Corporate Governance and Breach of Directors' Duty: A Case Study of Commonwealth Bank of Australia

This report discusses the importance of corporate governance principles and the consequences of failure to comply with them. It also provides a case study of Commonwealth Bank of Australia and its breach of directors' duty. The report includes theories of corporate governance and ethical practices.

BULAW5915 Corporate Law
Running Head: CORPORATE LAW ASSIGNMENT
0
Semester 2 2018 9 / 6 / 2 0 1 8
Student’s Name

CORPORATE LAW ASSIGNMENT 1
Contents
Part A...............................................................................................................................................2
Introduction 2
Corporate Governance statement of the company 2
Royal Commission 3
Unfair Practices and Class Actions: Royal Commission Finding 3
Corporate Governance Breach 4
Conclusion 4
Part B...............................................................................................................................................5
Why Corporate Governance Principles are necessary? 5
Theories 6
Bibliography....................................................................................................................................8
Books 8
Legislation 8
Other Resources 8

CORPORATE LAW ASSIGNMENT 2
Part A
Introduction
Corporate Governance is a topic, which is deeply connected with ethical practices. Corporations
Act, 20011 is the legislation that provides the manner in which an Australian company should
respond to it is stakeholders. These provisions are often known as Corporate Governance. This is
to understand that corporate governance is nothing apart from following good and fair practices,
which are also mentioned under the Corporations Act, 2001. The report attached herewith is
focused on one of the Austrian Company. The Chosen Company here is Commonwealth Bank of
Australia (the bank/CBA). This company is listed on the Austrian Stock Exchange (ASX) and as
the same is a bank, the Royal Commission is considering the operations.
Corporate Governance statement of the company
Similar to any other company, the bank also publishes it is corporate governance statement every
year in which the directors and management of the bank describe that what they think about
governance. According to the Corporate Governance Statement made by this company in the
year the bank is focusing on the financial well-being of it is customers and choosing this way to
ensure a long-term sustainability. Under the Culture heading, the bank has stated that the same is
focused and committed to developing an accountable culture, which not only supports to
business strategies of the bank but also coordinate with law and ethics2. Similar statements were
there in the annual reports for the year 2016 and 2017. By looking after the statements this can
understand that management of the company is concerned about corporate governance and
directors and officers of the same are adhere to follow good practices and governance is their
day-to-day activities.
However, the other side of the coin is also significant to study. Apart from the written
statements, the reality is more important to know. In the recent years, many of the Austrian
banks have reported negatively and it has come into light that they are not co-operating with the
fair practices. Commonwealth Bank of Australia is also one of them. After that in the year 2017,
Royal commission has established.
1 Corporations Act, 2001 (Cth)
2 commbank.com.au, Corporate Governance Statement (2018)
<https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/corporate-profile/corporate-
governance/CBA-2018-Corporate-Governance-Statement.pdf>.

