Corporate Law: Issues and Impacts of Poor Corporate Governance on Commonwealth Bank of Australia

This report discusses the importance of corporate governance and the case of Commonwealth Bank of Australia, highlighting the consequences of poor corporate governance. The report also covers the theories of stakeholder and consequentialism and emphasizes the need for companies to follow good corporate governance practices.

Running Head: COMMERCIAL LAW 0
Corporate Law
9/8/2018
Student’s Name

Corporate Law (BULAW5915) 1
Contents
Contents
Contents...........................................................................................................................................1
Introduction......................................................................................................................................2
Part A...............................................................................................................................................2
Corporate Governance:-...............................................................................................................2
Royal commission........................................................................................................................2
Commonwealth Bank: Good Corporate Governance..................................................................3
Commonwealth Bank: Poor Corporate Governance....................................................................3
Reasoning.....................................................................................................................................3
Part B...............................................................................................................................................4
Important of Good Corporate Governance..................................................................................4
Theories on Corporate Governance.............................................................................................5
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

Corporate Law (BULAW5915) 2
Introduction
A company is an artificial person and directors are the persons who act on behalf of the
same. In such a situation, there are chances that these people use unfair practices for their
personal benefits. Here the role of corporate governance comes into light. Corporate governance
is a guide that provides a working manner and standards to the management of the companies in
relation to conduct. Some of the banks proven failed to comply with corporate governance. The
chosen company for this report is one of the well-known banks of Australia “Commonwealth
Bank of Australia”. The bank is listed on Australian Stock Exchange (ASX) and therefore needs
to follow the corporate governance principles prescribed by ASX. This report is focused on the
issues involved in the corporate failure case of the chosen company and further includes the
reasons and impacts thereon. Before going ahead on topic directly, this is significant to know
that what exactly the corporate governance is.
Part A
Corporate Governance:-
Corporate governance is a well-defined system of process, rules, and practices through
which an organization is controlled and directed. It defines the procedure that a corporation
would follow in order to meet out their objectives ethically. This is a subject related to ethics. It
describes that what is and what it should be (Management Study Guide, 2018). In addition to this
corporate governance is a subject that provides a success to the company in a long run if follow
carefully.
Royal commission
Royal commission is an authority that looks after the conducts of bank, and other service
industry related to superannuation and finance. In the recent year, many of the cases have been
reported where banks of Australia has acted unethically. This issue brought negative impact on
the financial conditions of bank and affected the whole economy of the nation. This was the
reason that Australian Government felt the requirement to have a regulatory body in the area that
can control such issues. To resolve such requirement, Australian Government has established
Royal Commission in the year 2017 (The Guardian, 2018). The lead objective of this
commission is to check out the issues related to corporate governance failures in banking,
finance, and super annuation service industry of Australia.

Corporate Law (BULAW5915) 3
Commonwealth Bank: Good Corporate Governance
The bank often shows that the same is very keen to follow and apply corporate
governance. According to the corporate governance statements of the bank during last 3 years,
the bank is continuously focusing on the development of ethical practices and the focus of the
same is to establish a working culture that supports good corporate governance completely.
According to the corporate governance statement reflecting on the website of this bank, the same
is focusing on the development of a more accountable culture (Commbank.com.au, 2018). The
management of the bank argues that they do not support any act that is not supportable to
corporate governance.
Commonwealth Bank: Poor Corporate Governance
What the directors of the banks say about corporate governance versus what they really
follow. The two of these aspects are significant to know in this sector. It has noted out of
corporate governance statements of the company that there is proper corporate governance in the
bank but the same is not seems to correct. Some of the cases have reported in against of this
bank, from that it has proved that there is a significant failure of corporate governance in the
same. Recently a fee for no services scandal has come into light. The Royal Commission found
and raised this issue. ASIC alleged that bank has charged from it is clients for the services they
did not have received in actual (Danckert, 2018). In addition to this, one more issue has raised
by the authority Australian Securities and Investments Commission (ASIC). The issue is related
to interest rate rigging by the bank. ASIC alleged that to maximize it is profits, three times in the
past; this bank has done acts of manipulation in respect of bank bill swap reference rate (BBSW).
Further, there is also another case where this bank proved failure to lead good Corporate
Governance. Australian Transaction Reports and Analysis Centre (AUSTRAC) is a financial
intelligence agency, which overviews all the transactions of banks and financial institutions in
Australia. This agency made an allegation to the bank that the same has failed to report around
54000 transactions that were needed to be reported to (AUSTRAC) according to the provisions
of Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Effective Governance,
2018). The bank has agreed to pay $700 million in addition to legal cost as fine under this case.
Reasoning

