Corporate Governance Issues in Australia: Analysis and Recommendations

This article analyzes the corporate governance issues in Australia, including lack of diversity and independence among directors, and provides recommendations to address these issues. The recommendations include promoting diversity in the board of directors, standardizing executive remuneration, and increasing the number of independent directors.

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GOVERNANCE IN A GLOBALIZING WORLD
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Governance in a Globalizing World
Table of Contents
Introduction......................................................................................................................................3
Issue Summary of Two Articles......................................................................................................3
Article #1......................................................................................................................................3
Article #2......................................................................................................................................4
Corporate Governance Theory........................................................................................................5
Issue Analysis and Recommendations.............................................................................................6
Issue Analysis..............................................................................................................................6
Recommendations........................................................................................................................7
Conclusions......................................................................................................................................8
References......................................................................................................................................10

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Introduction
Corporate governance has become an impotent aspect of the current company’s success.
The latest scandals in many companies have been attributed to poor corporate governance. The
recent Commonwealth Bank’s scandal in Australia occurred because of the ineffective corporate
governance that allowed the manipulation of the bank’s financial statements. The culture of the
boards in Australia can explained as rooted in agency theory where the members of the boards
are predominantly agency-reasoning persons that want to only promote their interests at the
expense of the shareholders. The paper will investigate five articles regarding corporate
governance issues in Australia.
Issue Summary of Two Articles
Article #1
The article entitled “ASX200 boards near 30pce gender target: AICD” underscores the
need to incorporate more women as directors towards promoting corporate governance. The
article recognizes that there are an increasing percentage of women on boards in Australia’s 200
largest firms in the recent years. Statistics shows that the females in boards in Australia hit the
mark of 28.5 per cent in 2018, which was up from 25.4 per cent. There is an increase in the
number of women in senior leadership positions at ASX200 females and the increase in the
number of chief executives (Patten, 2018, pp. 1). In May this year, reports indicated that the new
directorships on ASX200 comprised 36 per cent that were mainly women; however, this figure
increased to 50 per cent between June and August this year, which was a positive trend. AICD

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chairperson Elizabeth Proust emphasized that the progress of attaining the 30 per cent mark for
females on ASX200 boards has been steady where it was improvement from less than 10 % in
2009. In addition, the article stresses that the percentage of women of boards of the 100 largest
firms was higher at 30.5 per cent, placing Australia ahead of Britain, Canada, and the United
States, where the percentages were 28.9 %, 23.9 %, and 23.6 %. The article further highlighted
the warning by the Australian Council of Superannuation Investors to firms (including TPG
Telecom) that did not have women directors that they will vote against the re-election of
directors (Taylor, 2017, pp. 1). Finally, the author underscored the importance of smaller firms
struggling in the gender stakes at the board level.
Article #2
The article entitled “Company boards are stacked with friends of friends so how can we
expect change” explains the challenges facing the boards of different companies in Australia.
Smith (2018) explains that the corporate governance in Australia is at a crisis in that there is no
diversity or independence on the Australian company boards. The author claims that there were
only 18.1 per cent of women in board’s seats in ASX100 firms and improved in 2015 to 25.2 per
cent. In 2015, 58 per cent of the directors in the ASX100 and 49 per cent in the ASX200 were
individually connected to the firms. These connections were detrimental to the growth of the
company because it may impair the judgement of the directors, where these directors could serve
their own interests and not look at the interests of the company and its shareholders. An example
of this effect was in the Enron and HIH Australia failure in their corporate governance. In
addition, the article further claims that social identity was key criteria in the appointment of
directors and independence and diversity elements are not considered (Smith, 2018, pp. 1). This

