focus on financial reports such as balance sheets, and income statements.
In this manner to state that under different theories of board orientation, the company has
different ratios of directors based on their dependency, a different area of board focus and adopts
different mode of key communications.
Now, moving the focus towards the theories of board orientation this is to mention that
there are five main theories of orientation. These are mentioned as below:-
 “Shareholder agency theory”
 “Shareholder Stewardship theory”
 “Stakeholder Ethical theory”
 “Stakeholder Managerial Branch”
 “Resources theory”
The factors defined by these theories can be understood by looking after the following
diagrams:-

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The picture is explanatory enough in it and can be read and understand easily. For
instance, after looking at the above-mentioned picture, one can understand that under shareholder
agency theory, the board carries a majority of directors who are independent. Further, it focuses
on the board remains around profits, growth, and dividend and lastly, the board chooses
documents such as balance sheet and income statement as a mode of communication.
Now to check the board orientation of commonwealth bank of Australia considering the
rules mentioned in the subjective table, this is to state that the bank is likely to have stakeholder
ethical branch theory (Ferrell, Fraedrich, & Ferrell, 2015). As mentioned above, the company has
nearly 80% of directors on its board who are non-executive and independent. If to have a look
after the board members, apart from chairperson and CEO of the company, eight directors are

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there where most of them have experience of working with other banks and financial companies
in past. They are likely to manage different areas of business and in this manner can satisfy the
need of different stakeholders. These directors do have their diversified experience. For instance,
Robert Whitfield, one of the independent directors of the bank has experience of senior
management in other significant banking and financial companies and therefore is likely to
develop efficient products and services for customers and to satisfy the need of them
(Reuters.com, 2017). Similarly, Wendy Stops, another independent director of the company has
significant experience in the risk management area and can fulfill the requirements and demands
of shareholders. In such a manner, it is clear that the board of the company reflects the diversity
of stakeholders.
Similarly, the area of focus of the board is not centered around one group of stakeholders.
Although the majority of the focus remains on customer satisfaction, the reason for the same is
past experiences of penalty and litigation faced by the bank by the royal commission (Gopalan,
2018). It does not mean that the board is not concerned about the interest of other stakeholders
such as employees of the society. The bank considers the requirement of society in its operations
and the same can be understood by the fact that during 2019, it has done low carbon financing
worth $5.1 billion.
Lastly, the bank made a disclosure committee that often provides many voluntary
disclosures to its stakeholders. The bank also makes voluntary environment disclosure where the
same highlight efforts are taken for climate change. In addition to this, the company also
provides voluntary disclosures related to employee turnover where the same provide details
related to register and retirement of different type of employees. Climate-related financial risk
disclosure is another important type of voluntary disclosure that the company addresses.

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In such a scenario, it is clear that in its working bank believes to follow stakeholder ethical
branch theory.
Legitimacy theory
Legitimacy theory is very much similar to the two other theories such as the managerial
and ethical branches of stakeholder theory. The lead idea of titled theory i.e. legitimacy theory is
associated with social contracts and informs the board why it is important (Schiopoiu Burlea &
Popa, 2013). In other words, this can be stated that under this theory, board members use
voluntary disclosures to maintain the company's legitimacy. A company can deliver the
information through its board for any of the reasons. Sharing the related information with
stakeholders is one of the things to do by the board to line up with the principles of corporate
governance. Voluntary disclosures are the owe which are not necessary to make under any
obligation but the company does so to follow the good practice of keeping its stakeholders
informed. Since voluntary disclosure is one of the factors of stakeholder ethical breach hence the
application of legitimacy theory also seems to be there.
This theory can explain what might have been disclosed and the reason for the same.
Every organization wants a label of legitimate from society in the same works and serve.
Nevertheless, society does consider legitimate to only those companies, which work in the best
interest of society. In this manner, every company, which wants a tag of legitimate, has to show
the efforts the same is taking for society. The theory states that the company should address the
issues and disclosures about the subject that the relevant society is concerned with. To discuss
the application of this theory to the “commonwealth bank of Australia”, this is to state that the
bank is active in an environment where the same has faced penalties in the past. In such a

