Corporate Governance Principles and Consequences for Unethical Practices in Commonwealth Bank

This article discusses the principles of corporate governance and the consequences faced by Commonwealth Bank for unethical practices. It also explores the legal, social, economic, and political consequences faced by financial advisers for charging fees from dead clients.

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Corporations Act 2001

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Answer A
Issue
Whether Common Wealth bank complied with the principles of the good corporate governance
or not in context of the hearings conducted by the Royal Commission related to the Bank
charged fees to dead clients
Law
The Corporate Governance is the concept which defines the rules, relationships and events
within which organizations control and exercise their authorities under the organizations. It
includes those mechanisms through which organizations and those who control the organizations
are held accountable. The main aim of the corporate governance is to promote the confidence of
investors, which is necessary for the abilities of the organizations which are listed on the ASX
(Williamson,1996).
Duties of directors under the corporate governance is considered as the important concept, and
these duties mainly focus on the duty of care, skill, and diligence owned by directors and also the
duty of directors to act honestly and in the best interest of the organizations. In other words,
corporate governance recognizes the two important duties of the directors in Australia, and both
the duties are also recognized by the Corporation Act 2001. Both the duties of directors which
are recognized by the corporate governance are stated below-
 Duty to act with due care and diligence, which means, directors while taking the actions
on behalf of the business need to evaluate all the aspects. This duty of director is also
recognized by Corporation Act 2001 under section 180.
 Duty to act with honesty and in the best interest of the organization, as this recognized
under section 181 of the Corporation Act 2001.
Both the duties of directors includes the concept of the best judgement rule, which means,
directors of the organization need to complied with the following regulations while taking any
action-
 Directors must take their business judgement with good faith and also for the right
purpose. In other words, while taking any action directors must hold the good intention.
 Directors must not hold any material personal interest in the subject matter, which means,
they must not take the action for their own personal benefit.
 Directors must hold the exact knowledge about the subject matter u to the extent which
directors of the organization feels right.
 Directors must believe that the business judgement taken by them ensures the best
interest of the organization also.
ASX Corporate Governance principles give number of recommendations which must be
complied by the organizations listed on ASX. Principle 3 of the ASX states that organization
needs to take ethical and responsible decision in their organizations (ASX, n.d.}. Organization
needs to promote the ethical and reasonable decision making in their organization, and also
ensure that they are participating in the same in active manner. This principle states number of
recommendations and these recommendations are stated below-

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In this context, company needs to establish the code of conduct and also required to ensure that
code complied with following contents-
 Code of conduct must include the legal obligations and also the expectations of different
stakeholders such as expectations of the customers, expectations of the employees, etc.
 Code of conduct must address the responsibility and accountability of the individuals in
terms of the reporting and investigating reports.
 Organization needs to establish the policy which deals with the trading and actions taken
by the directors, senior executives, and employees of the organization.
 Organization needs to frame the policy which regulates the actions of the directors and
other management in terms of the reporting of the financial actions.
Application
Banking royal commission of Australia states that, there are number of financial advisers of the
Commonwealth Bank who have charged the dead clients for providing the financial advice. In
this context, banking royal commission provides number of evidences from a 2015 document for
CBA’s Count Financial business which clearly showed that there are many cases in which
financial advisers charged service fees from the dead clients (SMH, 2018}.
Later, it is admitted by the CBA that its financial advisers not only breach the regulations of the
Corporations Act by charging service fees from the dead clients and charging services fees for
those services also which they did not receive, but also breach the provisions of the Corporate
governance.
CBA clearly state that they accept this allegation, and believe that they fail to meet the
obligations to act fairly and honestly in terms of some clients. This failure not only considered as
the breach of Corporations Act 2001 but also considered as the breach of ASX Corporate
Governance principles.
CBA already made the payment of the remediation of $118.5 million to those clients who are
affected. This payment also considered as an enforceable undertaking in terms of the corporate
regulator because of its fees for no service issues.
After considering the above stated facts, it is clear that directors of the CBA fail to fulfil their
duty in this context, as they does not act with honesty and in the best interest of the organization.
In this, directors fail to take their business judgement with good faith and also for the right
purpose. Directors clearly know that, the business judgement taken by them ensures the best
interest of the organization also.
Organization also failed to comply with the ASX recommendation in context of the corporate
governance principle. As financial advisers indulge in unfairness and cheat their clients. It can be
said that, organization fails to comply with principle 3, and this means that organization fails to
ensure the ethical and responsible decision making in the organization.
Conclusion
After considering these facts, it clear that common wealth bank not only fails to ASX
recommendation in context of the corporate governance principle which imposed obligation on