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is promoted by the group think where members of the board are more concerned with being liked
and connected member of a specific social group, where members will conform to a status quo
that guarantees them membership perks as highly paid directorship responsibilities. The author
concludes that the group think philosophy will make boards to sign off questionable business
deals that the current banking sector.
Corporate Governance Theory
Agency theory is an appropriate theory that better explains the current crisis facing
corporate governance in Australian companies there is lack of independence and diversity in
terms of appointing directors. Agency theory, as pioneered by Jensen and Meckling (1976), is a
well-liked principle in corporate governance. Accordingly, the agency theory holds that in a
public company, there exists a primary challenge in line with shareholders’ concerns: senior
management does not at all times work to optimize shareholders’ return on investment (ROE). In
line with company management, the agency costs would be produced by the variance amid his
significance plus those of external shareholders. The agency costs will tend to promote the
interest of the corporate executive where the appointment of board of directors is not based on
merit, but rather “friendship” (Kulik, 2005, pp. 349). The lack of diversity and independence
among the ASX100 and ASX200 companies in Australia has been attributed to a well-built
agency culture with cooperatively non-compliant customs, a bountiful rare-failure setting, and
fresh recruits with modest business ethics on the training (Wallace, 2015, pp. 1).
It is also evident from the article that many business directors and executives’ hires
individuals that are part of the company or having connections with the company that will at the

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end promote their interests rather than that of the shareholders of the corporation (Greber, 2018,
pp. 1). The lack of diversity has been attributed to agency-reasoning where the recruitment
process is not objective. The recruitment process recruits only individuals that have connections
with the company and not based on qualified individuals from the outside world. This will allow
the board members to promote unethical practices that will hurt the interests of the shareholders.
This has affected the ethical practices of firms in Australia where corporate governance have
been affected by unethical practices that are promoted at the board and senior management level
(Broome, Conley & Kimberley, 2011, pp. 760).
The agency theory better explains the failure of corporate governance in several
companies that was hit by corporate scandals. The theory better explains how Enron was affected
by corporate scandal in 2001, where the board of directors and senior management promoted
their interests through unethical practices. Enron never trained its employees on ethics that
resulted in unethical practices while the senior management and the boards failed to carry out
risk management as their responsibility into averting the corporate scandal (Harwell, 2018, pp.
1). The agency theory holds that there was lack of balance between stewardship reasoning and
agency reasoning that resulted in unethical practice. This is clear in the second article that was
analysed in 1(a) above.
Issue Analysis and Recommendations
Issue Analysis
In the two articles, there are many corporate governance issues that affect the
performance and the existence of firms in Australia and other parts of the world. The issues

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highlighted in the article have resulted in crisis in corporate governance that has led to poor
governance permitting corporate scandals in different sectors of economy, such as the banking
sector. In the articles, there was like of diversity where women were inadequately represented in
the board of directors and senior management positions that affected the constitution of the
board. There was also the challenge of lack of independence among the directors because the
directors had conflict of interest in regard to the company’s interest because they were connected
to the company. In addition, remuneration was another issue that resulted in bad management in
the company’s boards (Frost, 2018, pp. 1). The other issues that arose in the articles were the
pressure from the shareholders on ROE on the management.
Recommendations
 Companies in Australia and Sweden should ensure that their boards have shareholder
directors that will ensure that they do not have connection with the company to avoid
conflict of interests. Shareholders board of directors will ensure that the interests of the
shareholders are promoted rather than that of the “friends” in the company who are also
serving in the board. Shareholder directors will play a primary role on elements of
performance of the company, like negotiating and monitoring of chief executive officer
(CEO) compensation, as well as advising on takeover acquisitions. This will help remove
the current pressure from the shareholders for the need for the senior management to
perform and to assure them of their ROE (Broome, Conley & Kimberley, 2011, pp. 761).
 Independent board of directors should be largely encouraged by the Swedish and
Australian companies because they will be less biased and will better promote the interest
of the shareholders. The outside boards of directors are independent and that may serve

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on many boards whilst lacking any specific firm orientation (Swan, 2016, pp. 1). The
majority of the company’s board of directors should be independent to stop unethical
practices that would result in a corporate governance failure. This implies that companies
should ensure that the majority of the independent directors exceed the shareholders
directors to reduce the conflict of interest within the company (Klein, 2010, PP. 47).
 The remuneration of the executives should be reasonable where there should be clear
guidelines on what the executives should receive as a pay. The current remuneration in
Australia and England to executives is beyond the recommended and there is need to
balance the compensation with that of the junior employees. This will reduce the current
inequalities in pay that will result in potential scandals (Gaumnitz & Lere, 2004, PP.
330).
 Promoting diversity in the board of directors in companies in Australia and Sweden
should be priority where the number of women and minorities should be included into the
board. This should mean that there should be more women in the board, but appropriate
criteria for selection and recruitment should be adopted. In addition, legislation can be
enacted to increase the number of women in company’s boards that will bring about
gender balance in the boards in the two countries. The enactment of quota legislation
should include the input of all the stakeholders to ensure a consensus is attained and
avoid future conflicts and improve diversity inboard composition that will eliminate
unethical practices (Stephanie, 2014, pp. 1).
Conclusions