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situation, the issue for consideration for the relevant authority is related to compliance and
assurance that the bank is not doing anything legal.
Further, to state that the bank supports a comprehensive credit reporting regime which is
a voluntary disclosure (treasury.gov.au, 2015). It clearly shows that even without the application
of any legislation, the company considers the best interest of society. In addition to this, the
company also had its continuous disclosure policy where it can make a voluntary disclosure.
Further, as mentioned above, the company makes the environment and climate change-related to
voluntary disclosures that are another concern of society these days. In this way to state that the
bank understands the concern of the society it is working in a very well manner and is likely to
be legitimate as it informs the society on a timely basis that what the same is doing for those
concerns.
Conclusion
In conclusion, this is to state that the commonwealth bank of Australia provides a range
of products and services to the customers and working for more than 100 years. Most of the
directors of the same are independent and the recent area of focus of the bank is to achieve
customer satisfaction and up gradation in governance level. The most likely theory of bard
orientation that applies to the bank is stakeholder ethical theory since the bank has appointed a
range of directors that address the issues of various stakeholders. In addition to this, the bank
manages all the stakeholders efficiently. Further, it makes voluntary disclosures where most of
them focus on CSR.
Further as applying the provisions of legitimacy theory, the same is likely to be
considered as legitimate as communicate with society through disclosures related to the

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significant concern. Conclusively a good level of governance can be seen in the company where
the same is learning from past experiences and altering the practices which are not ethical.

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References
Commbank.com.au (2020) Our history. Retrieved from: https://www.commbank.com.au/about-
us/our-company/history.html
Commbank.com.au. (2019a) 2019 Annual Report. Retrieved from:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/
annual-reports/CBA-2019-Annual-Report.pdf pp 4
Commbank.com.au. (2019b) 2019 Annual Report. Retrieved from:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/
annual-reports/CBA-2019-Annual-Report.pdf pp 88
Ferrell, O. C., Fraedrich, J., & Ferrell, L. (2015). Chapter 2: Stakeholder relationships, social
responsibility, and corporate governance. In Business Ethics (10th ed., pp. 28-58).
Stamford, CT: Cengage Learning.
García Martín, C. J., & Herrero, B. (2018). Boards of directors: composition and effects on the
performance of the firm. Economic research-Ekonomska istraživanja, 31(1), 1015-1041.
Gopalan, S. 2018) Commonwealth Bank’s $700 million fine will end up punishing its customers.
Retrieved from: https://theconversation.com/commonwealth-banks-700-million-fine-will-
end-up-punishing-its-customers-97918
Letts, S. (2018) Banking royal commission: How much will their misbehaviour cost the banks?
Retrieved from: https://www.abc.net.au/news/2018-09-14/bank-royal-commission-how-
much-will-misbehaviour-cost-the-banks/10246846

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Rba.gov.au. (2020) Origins of the Reserve Bank of Australia. Retrieved from:
https://www.rba.gov.au/education/resources/explainers/origins-of-the-reserve-bank-of-
australia.html
Reuters.com. (2017) BRIEF-Commonwealth Bank Of Australia appoints Robert Whitfield to
Bank’s Board. Retrieved from: https://www.reuters.com/article/brief-commonwealth-
bank-of-australia-app/brief-commonwealth-bank-of-australia-appoints-robert-whitfield-
to-banks-board-idUSFWN1LK00P
Schiopoiu Burlea, A., & Popa, I. (2013). Legitimacy Theory. Encyclopedia Of Corporate Social
Responsibility, 1579-1584. doi: 10.1007/978-3-642-28036-8_471
treasury.gov.au. (2015) Financial System Inquiry Final Report. Retrieved from:
https://treasury.gov.au/sites/default/files/2019-03/C2014-
053_Commonwealth_Bank_of_Australia.pdf