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the bank to ensure ethical decision making and honesty. Directors of the CBA also fail to fulfil
their duty in this context, as they do not act with honesty and in the best interest of the
organization.
Answer B
Issue
Whether there are any possible legal, social, economic and political consequences faced by the
financial advisers for charging fees from the dead clients
Rule
The development of theories and models in corporate governance is considered as new concept
which deals with thee social ethics. In this competitive environment of business, organizations
are trying to indulge good governance principles in their organizations. Globalization is the
another reason because of which corporate governance becomes important in the organizations,
as there is very less control of government in the organizations because of which requirement of
accountability increase (Crane and Matten, 2007). Organization needs to promote the ethical and
reasonable decision making in their organization, and also ensure that they are participating in
the same in active manner.
Therefore, this concept of corporate governance becomes important element in managing the
organizations in this resent world of business and complex business environment. It must be
noted that there is no universal definition of the corporate governance, but it is usually defined as
the set of process and structure which direct and control the business organizations. Generally, it
includes the set of rules which governs the relationship between the management, shareholders
and stakeholders (Ching et al, 2006). This term also defines the procedure of the decision making
and also the process through which decisions can be implemented. Following are the two
corporate governance theories which deals with the issue stated above—
Resource dependency theory- this theory states the argument that, board of directors of the
organization are considered as the providers of the resources to the executives, and these
resources help the executives in fulfil the goals of the organization (Clarks, 2004}. This theory
gives recommendations to the organizations that directors must intervene for providing the
strong financial, human, and intangible support to their executives. This can be understood
through example, board of directors are professional experts of the organization and this
expertise can be used by them for training and mentoring their employees so that they can
improve the performance of the organization. Board of directors can also involve in the networks
so that they can attract best resources for the organizations. This theory states that control of
making the decisions must lie in the hands of the directors, and employees of the organization
need to take approval from the board before taking any action. This theory gives the power to the
board of directors to access their control in the organization, and through this control they can
restrict the fraudulent activities in the organization and promotes ethics (Maisenbach, 2006).
Stakeholders theory- this is another theory which mainly based on the assumption that
organization own duty towards all the stakeholders of the organization and not only of the

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shareholders. In other words, not only the shareholders hold the stake in the organizations, but
also the other stakeholders hold the stake in the organizations. This theory states the argument
that there are number of stakeholders such as customers, suppliers, and the surrounding
communities also hold the interest in the organizations. These stakeholders also get affected by
the success or the failure of the organizations. Therefore, it becomes necessary for the
organizations to understand they own duty towards all the stakeholders of the organization. The
main aim of this theory is to understand that any unethical practice or fraud committed by the
organization affects the consumers and communities in adverse manner (Rezaee, 2009).
Those directors and officers who indulged in unethical practices also face legal consequences
such as penalties of monetary nature, imprisonment, and sometimes both (Sanda, Mikailu &
Garba, 2005).
Organization indulged in these actions also face social consequences such as Organizations loss
their reputation in the society and less admired by the customers.
Application
Commonwealth bank of Australia indulged in the fraudulent activities which are investigated by
the banking royal commission. As stated above, there is lack of corporate governance practices
in the organization because of which such big scandal occurred in the bank.
In this bank can use the resource dependency theory and stakeholder’s theory for ensuring the
effective corporate governance practices in the organization. Resource dependency theory- this
theory states the argument that, board of directors of the organization are considered as the
providers of the resources to the executives, and these resources help the executives in fulfil the
goals of the organization. This theory gives the power to the board of directors to access their
control in the organization, and through this CBA can control and restrict the fraudulent
activities in the organization and promotes ethics.
On the other hand, through stakeholder theory, organization can protect the interest of all the
stakeholders in the organization, and not only of the shareholders. It becomes necessary for the
organizations to understand they own duty towards all the stakeholders of the organization. The
main aim of this theory is to understand that any unethical practice or fraud committed by the
organization affects the consumers and communities in adverse manner. this is another theory
which mainly based on the assumption that organization own duty towards all the stakeholders of
the organization and not only of the shareholders.
Conclusion
CBA indulged in these actions also face social consequences such as Organizations loss their
reputation in the society and less admired by the customers. In this bank can use the resource
dependency theory and stakeholder’s theory for ensuring the effective corporate governance
practices in the organization.

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References
ASX. Corporate Governance principles. Retrieved from https://www.asx.com.au/documents/asx-
compliance/cgc-principles-and-recommendations-3rd-edn.pdf.
Ching, K. W. Tan, J.S. & Chi Ching R. G. (2006). “Corporate Governance in East Asia, The
Road Ahead”. Prentice Hall Publication.
Clark, T. (2004). “Theories of Corporate Governance: The Philosophical Foundations of
Corporate Governance” London and New York: Routledge.
Corporation Act 2001- Section 180.
Corporation Act 2001- Section 181.
Crane. A and Matten. D. (2007). “Business Ethics” (2nd Ed). Oxford University Press.
Maisenbach, R.J. (2006). “Habermas’s Discourse Ethics and Principle of Universalization as a
Moral Framework for Organizational Communication”. Management Communication
Quarterly, Vol. 20, No. 1, pp. 39-62.
Rezaee, Z. (2009). Corporate Governance and Ethics. John Wiley & Sons, Inc, USA.
Sanda, A. U. Mikailu, A. S. & Garba, T. (2005). Corporate governance mechanisms and firm
financial performance in Nigeria. AERC Research Paper, 149, Nairobi.
SMH, (2018}. CBA admits breaching the law in response to royal commission findings.
Retrieved from https://www.smh.com.au/business/banking-and-finance/cba-admits-
breaching-the-law-in-response-to-royal-commission-findings-20180510-p4zelg.html.
Williamson, O. (1996) “The Mechanisms of Governance”. Oxford University Press, Oxford.