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The articles highlight the challenges that affect the Australian companies in regard to corporate
governance. The current challenges have been linked to inadequate independence of the board of
directors and diversity. There is the need to promote the independence of the board of directors
and inclusion of women and minorities in the board of directors. In addition, the remuneration of
the executives should be standardized to that of the junior employees to ensure that they are
motivated. The majority of the company’s board of directors should be independent to stop
unethical practices that would result in a corporate governance failure. It means that firms ought
to ensure that the majority of the independent directors exceed the shareholders directors to
decrease the conflict of interest within the business.

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References
Broome, L., Conley, J. & Kimberley, K. 2011. ‘Dangerous Categories: Narratives of Corporate
Board Diversity’. North Carolina Law Review, 89(2); 759-760.
Frost, S. 2018. ‘APRA chairman Wayne Byres says banking executive pay is out of step and
much change’. Financial Review. [Online]. 28 Oct. 18< https://www.afr.com/business/banking-
and-finance/financial-services/apra-chairman-wayne-byres-says-banking-executive-pay-is-out-
of-step-and-must-change-20180904- h14x9g>
Gaumnitz, B.R. & Lere, J.C. 2004. ‘A Classification Scheme for Codes of Business Ethics’.
Journal of Business Ethics. 49 (4);329-335.
Greber, J. 2018. ‘Is Elon Musk running out of time at Tesla’. Financial Review. [Online]. 28 Oct.
18< https://www.afr.com/leadership/company-culture/is-elon-musk-running-out-of-time-at-tesla-
20180827-h14ld3>
Harwell, D. 2018. ‘Investors question how long Tesla CEO Elon Musk’s victory lap can last’.
Seattle Times. [Online]. 28 Oct. 18< https://www.seattletimes.com/business/wapotesla-hits-key-
mark-with-many-more-to-go/>
Klein, T.D. 2010. ‘Built for change : essential traits of transformative companies’. Santa
Barbara, Calif. : Praeger.
Kulik, B.W. (2005). Agency Theory, Reasoning and Culture at Enron: In Search of a Solution.
Journal of Business Ethics. 59(4); 347-360.

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Patten, S. 2018. ‘ASX200 boards near 30pc gender target: AICD’. Financial Review. [Online].
28 Oct. 18 < https://www.afr.com/leadership/asx200-boards-near-30pc-gender-target-aicd-
20180906-h1501q>
Smith, S. 2018. ‘Company boards are stacked with friends of friends so how can we expect
change?’ The Conversation. [Online]. 28 Oct. 18< https://theconversation.com/company-boards-
are-stacked-with-friends-of-friends-so-how-can-we-expect-change-95790>
Stephanie, S. 2014. ‘Women on Corporate Boards: Non-Quota Initiatives to Increasing Board
Gender Diversity in the US’. Grove City College Journal of Law and Public Policy. 5(1);1-12.
Swan, P. 2016. ‘Experienced shareholders better than independent directors for business’. The
Conversation. [Online]. 28 Oct. 18< https://theconversation.com/experienced-shareholders-
better-than-independent-directors-for-business-61160>
Taylor, D. 2017. ‘Corporate gender equality: Why boards need more women to make more
money’. ABC. [Online]. 28 Oct. 2018< https://www.abc.net.au/news/2017-08-17/why-boards-
need-more-women-to-make-more-money/8809222>
Wallace, R. 2015. ‘Women to Make Up Half of Boards, Court Posts, Victorian Premier Says’,
The Australian. [Online]. 28 October 2018 <www.theaustralian.com.au/national-affairs/state-
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1227282264297>

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