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Royal Commission
This commission checks out the suspicious activities in bank, finance, and superannuation
services industry. The chosen company i.e. Commonwealth Bank of Australia has acted
negatively in the area of corporate governance. The following discussion provides a justification
for this statement.
Unfair Practices and Class Actions: Royal Commission Finding
Recently in the year 2017, Australian Transaction Reports and Analysis Centre (hereinafter
mentioned as AUSTRAC) has made a claim against the Commonwealth Bank of Australia
(hereinafter referred as a bank), in which it has been reported that the bank failed to make follow
Federal Government's anti-money policies. The authority claimed that the company has not made
a disclosure regarding around 54000 account transaction that consisted of value more than
$100003. These transactions were required to be reported. Each such transaction if proving to be
breached could attract the penalty $18 million. In this manner, the bank was in danger to pay
hundreds of billions of dollars in penalty. As soon as this news has published the market price of
shares of the company fall down very speedily. The shareholders of the company have faced a
heavy lose cause of such a fall in the prices of shares of the company. The reason behind such
fall was the negative impression on the reputation and financial position of the company cause of
heavy penalties. Later on, shareholders have initiated a class action against this company4. In this
settlement, the bank becomes agreed to pay $700 million as a penalty5. In addition to this, when
Royal Commission has alleged many of otter banks about unethical practice, CBA also accepted
that the same has charged the customers for no services. The commission further found that the
bank has also breached the provision of law by outlining some accounts and investment products
as commission free and later on charging commission and keeping them in bank account6.
Corporate Governance Breach
3 James Hancock, Commonwealth bank Shareholders launch class action over money- laundering scandal (9
October 2017) <http://www.abc.net.au/news/2017-10-09/commonwealth-bank-shareholder-class-action-set-to-get-
underway/9029988>.
4 commbank.com.au, Commonwealth Bank Lodges Response to amended AUSTRAC and class action claims (23
FEBRUARY 2018) < https://www.commbank.com.au/guidance/newsroom/response-to-amended-AUSTRAC-and-
class-action-claims-201802.html>.
5 Austrac.gov.au, AUSTRAC and CBA agree $700m penalty (4 June 2018)
<http://www.austrac.gov.au/media/media-releases/austrac-and-cba-agree-700m-penalty>.
6 Sarah Danckert, Clancy Yeates and Ruth Williams, NAB, CBA recommended for criminal charges in commission
findings (24 August 2018) < https://www.smh.com.au/business/banking-and-finance/nab-cba-recommended-for-
criminal-charges-in-commission-findings-20180824-p4zzna.html>.

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After discussing the previously mentioned case, it is far clear that the bank failed to perform
good corporate governance practices. The two major issues and breach were there. One is a
breach of director duty and another one is a failure to submit a continuous disclosure.
Breach of director Duty
Division 1 of Corporations Act, 2001 provides the duties and requirements that every director
and officer need to perform. Section 181 is a significant section, which says that directors and
officers of the company must act in good faith and in the best interest of the company7. This
section further states that these officers perform their duties for a proper and meaningful purpose.
In addition to this section, section 182 requires the director and officers of the company to not to
take unfair advantage of their position8. Further section 2M States that director of the company
must inform the shareholders of every possible aspect of the financial results of the company. By
reviewing the aforementioned cases, this can be stated that the director of the bank has breached
their duties prescribed under corporations act, 2001. Being the director of the company, they
must be aware of non-compliances and they must ensure the prevention of such issues.
ASX Principles
Australian Stock Exchange has published some recommendations and 8 principles on corporate
governance. Every company of the nation whose securities are listed on an open platform is
required to meet out the requirements of these principles. According to the principles issued by
ASX, director and officers of the company should adhere to good and ethical practices. Further
forth principle says that every listed company should develop a procedure for reporting to
authorities. As CBA has done many of the unethical conducts, this can be stated that the bank
has noy followed good governance practices. By charging the accounts for no fee and in an
unreasonable manner, the bank is proven for breach of ASX principles.
Conclusion
In conclusion, of the discussion, this can be stated that the bank is not adhering to the principles
of good corporate governance. Although the bank is trying to develop a good governance culture,
the same is missing somewhere in the operations.
Part B
Why Corporate Governance Principles are necessary?
7 William Roberts, Directors' Duties (2018) <
https://www.williamroberts.com.au/News-and-Resources/News/Articles/Directors--Duties>.
8 Austlii, Corporations Act 2001 - SECT 182 (2018) <
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s182.html>.