Corporate Law (BULAW5915) 4
By reviewing the good and poor government cases and comparing between both of them,
this can be stated that the bank failed to follow and perform good corporate governance. The
poor corporate governance has proved to be there in the bank.
An aspect of Corporate Governance that not been followed by the bank
1. Duties of Director: - Director duties is one of the most important aspects of the subject of
Corporate Governance. Under Corporations Act, 2001 (Cth) (hereinafter mentioned s act)
duties of directors are defines. These duties are closely connected to corporate
governance as the same ensures good corporate governance in a company. According to
section 180 of the act says that every director and officer of the company must perform
their duties with due care and diligence (Kakabadse, 2009). Further section 181 says that
the management of the company must do the act of in good faith of the company
(Australian Government, 2018). The director and officers of the company have not taken
any reasonable steps to prevent the issues of unfair practices in the company. In the case
of non-disclosure of transactions to AUSTRAC, directors of the company are believed to
be aware of the issue, yet they did not do anything about it. Being the management of the
company they must had proper financial information of the bank and they might be aware
of the compliance that was required to follow. By not providing proper disclosure to
authority and to mislead the interest rate, the director of the company acted in against of
good corporate governance.
2. ASC Principles: - Australian stock exchange is one of the lead stock exchanges of
Australia that list the shares and securities of the company. In 2002, a council on
corporate governance has established. In the year 2003, this council has developed some
principles and recommendation on the corporate governance that are known as ASX
Corporate Governance Council Principles and Recommendations (Plessis, Hargovan &
Bagaric, 2010). On every listed company, these principles are total eight in number.
These principles say that a listed company should behave responsibly and ethically.
According to these principles, a listed company should pay remuneration to directors
wisely. The same must not lead an issue of conflict with shareholder’s interest (Mallin,
2016). As in the reviewed bank, many of the cases were there in which a failure of
corporate governance has reported, therefore this would not be wrong to state that the
bank has not complied with the provisions of these principles. Under these principles and
recommendations, it was the duty of the directors of the bank (which is a listed company)
to make the balanced disclosure on time (ASX Corporate Governance Council, 2018). As
directors of the company failed to disclose the information regarding around 54000
transactions and charged fee from clients for no services this can be stated that the
company has not complied with the requirements of the principles and recommendations
of ASX.

Corporate Law (BULAW5915) 5
Part B
Important of Good Corporate Governance
What is corporate governance? The answer of this question is already discussed under Part
A. Now, this is to know that why a good corporate governance is important. The issue can be
answered as that there are many adverse impacts of a poor corporate governance. As with a
company, interest of many of the stakeholders is attached, therefore it becomes necessary for
these companies to follow good corporate governance. A company, which practices good
corporate governance, survives and develops in a long run. Further, the interest of whole the
society and economy are also attached with a company; this is the reason that the authorities such
as ASX, ASIC and Royal commission continuously advise the companies to adhere the ethical
practices and to develop a good corporate governance culture thereof. Following are some of the
consequences of poor corporate governance:-
1. Economic Consequences- Cause of poor governance in a company, many of the frauds
issues are reported. To settle the matter, these companies have to pay fines and penalties
to authorities in addition to compensation to victim parties. For instance in one of the
found scandal of commonwealth bank of Australia also, the bank has agreed to pay the
penalty of $700 million apart from the cost of proceedings. Businesses are the center for
every economy and every listed company especially plays a vital role in the development
of a country. Cause of such kind of scandals, a particular company, or bank comes into
the critical financial conditions that further affect the economy of that nation. Therefore,
this is to be stated that a company, as well as the whole sole economy of the nation, has
to face significant economic loss in the cases of poor corporate governs.
2. Legal Consequences- Breaches and penalties are the lead issues. Wherever poor
corporate governances exist, there are certain breaches of the provisions of laws and
legislation. In addition to penalties, imprisonment is also a punishment that a court can
grant in the cases of poor corporate governance and unethical practices.
3. Social Consequences- A society is an important factor. A company works in a social
environment and people all the stakeholders are part of this society. People trust over a
company and for this reason, they agree to attached their interest in the company. A poor
corporate governance put an adverse impact on the reputation of the company. Cause of
poor corporate governance, the value of company diminishes in the society and the same
losses trust of it is current and possible stakeholders.
4. Political Consequences- Whenever a scandal or other issues related to bad corporate
governance is reported, the government of the nation has to give the answers for the
same. Sometimes they need to change their policies cause of such issues that can prove
negative for the current political party of the nation.

