What is corporate governance?

Corporate Governance
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Executive summary
Corporations are an artificial entity where directors and executives play an important role
in a corporate agent. In every company, these agents take decisions on behalf of corporate and
determine the processes and policies, therefore the board structure must be strong. Here this is
necessary to state that the board is not a person itself but these are directors who frame the same.
A diverse board system is a necessity of today’s date and the report has developed in the similar
issue.
The diversity issue in National Australia bank has been discussed firstly with the help of
statements made by its chairperson. The chairperson of the company believes in shareholder
theory of corporate governance. Further possible advantages and disadvantages of board
diversity have been discussed where pros includes better brand image, better and quick decision-
making and delayed decision, trust issues, communication difficulty can be consider as cons.
Some recommendations have also been outlined and lastly a conclusion summarizing report has
mentioned.

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Contents
Executive summary.........................................................................................................................1
Introduction......................................................................................................................................2
National Australia Bank and opposition for diversity.....................................................................2
Corporate governance theories and diversity..................................................................................3
Advantages of board diversity.........................................................................................................4
Disadvantages of board diversity.....................................................................................................5
Recommendations and impact.........................................................................................................7
Conclusion.......................................................................................................................................7
References........................................................................................................................................8

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Introduction
A company has a range of stakeholders that affect its business as well as also gets
affected by it. In such a situation, it is advisable to have a director on the board eligible to
consider the interest of different types of stakeholders.
Board diversity is an emerging issue of corporate governance that refers to having an
optimal mix of expertise, skills, and experience at the board to ensure the ability of the same to
guide strategies of the company. Diversity can be ensured at various grounds such as gender,
ethnicity, age, independence and so on. Diversity seems important to ensure better decision
making as people from different backgrounds and having different attributes can give a range of
advice. The report presented hereby is solely developed on the topic of board diversity where the
main objective is to check the pros and cons of having the same. The objective shall attain with
the help of a company’s example where the issue of diversity has debated and the report shall be
bifurcate among relevant headings.
National Australia Bank and opposition for diversity
The company selected for the discussion hereby is National Australia Bank, which is one
of the four largest financial institutions of Australia. The company believes in having a good mix
of skills at the board since ever but recently some opposition to increasing the board diversity has
been seen that certainly affected overall diversity somewhere. At present, the company does have
five male and three female members at its board that represents gender diversity
(capital.nab.com.au, 2019). The opposition is very recent that has been made by its newly
appointed chairperson Philip Chronicon. Recently he has been in a conversation with John

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Wilson, Member for Fremantle who has asked Chronican about having a representative of
employees at the board of the company. In reply to the query, the chairperson rejected the idea of
doing so by considering the same as abnormal practice (parlinfo.aph.gov.au, 2020). He further
stated that it is not a practice of the Australian market and therefore the company also not
looking after it. Board members cannot represent the interest of one set of stakeholders. This is
not the only area where the chairperson showed his disagreement with the idea of changes in
board structure. However, in addition to the same, he also stated that diversity is important but
the nature of the business demands expertise. (Boyd & Seo, 2019). These statements reflect the
opinion of the chairperson of NAB where he wants the board member to be selected based on
merits and qualifications rather than just by the attributes of the diversity.
Corporate governance theories and diversity
As already mentioned, the concept of board diversity is related to corporate governance
hence the same is likely to be influenced by some of its theories. Whether the board shall be
diverse or not depends on the thinking and rationales of board members. The stakeholder theory
of corporate governance consider each of stakeholder important and demands that the board must
consider the interest of all while taking decisions or develop policies for the entities (Dennehy,
2012). Nevertheless another theory i.e. shareholder theory provides just another concept
considering shareholders as the only important stakeholder. The theory believes that the decision
of the board must always be in favor of shareholders. The statements made by the chairperson
mentioned above seem influenced by shareholder theory where he only wants to have those
members at the board that has expert knowledge of the finance sector and can make better

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financial decisions. Hence to state that the application of shareholders can be understood as a
reason behind the opposition of increasing diversity at NAB.
Advantages of board diversity
The company does already have a good level of gender diversity but if the same would
increase it further or extend the other type of diversity such race or ethnicity, the same can
experience many benefits that are list out as below:-
 If the company would appoint a representative of different stakeholders in their board
then implementing any change in the organization shall be much easy. When the
representative remains on board the same can better present interest of stakeholders
and can develop a decision considering the interest of them in addition to the interest
of the organization. Stakeholders adopt such decisions more positively which is
ultimately beneficial for the company. For instance, if the company has a
representative of minority shareholders, the decision taken for them are more likely to
be accepted by them.
 Better decision making:- This is another benefit of having a well diverse environment
where better decisions can make when people belong to different social backgrounds
and have their different opinions and mindset. The expertise of many people and their
different opinions increases the chances of taking correct decisions. Diversity
enhances the functional abilities of the board where they can make better strategic
decisions (Hagendorff, & Keasey, 2012).
 Increase in reputation:- When stakeholders known that their organization has diverse
board structure where people of different gender, age group, race have given space,
they admire it which increase company's reputation and brand image in the market