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There is a need to understand that what the corporate governance is. This is to be stated that this
is a system and a set of rules, which provides the manner in which a person required to do the
conduct. This is nearly related to ethics. Further, why corporate governance is a significant topic
is also an important topic to know. This is a topic which enhances good practices in an
organization, this is the reason for that the authorities such as the Australian Securities and
Investments Commission and Austrian Stock exchanges ensure that every company follows this.
The importance of Corporate Governance can also be understood by reviewing the consequences
in cases of failure. Some serious results can come to the company when the same becomes fail to
perform the corporate governance. These consequences as follow:-
1. Economic Consequences: - Penalties and fines will be there for sure in cases of non-
compliance and failure of performing corporate governance. Companies, when not
complies with the requirements of corporate governance, become liable to pay a heavy
amount in the form of penalty to government or damages to the victim parties, which
brings an adverse impact on the economic condition of the company9. In the case of
Commonwealth bank also, a heavy penalty has levied on the company.
2. Social Consequences: - The issue of failure to perform corporate governance also brings
out some social impacts. Trust and reputation are the aspects, which develops a company
in a long term. When a case comes out in the news in relation to non-compliances of
corporate governance principles, then trust and reputation of the company diminish.
People of Australia had a huge faith in commonwealth bank, but after the scandal and
beaches of compliances, the trust level of this bank has diminished.
3. Political Consequences: - Cause of Poor Corporate Governance, the government of the
country and authorities thereof need to make amendments to the policies. These cases
forced the authorities to make further restricted provisions and policies, which results in a
prevention of business growth in the nation.
4. Legal Consequences: - Governance is all related to Law. Sometimes the act of
management of the company is of illegal nature. In such circumstances, the law attracts
challenges. Breaches in the same become so casual10. Many of the cases are there which
made a new law in the area and acted similarly to a legal precedent. For instance, the
non-disclosure of some transactions by the management of the Commonwealth Bank of
Australia, bring the issue of breach of the law.
The above are the consequences of poor corporate governance. The reputation of the bank
has decreased to a significant level after the said class actions and cases against the bank.
This is the reason that authorities continuously focuses on following good corporate
9 Leng Jing, Corporate Governance and Financial Reform in China's Transition Economy (Hong Kong University
Press, 2009) 28.
10 Caputo lawyers, Consequences of Poor Corporate Governance (14 January 2014) <
http://www.caputolawyers.com.au/consequences-of-poor-corporate-governance/>.

CORPORATE LAW ASSIGNMENT 6
governance. Australian Stock Exchange has developed principles and recommendations on
corporate governance11. These principles provide a way, a guide for directors and officers of
the company, and tell them how to behave and act while doing business activities.
Theories
As corporate governance is a topic related to ethics, some of the ethical theories also apply to the
corporate governance12. These theories are a branch of philosophy, which describes that what is
correct or incorrect and provides implications. They provide different concepts and beliefs. Two
most important theories of Corporate Governance are stated below-
1. Shareholder Theory: - Milton Friedman originally introduced this theory13. This theory
only keeps shareholders into consideration. According to the theory, shareholders are the
most important person in an organization. They are the persons who take a part in the
profits of the company and introduce the capital to the same14. Without a proper capital
amount, a company cannot run it is business; this is the reason that shareholders are a
significant group of a company. According to this theory, boards of directors have a
prima facie duty to maximize the profits and economic interest of the shareholders15. In
the case of CBA, because of the conduct of bank, share price of the same has fallen down
and shareholder had to suffer with a huge loss. As shareholder theory demands that
interest of shareholder should be priority, CBA has not worked according to this theory
as the bank has not reviewed the long term effect of unethical practices on value of
shareholders.
2. Stakeholder Theory: - As the name implies, this theory is related to a stakeholder of a
company. The theory says that the focus of the management of the company must not be
only on shareholders. A stakeholder is a wider term and includes many of the group of
people such as employee, customers, government, and others. The theory believes that a
company cannot run in a long way if the same do not consider the interest of other
stakeholders apart from shareholders16. As per this theory, the board of directors of a
company works to check the interest of every possible stakeholder and considers the
11 ASX Corporate Governance Council, Corporate Governance Principles and Recommendations (2018)
<https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf>.
12 BPP Learning Media, CIMA BA4 Fundamentals of Ethics, Corporate Governance and Business Law (BPP
Learning Media, 2016).
13 Corplaw Blog, Shareholder & Stakeholder Theories Of Corporate Governance (16 July 2013) <
http://www.corplaw.ie/blog/bid/317212/Shareholder-Stakeholder-Theories-Of-Corporate-Governance>.
14 Lawrence Hsieh, Long-term value and shareholder theory of corporate governance (12 January 2016) <
https://www.eiuperspectives.economist.com/strategy-leadership/long-term-value-and-shareholder-theory-corporate-
governance>.
15 MBA Program Journey, The Social Responsibility of Business is to Increase its Profits (16 August 2010) <
https://livingmba.wordpress.com/tag/shareholders-theory/>
16 PubMed Health, Theories about boards (2018) < https://www.ncbi.nlm.nih.gov/pubmedhealth/PMH0081078/>.