Corporate Law (BULAW5915) 6
Theories on Corporate Governance
Some theories are mentioned there in relation to corporate governance. These theories are
basically the aspects and approaches in this area. Different theories provide different ways to
deal with corporate governance. According to a different kind of theory different, different
factors are important and focused should be made on them only. Although, all these theories lead
the ethical actions and say that a company must act for the wellness. Two of the important
theories over this topic is mentioned hereunder:-
a) Stakeholder Theory: - This theory made it is focused on all the stakeholders of a
corporation. According to this, no doubt, shareholders are the important stakeholders of a
company because they invest theory money and provide proper financial vehicles to the
company, yet they are not the only one (Freeman, Harrison, Wicks, Parmar, & Colle,
2010). The theory says that a company should not devote the all focus to shareholder
only; the same must consider the interest of all it is stakeholders. Stakeholders of a
company include employees, customers, suppliers, government authorities, and society
and so on. These all are important for a company because they play different and
important roles. Profit is an aspect but the same cannot be everything for a company.
Setting aside interest of all other stakeholder and keeping the shareholder of the company
in mind cannot be proved right for a company. The theory further says that if a company
wants to develop in a long-term and wants to follow a good corporate governance
practice, then it is advisable that the same should focus on the interest of stakeholders
rather than shareholders.
b) Consequentialism (Utilitarianism) Theory:- This theory has a different perception on
the topic of corporate governance. Similar to stakeholder theory, this theory also provides
some requirements that a company should follow while doing conduct in order to ensure
that good corporate governance exist in the organization. This theory makes it is focused
on results. According to this theory of corporate governance, every action will be termed
as ethical if the same brings a positive result to someone (Elengovan, 2018). A complete
action is whether lies under good corporate governance or poor corporate governance, it
depends on the result of the same. Further, the theory focuses on the happiness of
maximum people involved and affected out of a particular action. It chooses an action
that leads good result to many of the people (Repository.up.ac.za, 2018). In addition to
this, the theory believes that good result for all must be a priority of an organization in
comparison to the right of all individuals. Therefore, this is to be stated that according to
the principles of this theory if an act breach the right of an individual but the same brings
good results to many of others, then such act will be termed as good corporate
governance practice (Aras & Crowther, 2012).

Corporate Law (BULAW5915) 7
Conclusion
To summarize and conclude this report, this is to state that corporate governance is one of
the most important aspects of a company. Companies in Australia have to work according to the
provisions of the Corporations Act, 2001. If the companies in this nation ate listed one, then the
same would also be required to follow with the principles and recommendation on corporate
governances issues by ASX. Many of the issues of corporate governance failures have reported
recently. Commonwealth Bank of Australia is also one of them. Such governance failure led to
many issues to this bank. As the bank is one of the listed companies of ASX, it was required to
follow the corporate governance principles by the same in addition to the duties of directors
related provisions that are mentioned under corporations act, 2001. However, the bank has failed
to following both of them. Such kind of issues was increasing in Australia, therefore the
government has introduced a separate body named Royal Commission that is now reviewing the
conducts of the bank and financial services related companies in Australia and ensuring that such
originations would not lead Poor Corporate governance.

Corporate Law (BULAW5915) 8
References
Anti-Money Laundering and Counter-Terrorism Financing Act 2006
Aras, G., & Crowther, D. (2012). Corporate Governance in Banking. England: Notion Press.
ASX Corporate Governance Council. (2018). Corporate Governance Principles and
Recommendations. Retrieved from: https://www.asx.com.au/documents/asx-
compliance/cgc-principles-and-recommendations-3rd-edn.pdf
Australian Government.(2018). Corporations Act 2001. Retrieved from:
https://www.legislation.gov.au/Details/C2018C00275
Commbank.com.au. (2018). Corporate Governance. Retrieved from:
https://www.commbank.com.au/about-us/shareholders/corporate-profile/corporate-
governance.html
Corporations Act, 2001 (Cth)
Danckert, S. (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
Effective Governance. (2018). The year in review — A look at Australian corporate governance
in 2017 and what’s ahead in 2018. Retrieved from:
https://www.effectivegovernance.com.au/the-year-in-review-2017/

Corporate Law (BULAW5915) 9
Elengovan, S. (2018). Deontological Approach to Business Ethics - Beyond Maximization of
Profits. Retrieved from: https://www.scribd.com/document/132172382/Deontological-
Approach-to-Business-Ethics-Beyond-Maximization-of-Profits
Freeman, R., E., Harrison, J., S., Wicks, A., C., Parmar, B., L., & Colle, S., D. (2010).
Stakeholder Theory: The State of the Art. UK : Cambridge University Press.
Kakabadse, A. (2009). Global Boards: One Desire, Many Realities. UK: Springer.
Mallin, C., A. (2016). Handbook on Corporate Governance in Financial Institutions.
UK:Edward Elgar Publishing,
Management Study Guide. (2018) Corporate Governance - Definition, Scope and Benefits.
Retrieved from: https://www.managementstudyguide.com/corporate-governance.htm
Plessis, J., J., D., Hargovan, A., & Bagaric, M. (2010). Principles of Contemporary Corporate
Governance. United States of America: Cambridge University Press.
Repository.up.ac.za. (2018). Chapter six: business ethics and corporate governance. Retrieved
from: https://repository.up.ac.za/bitstream/handle/2263/28706/06chapter6.pdf?
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The Guardian. (2018). Banking royal commission: all you need to know – so far. Retrieved from
https://www.theguardian.com/australia-news/2018/apr/20/banking-royal-commission-all-
you-need-to-know-so-far