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and provide them a competitive advantage. For instance, if to check the diversity
level of the company against corporate governance guidelines of the Australian Stock
Exchange, the same has a good place where it attained 30% gender based diversity
(Kamalnath, 2019).
 Increased ethics:- The diverse board is more likely to pursue ethics in their actions.
The reason behind the same is that the chances of considering ethics as an important
activity enhance when people with different attributes present in a board (Larkin,
2020). Further, if all the directors are selected based on merits, there are chances that
they would only consider those decisions that are profitable of the company or would
think in the same direction. Board diversity reduces such chances and motivates
ethics. Recently the company has found to be involved in some ethical scandals
wherein one of them, it charged a fee for no service (Murdoch & Kaye, 2019). The
ethics of people are influenced by their social attributes and therefore it is expected
that diverse boardroom can manage ethics in a better way.
In addition to the above, many other benefits are also thereof having diversity in the boardroom.
For instance, such boards can keep up with internal problems and market trends.
Disadvantages of board diversity
After the above-mentioned discussion, it is far clear that by adopting diversity, the situation of a
company can be better in many areas. Nevertheless, it would be wrong to state that it does not
have any negative impacts. Some of the likely disadvantages are mentioned as below:-
 Communication difficulty – This is one of the main disadvantages of diversity. When
people from different cultures and age groups are there then it generates a personality

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clash that further becomes a hurdle in proper communication (Frijns, Dodd & Cimerova,
2016). Board members often take differences in opinion as personal attacks and start
hiding agendas from each other. This problem becomes very dangerous for the company.
Hence, if NAB would lead much attention to the gender or other type of diversity then a
communication gap can be there that further may prove adverse for the financial results
of the company.
 Delayed decision:- Due to communication and trust issues, decisions at board level are
likely to be delayed that further causes loss of business opportunities. Whereas on a
different side, when board members are selected based on merits and expertise, they think
in the same way and can take quick business decisions.
 Trust issues: When the board does have members from different social groups, it is likely
to have trust issues with them (Manzoni, Strebel & Barsoux,2010). People with the same
group have strong trust rather than the other groups. If NAB would have more women at
board or people of young age there is a possibility that they can stop trusting decisions or
agendas of members of other gender or old age directors and the company may have to
pay a high cost for the same. A company that too a bank cannot expect to grow in an
environment where board member does not have a sense of understanding and trust with
each other. Similarly, many times independent director does not feel like part of the
company's culture that further leads to trust issues and clashes.
Above mentioned are some demerits that NAB may face if to increase any more diversity at the
board as it has already attained a good level of gender diversity. However, due to these demerits,
the advantages discussed above cannot be ignored.

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Recommendations and impact
These recommendations present certain ways in which diversity can be increased at
NAB. The very first recommendation to make here is that the company, the specific chairperson
must shift the focus to the stakeholder theory of governance and must involve people that can
represent at least some of the major stakeholder groups. Secondly, in the process of appointment
of directors focus must be centered on new skillsets (Khanna, 2019). Recruiting people having
industry-specific people does not lead to diversity and therefore NAB is required to hire people
having a variety of skills. Providing training to emerging leaders also seems a good option.
Training companies can develop chances of appointing these leaders with different skills and
social attributes in the future. It is necessary to know that the issue is not with the supply but is
with the demand itself where some other women directors can also be introduced on the board of
the company to achieve diversity. Higher board diversity is likely to bring good governance in
the company considering the advantages of a different skill set.
Conclusion
To conclude the issue of board diversity discussed here this is to state that NAB has
certainly managed to attain a good diversity. The new chairperson of the company does believe
in having board members based on their expertise but the same cannot lead diversity. The
advantages of the diversity in the company include a better brand image, better and quick
decision-making, increased ethics and so on. An increased level of diversity shows that the
company values people having different social characteristics and believes in following
corporate governance considering interest of all. On the different side, disadvantages include the
delayed decision, trust issues, communication difficulty. By different appointment systems and

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training, increased diversity can ensue at NAB. If the bank wants to increase its diversity the
same would has to re consider its current approach of selecting board members.

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References
Boyd, T. & Seo, B. (2019) ANZ and NAB tackle culture crisis. Retrieved From: -
https://www.afr.com/companies/financial-services/anz-and-nab-face-standing-committee-
20190327-h1cuch
capital.nab.com.au. (2019) Annual Financial Report 2019. Retrieved From: -
http://capital.nab.com.au/docs/2019-Annual-Financial-Report.pdf
Dennehy, E. (2012). Corporate governance - a stakeholder model. International Journal Of
Business Governance And Ethics, 7(2), 83. doi: 10.1504/ijbge.2012.047536
Frijns, B., Dodd, O., & Cimerova, H. (2016) The Downside of Cultural Diversity on Corporate
Boards. Retrieved From: - https://clsbluesky.law.columbia.edu/2016/09/05/the-downside-
of-cultural-diversity-on-corporate-boards/
Hagendorff, J., & Keasey, K. (2012). The value of board diversity in banking: evidence from the
market for corporate control. The European Journal of Finance, 18(1), 41-58.
Kamalnath, A. (2019) Reality check: more women on boards doesn’t guarantee diversity.
Retrieved From: - https://theconversation.com/reality-check-more-women-on-boards-
doesnt-guarantee-diversity-103526
Khanna, S. (2019) 4 strategies to boost board diversity. Retrieved From: - https://www.fm-
magazine.com/news/2019/jul/how-to-boost-corporate-board-diversity-201921186.html

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Larkin, M. B. (2020). Board gender diversity, corporate reputation, and market performance.
International Journal of Banking and Finance, 9(1), 1-26.
Manzoni, J. F., Strebel, P., & Barsoux, J. L. (2010). Why diversity can backfire on company
boards. Wall Street Journal, 25.
Murdoch, S. & Kaye, B. (2019). UPDATE 2-Australia's NAB faces 'fees for no service' lawsuit.
Retrieved From: - https://www.reuters.com/article/nab-regulator-lawsuit/update-2-
australias-nab-faces-fees-for-no-service-lawsuit-idUSL4N28R1JL
parlinfo.aph.gov.au. (2020) Standing Committee on Economics 27/03/2019. Retrieved From: -
https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A
%22committees%2Fcommrep%2Fe199b980-d2e3-431c-8323-
578835e7ec72%2F0002%22