CORPORATE LAW ASSIGNMENT 7
same while making plans and policies of the company. In such a scenario, it becomes a
difficult situation for the company and the same can have to face serious consequences17.
CBA has also breached this theory. By non-reporting suspicious transaction to the
authority CBA has not considered the interest of government and authority here. Further,
by charging commission for no commission accounts was also an act that CBA has not
done outside of the interest of it is customers.
Bibliography
Books
17 The Business professor, Stakeholder Theory of Corporate Governance (2018) <
https://thebusinessprofessor.com/knowledge-base/stakeholder-theory-of-corporate-governance/>.

CORPORATE LAW ASSIGNMENT 8
BPP Learning Media, CIMA BA4 Fundamentals of Ethics, Corporate Governance and Business
Law (BPP Learning Media, 2016).
Leng Jing, Corporate Governance and Financial Reform in China's Transition Economy (Hong
Kong University Press, 2009) 28.
Legislation
Corporations Act, 2001 (Cth)
Other Resources
ASX Corporate Governance Council, Corporate Governance Principles and Recommendations
(2018) <https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-
recommendations-3rd-edn.pdf>.
Austlii, Corporations Act 2001 - SECT 182 (2018) <
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s182.html>.
Caputo lawyers, Consequences of Poor Corporate Governance (14 January 2014) <
http://www.caputolawyers.com.au/consequences-of-poor-corporate-governance/>.
commbank.com.au, Commonwealth Bank Lodges Response to amended AUSTRAC and class
action claims (23 FEBRUARY 2018) <
https://www.commbank.com.au/guidance/newsroom/response-to-amended-AUSTRAC-and-
class-action-claims-201802.html>.

CORPORATE LAW ASSIGNMENT 9
commbank.com.au, Corporate Governance Statement (2018)
<https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/corporate-
profile/corporate-governance/CBA-2018-Corporate-Governance-Statement.pdf>.
Corplaw Blog, Shareholder & Stakeholder Theories Of Corporate Governance (16 July 2013) <
http://www.corplaw.ie/blog/bid/317212/Shareholder-Stakeholder-Theories-Of-Corporate-
Governance>.
James Hancock, Commonwealth bank Shareholders launch class action over money- laundering
scandal (9 October 2017) <http://www.abc.net.au/news/2017-10-09/commonwealth-bank-
shareholder-class-action-set-to-get-underway/9029988>.
Lawrence Hsieh, Long-term value and shareholder theory of corporate governance (12 January
2016) < https://www.eiuperspectives.economist.com/strategy-leadership/long-term-value-and-
shareholder-theory-corporate-governance>.
MBA Program Journey, The Social Responsibility of Business is to Increase its Profit (16 August
2010) < https://livingmba.wordpress.com/tag/shareholders-theory/>
PubMed Health, Theories about boards (2018) <
https://www.ncbi.nlm.nih.gov/pubmedhealth/PMH0081078/>.
Sarah Danckert, Clancy Yeates and Ruth Williams, NAB, CBA recommended for criminal
charges in commission findings (24 August 2018) < https://www.smh.com.au/business/banking-
and-finance/nab-cba-recommended-for-criminal-charges-in-commission-findings-20180824-
p4zzna.html>.
The Business professor, Stakeholder Theory of Corporate Governance (2018) <
https://thebusinessprofessor.com/knowledge-base/stakeholder-theory-of-corporate-governance/>.

CORPORATE LAW ASSIGNMENT 10
William Roberts, Directors' Duties (2018) < https://www.williamroberts.com.au/News-and-
Resources/News/Articles/Directors--Duties>.